Stefano Santoro jokingly suggested a few weeks ago that he may have to start attending more morning real estate events to score a free breakfast.
“I’m trying not to starve,” the commercial broker told The Real Deal.
While Santoro is not facing famine, he and other brokers are feasting on fewer commercial deals in South Florida, compared to this time last year.
In January of 2022, when he checked CoStar in the mornings, he would see about 10 to 20 closed deals in Miami-Dade, Broward and Palm Beach counties per week, said Santoro, who runs his own brokerage, Miami-based Disruptive Real Estate.
“Now, it’s five to 10 deals,” Santoro said. “There’s a little haze going on. You won’t see a shift until the summer. That’s when you will see properties trading at the torrid pace we saw in 2021 and 2022.”
Banks are tightening lending amid inflation and higher interest rates, and buyers are expressing reluctance to pull the trigger. As a result, sales volume for offices, multifamily, industrial and retail assets in South Florida has tailed off, Santoro and other commercial brokers say.
“Velocity slowed down because you had a meltdown in the third quarter and fourth quarter due to rising inflation and rising interest rates,” said Arthur Porosoff with The Porosoff Group at Compass Florida. “Many deals that were supposed to close in those quarters were bumped to the end of the first quarter of this year.”
Hollywood-based investor Todd Nepola, who targets shopping centers and strip malls in suburban areas of Broward and Palm Beach counties, said that he is seeing properties previously under contract get relisted at a discount.
“There is not a lot of activity,” Nepola said. “I think brokers are having a hard time right now. I expect February to be pretty slow too.”
Current Capital Management, Nepola’s boutique real estate firm, remains on the hunt for retail properties. But higher mortgage rates and tighter lending requirements have made it harder for him to find a deal that makes financial sense, he said.
“The banks started drying up in September and October,” Nepola said. “In April, when I bought two shopping centers in Palm Beach County, I had 20 banks begging me for business, taking me to lunch.”
Two Current Capital affiliates landed a $10 million loan from South State Bank with favorable terms. The mortgage was used to purchase the retail properties in Lake Worth and West Palm Beach for a combined $12.7 million in April, Nepola said.
By December, free lunch dates evaporated. When Current Capital acquired two shopping centers in Lauderdale Lakes for $23.7 million that month, it was a much less friendly lending environment.
“I only got three banks to listen to me,” Nepola said. “They would do the deal, but at a much higher interest rate.”
Current Capital obtained a loan for $13.5 million from Valley National Bank, but Nepola believes his lender could have lent more. “The deal made sense, and they could have covered more debt,” Nepola said. “They just didn’t want to give it.”
Miami-based real estate attorney Suzanne Amaducci-Adams, who leads the real estate practice at Bilzin Sumberg, said she is also seeing deals getting terminated or delayed. She said she noticed a drop-off in activity around Thanksgiving.
“I had a hotel deal where the metrics for the hotel just kept getting better and better,” Amaducci-Adams said. “It should have been a great deal.”
Her client had obtained financing for a high performing property, but was unable to convince investors to put up the equity because of uncertainty in the market, she said.
Rising interest rates “greatly impacted underwriting and cash flow,” she added, and soaring insurance costs are also playing a role. “Insurance will push the value and the purchase price down,” she said.
Even South Florida’s industrial sector, the commercial real estate segment that has highly performed since the onset of the pandemic, is showing signs of softening. Recently, a Hialeah Gardens outdoor storage facility sold for $1.2 million an acre, after previously trading for $2.4 million an acre in 2021.
Yet, at least one prominent Miami-based commercial broker insists there is no reason to panic. Tony Arellanno with Dwntwn Realty Advisors said January is typically a slow month for commercial deals.
“The same phenomenon happens in the car industry,” Arellano said. “December is one of the busiest months for car sales, and January is one of the worst. It’s similar for commercial real estate investment.”
Commercial deals trading at eight figures and above tend to have 60-to-90-day cycles from contract to closing, Arellano said.
“We try to wrap them up by the end of December and the beginning of the new year,” he said. “Then we get our bearings for the new year. We won’t see many new deals close until the end of the first quarter and beginning of the second quarter.”