Writer: Max Crampton-Thomas
2 min read May 2021 — Atlantic Western Realty Companies had one of its best years in 2020. As Bradley Scherer, the company’s founder and president, told Invest:, “you must buy land and wait; you can’t wait to buy land.” But Brad sees emerging disparities between the increasing price of real estate assets and the fundamentals – which could present future opportunities for his company.
How was your company able to successfully grow despite the challenges of the last year?
We had a terrific 2020. We had deals in the queue that successfully closed despite the COVID shutdown. It was one of our best years ever. We always say you must buy land and wait; you can’t wait to buy land. Over the past 20 years and most notably over the last 10, we’ve been almost exclusively focused on land as the core of our business. Land transactions typically have very long gestation periods between the deal and closing. So, the great year we had in 2020 was the result of two to three years of previous hard work.
What specific factors could hamper growth or slow it down?
What we’ve seen in certain asset classes is the aggressive influx of new capital looking for deals. The office sector is one of those areas that has received a disproportionate amount of new investment. But the office fundamentals have somewhat lagged investment activity. We believe buyers of office buildings may have gotten ahead of the underlying occupancy and lease markets in their rush for an investment opportunity. I think the fundamentals need to catch up to investment values.
Another issue is the increasing cost of building materials and labor. That’s producing a much higher cost of replacement that I think eventually will put some pressure on growth.
When you say the fundamentals need to catch up does that mean the market is in a bubble?
In downtown West Palm Beach, the class A office vacancy rate is 36% but at the same time, asking rents have never been higher. So with the highest prices ever paid for buildings, something has to give. Either many more tenants are going to have to pay a lot more in rent or investments that have overpaid are going to underperform. Is it a bubble? I don’t know, but something has to give.
I’ve been doing this for a long time. Good times don’t last and neither do bad times. What could spoil the party? Much higher inflation in construction, labor and material costs, as well as perhaps new Federal taxation policy (if some of the proposals that are being considered at the federal level get enacted), including elimination of the 1031 exchange rules.
What is behind the increasing popularity of multifamily mixed-use developments over the last year?
I am a contrarian in that regard. Mixed-use as a successful concept is rare. It is rarely the preference of a conventional developer. It’s imposed upon them by city planners who have these wishes and dreams or poor planning objectives.
Pure-play multifamily projects are currently the sweet spot because they are filling the needs of so many people who need a residence but can’t afford the down payment of a single-family house, given the recent appreciation. A lot of traditional homebuyers are getting priced out of the market. That is why the higher-end multifamily rental projects are having such great success. But it is very hard to find land entitled for multifamily development now, which is where a lot of energy is being spent.
What will be the long-term consequences of the pandemic for the real estate market in Palm Beach?
The short-term impacts and the long-term impacts are aligned. We’ve been one of the great beneficiaries of the COVID situation because we did not overreact during the pandemic. Palm Beach County has received an enormous influx of highly affluent Northeastern wealth. That translates into the longer-term impact. Palm Beach County is going to be one of the Top 10 or 5 municipalities in the whole country that outperform because of COVID, not despite it.
Which neighborhoods in the county have the highest potential or where is the growth concentrated?
From a pure price appreciation standpoint, I think the appreciation of residential values on the island of Palm Beach standout. There was a recent story in the paper about a property of Tarpon Island that reportedly is under contract to sell for more than $80 million. My firm had the listing for Tarpon Island in 1993-4 at the time for less than $6 million which translates into close to 40% year-over-year appreciation for 30 consecutive years in a row.
But that being said, no region in Palm Beach County has underperformed in this cycle. Every area is doing great. Wellington, North Palm, PGA, and Boca are all thriving. The rising tide has lifted all boats.
What measures are you taking to protect the company from a potential downturn?
I don’t protect the company from downturns. I look forward to downturns because that is where we add the most value. Downturns present more opportunities. I welcome asset dislocations because that presents the best opportunities for me to help clients.
What’s your near-term outlook and what are you particularly excited about?
Single-family and multifamily are going to continue to outperform, and industrial is one of the strongest sectors in Palm Beach County not only because of growth but because of lack of supply. New development land is non-existent. In my view, over the next two years, the county is poised to experience one of the most robust economies in my 40 year career
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