Given a handful of macro-factors in the Miami industrial market including the Panama Canal expansion nearing completion, PortMiami expansion, strong American dollar, and improving relations with Cuba coupled with the country’s new mega-port project, it is a unique time to be an industrial real estate service provider. To succeed in this environment, it takes deep local knowledge and a global understanding of how Miami, the Caribbean and Latin American economies and infrastructure are intertwined into global commerce.
The first macro-factor is the Panama Canal expansion, its first major renovation since the 1914 opening. The expansion is set to have a major impact on global trade; specifically, the way cargo will be handled and transported throughout the Western Hemisphere. The larger canal will accommodate the new line of Post-Panamax vessels — supertankers, container and passenger ships too large to previously pass through the canal. Miami is a prime location for these vessels and offers a tremendous expansion opportunity for the local industrial market provided the vessels have a port to dock.
Lucia Custer, NAI Miami
Gabriel Garcia-Menocal, NAI Miami
In response to the Panama Canal expansion, PortMiami completed a deep dredge project to allow the Post-Panamax vessels full access, which is the second macro-factor affecting Miami’s industrial market. The shipping channel was dredged to a depth of 50 to 52 feet and widened to boost cargo and improve efficiency. A port tunnel was added, linking the port directly to I-395 in order to expedite truck traffic and not clog current roads. An abandoned rail link was reactivated tying the port directly to the Florida East Coast Railroad rail yard near Miami International Airport, allowing cargo services to be delivered anywhere in the continental United States within four days.
The third macro-factor is the American dollar impacting foreign buying power. After years of finding bargains in a down real estate market, purchasers from abroad now face increasing costs because their home country’s currency has fallen against the dollar, in addition to rising local prices.
Brazil was hit the hardest with the dollar appreciating over 53 percent versus the Brazilian real during the past year. Mexico saw the dollar appreciate 23 percent versus the peso and Canada felt the pinch as well due to slower economic growth from falling oil and other raw material prices.
The final macro-factor is Cuba. Cuba is in desperate need of significant investment, especially in real estate and infrastructure. With the possibility of the embargo ending, there is some optimism the industrial market may be positively impacted. It is a high-risk situation as all land in Cuba is government controlled, allowing no recourse if a deal goes wrong. What has piqued interest is Cuba’s mega-port project west of Havana, in Mariel. If the embargo is lifted, this port could impact the industrial warehouse market in South Florida.
With the expansion and infrastructure growth that has happened in Miami and throughout Latin America, including many of the factors listed above, industrial demand is at an all-time high and rents have surpassed pre-recession figures. According to CoStar’s year-end 2015 and first-quarter 2016 reports, vacancy rates are their lowest since 2007 at 4.7 percent, while absorption is up over 900,000 square feet. Total year-to-date industrial building sales activity in 2015 was up compared to 2014. Average rental rates currently stand at $9.01 per square foot, industrial gross, marking the 16th consecutive quarter in which rates have increased.
Total inventory in the Miami-Dade industrial market area is currently around 232 million rentable square feet. However, specific industrial niches are experiencing higher degrees of difficulty in finding space. The 15,000- to 30,000-square-foot user is an example. While there is a significant demand for these sized spaces, new construction is starting with the smallest available size at 50,000 square feet or higher. Developers are not receptive to split these spaces based on current demand. New construction of roughly 600,000 square feet is currently underway.
Due to increasing demand and supply constraints, large investment firms are struggling to purchase warehouses and industrial parks. Sales are the highest levels both on price per square foot and cap rates. By the end of 2015, the average price per square foot was $95.94 and cap rates were averaging 5.51 percent. One of the largest 2015 transactions was the sale of 7800 N.W. 29th St. in Miami, an 180,000-square-foot industrial building which sold for $38.5 million, or $213.89 per square foot.
Overall, the industrial market is stable and growing as a result of these macro-factors impacting South Florida. This market is seeing the second highest level of investment volume since 2007. This trend is likely to continue throughout 2016 because of low interest rates, diminished level foreign nationals investments, rising leasing rates and new supply balanced with demand growth (making oversupply unlikely). Miami stands out to be a strong industrial market for the foreseeable future.
— By Lucia Custer, Executive Director of Industrial Brokerage Services and Gabriel Garcia-Menocal, Executive Director of Industrial Brokerage Services, NAI Miami. This article originally appeared in the May 2016 issue of Southeast Real Estate Business.