2 min read September 2022 — The Sunshine State’s dynamism and demographic explosion is shining a bright light on Miami’s residential developments. Kevin O’Grady, managing director, co-founder and co-CIO at Concord Summit Capital, shared with Invest: why there is still significant investment appetite for the area’s residential projects. “We are in the beginning of the growth curve for this market,” said O’Grady.
What are some of the biggest highlights and achievements since the last time we spoke?
We opened up our L.A. office, effectively expanding from Miami to Denver to L.A., and we are looking at opening up in Dallas in early 2023. We want to be geographically dispersed in strategic areas while keeping our essence as a specialized group that focuses on structured finance. Texas is a highly strategic area as there is a lot of growth similar to in Florida. L.A. is a very distinct market where we feel we need a presence.
We had a record year with regard to overall fee production. We closed a number of transactions and the lion’s share was focused on construction financing largely for multi-family and condominiums, which is really indicative of market conditions. We did several bridge-to-perm financings, which has been a popular product for people that are on high-leveraged loans at a higher rate. The product enables them to refinance at no occupancy, take out their high cost construction financing to have a ramp up period to stabilize, and transition to an agency loan or some type of permanent financing.
What is your general overview of the current market for your industry at present?
I think the industry is in what I would call choppy waters. It has been anticipated for quite some time, but a lot of it is not really due to a lack of demand. The industry suffered from a lot of what the rest of the country was suffering from in the first part of the year; a significant portion of the supply chain was interrupted and construction costs started to go up. For those of us in the industry who do a lot of this type of financing for developers, we had a lot of problems to solve from December 2021 up until now with price stability and now rate creep. As a result, a lot of our closings have been pushed out. Many of the projects experienced upwards of 30% cost increases.
The good news is that in Florida, particularly, the market has been robust enough to absorb these kinds of increases. The kinds of challenges that have hit us because of price increases have not put any of our projects under water or required them to be mothballed at this point in time. We have been able to close everything. We either restructure it, recapitalize it, or do whatever we need to do in order to get it done.
At present, we are seeing more stability in construction costs. People are breathing a little bit more of a sigh of relief, but now they’re getting hit with inflation, which is causing the Fed to implement monetary policies that are driving our rates up. The combination of the widening of rates and the uncertainty in the marketplace due to inflation causes everybody to have a hard time determining what equity values are going to be in the future to make sure the values are there.
You are going to have a difficult time underwriting what the value of your property is going to be two or three years from now if you cannot predict overall inflation, how to structure that into a deal, or whether you are going to get the returns that you are expecting if you are going to put equity into a real estate project.
As a result, a majority of equity investors are sitting back and waiting. Also, a significant portion of them change their investment policies when they start to see if we are going to move into a downturn. They start to restructure their money or reorient their money for more of a value-add or a distressed type of an opportunity if they anticipate a downturn. We have been to this dance before. During COVID we all thought the entire industry was going to collapse and everybody beefed up under the same type of scenario with cash ready to buy, and that didn’t happen. There was a lot of rescue capital that hit the market. People were patient and they restructured their loans into forbearance or otherwise. The market did not yield what we thought in terms of the number of distressed assets. We may very well hit a soft landing and the same will apply now.
How have you seen residential demand evolve in the past year?
We are seeing a tremendous demand for rental housing throughout the U.S. We go sector by sector, from what we see in the capital markets by way of debt and equity to the whys and wherefores that people are wrestling with. There is still huge demand for multifamily housing or housing in general, which is forcing a lot of people into rental housing. As a result, rents continue to skyrocket but they have flattened in some markets. There is not enough multifamily housing under production right now to meet the demand. Single family rentals have also skyrocketed as the number of burdened seniors over the last three or four years has increased. This is a product in huge demand because it gives some people an opportunity to have a single-family residential experience as rentals, in addition to having a choice of living in a building that has multiple tenancy.
How would you characterize the retail market at present?
The retail market has been evolving and changing in its complexion and structure for the last 10 years for several reasons. A lot of it could be due to socioeconomic, cultural and sociological reasons. It could just be the availability of products online. Retail is bouncing back very well nationally because of pent-up cash that people accrued during COVID. For hard box and hard retail, street retail, we are seeing a lot of demand in Florida. We have a lot of projects in the market that have multiple uses to them rather than just a straight-up retail use. They are “experiential” and have living and lifestyle, as well as entertainment, incorporated into the development plan.
Industrial storage throughout the nation is extremely strong, as well as self-storage. Then you get into niche products, whether they be lab tech or more tech oriented assets, which have also been very strong. Even in commercial office space, which everybody signaled the doom of, we have seen rental increases over the last year in upwards of 25% in Miami alone.
What makes Florida a great market?
Unlike major mature markets such as New York City or Washington D.C., we have so much opportunity still here in the state of Florida. We are in the beginning of the growth curve for this market. There is a whole landscape available just in the Miami CBD to be developed. You also have a very friendly and cooperative public administration that is growth-driven. Plus, you have a huge demand that continues to be spurred by various influences over the years. The dynamics in Florida are such that this is going to be a very high-growth market for years to come. It was just going to be a matter of what pushed that growth forward.
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