When real estate developers began to travel to Argentina, Brazil, Venezuela and Mexico to market their luxurious condos to foreign buyers not too long ago, they were not only exporting Miami condos. Inadvertently, they were also helping export Miami commercial real estate.
Unlike in any past real estate cycle, foreign investors are increasingly becoming an important player in the acquisition of income-producing properties ranging from $1 million to $20 million in Miami. Many of these investors were introduced to the city by condo developers and became interested in commercial properties after buying one or more residential units in South Florida. Their profiles vary. Some of them are wealth managers, family offices, private equity funds and high net worth individuals seeking to diversify their investment portfolio to protect and grow their capital. As a gateway market, Miami is well positioned to absorb geopolitical and economic shocks, often common in their countries.
A strong dollar doesn’t seem to be slowing them down. While condo buyers tend to be more susceptible to a stronger dollar, which erodes their purchasing power, these investors have a lot more room to work with fluctuating currencies and a lot more patient capital. On top of that, foreign investors of commercial real estate are increasingly having access to acquisition financing. That means they may need to convert to dollars less than half of the purchase price, as lenders like Brickell Bank (formerly Espirito Santo,) Banco do Brasil and Sabadell Bank, among others, could finance the remaining acquisition.
Foreign investors have a voracious appetite for restaurant properties, such as McDonald’s, Burger King and other franchises. They also target single-tenant properties occupied by national retail chains like pharmacies, auto parts and bank branches. For the most part, these tenants are responsible for paying the insurance, property taxes and maintenance costs. The investor’s only job is to collect the rent monthly. When it comes to office buildings, foreign buyers look for properties occupied by a few tenants because they are easy to manage at a distance.
Foreign investors are becoming tough competitors for domestic buyers because, for the most part, they are ready and willing to pay higher prices for assets that promise them peace of mind on several fronts, including protecting their capital and allowing them a hands-off ownership approach. As a result of these new players in the commercial real estate market, office deals in the $10 million to $50 million price-range drove up transaction velocity more than 30 percent in the first half of 2015 over the past year, according to a recent report by Marcus & Millichap researchers. On the other hand, transactions of office buildings valued at more than $50 million — not targeted by these investors — remained virtually unchanged during the same period, according to the Marcus & Millichap report. Transaction dollar volume also rose more than 30 percent over the past year. The average price of the assets sold over the past 12 months was $248 per square foot, 7 percent more than the average price in the preceding year.
The growing presence of foreign investors in Miami is having a similar effect on single-tenant properties, such as Walgreens, CVS and other creditworthy retailers. Transaction velocity of this type of asset jumped 17 percent in the last 12 months. The growing demand for these properties is putting pressure on values. The average sale price for this type of properties is $455 per square foot, a 4 percent jump from a year ago. Fast-food locations can sell for $740 a square foot, making it one of the most expensive product types in Miami-Dade, according to Marcus & Millichap. Single-tenant rent continues to grow. In the last three months, it went up 2.7 percent, according to Marcus & Millichap. Annually, these properties recorded a 6.7 percent rent hike, reaching $31.53 per square foot.
People often ask me where they can find statistics reflecting this new wave of foreign investors. The answer is simple: You won’t find any.
The industry does a good job collecting information on deals involving assets valued at $50 million and up. But when it comes to small- to mid-size commercial deals, there is none. It gets even more complicated when one tries to figure out where the money behind a buyer — which is usually an LLC — comes from. My knowledge on this subject comes from dealing directly with foreign buyers, mainly from Latin America and increasingly from Europe. I have been brokering deals in South Florida for more than 15 years and never before saw foreigners buying commercial assets at this speed. In less than three years — since the international condo craze began — I sold more commercial properties to foreign investors than in any other real estate cycle in my career.
When I talk to my clients, I often hear the same reasons why they have transitioned from buying condos in Miami to buying office buildings, retail centers and so forth. Some compelling reasons are the fact they can achieve rates of return in the 5 percent to 8 percent range; have access to acquisition financing; see it a safer way to protect their wealth against their country’s currency devaluation; and can begin to generate income right away — unlike with pre-construction condos. Now that foreigners have discovered Miami’s commercial real estate market, they are here to stay. The rapid recovery of our real estate market after our worst recession ever has proven to them their investment is safer in Miami regardless of where we are in the real estate cycle, compared with the ups and downs of their countries’ economy.
Alex Zylberglait is senior vice president of investments in the Miami office of Marcus & Millichap.
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