The Miami Commercial Real Estate Market and its Opportunities

In this episode of the Better Decisions podcast, I speak with Miguel Solis. Miguel is a sales associate at Douglas Elliman who is an expert in Miami commercial real estate.  While many investors look at residential real estate, commercial real estate is often overlooked. Residential investors tend to stay on the residential site and seldomly drift into the commercial field. This does not necessary have to be that way.  I decided to sit down with Miguel to demystify the world of commercial real estate and to show you the opportunities that exist.

In this podcast and article, we discuss the different forms of commercial real estate, the risks, the benefits, how to buy commercial real estate, and what product to buy where.

Understanding Miami commercial real estate and its options

However, managing multiple rents can be challenging, and some buyers may not know how to deal with it. When a multi-family unit is sold, the new owner may send a letter to the current tenants informing them of the new rent or asking them to move out within 60 days. Most tenants would prefer to stay despite the increase in rent, so the cap rate can improve quickly. While many buyers focus on cap rates let’s not forget about appreciation. Miami’s status as the fastest-growing city in the US means that there is always a demand for housing, and emerging markets like Little Havana are becoming increasingly attractive to tenants due to rising prices in areas like Brickell.

Offices

Many businesses and hedge funds are moving into Miami these days, all looking for offices. The pandemic is over, and people are going back to the office. This increases the need for office space. Just like the residential market buying is more beneficial in the long run, but many businesses prefer to keep renting office space.

Retail

Investing in retail space through triple net leases can be an attractive option for out-of-town investors. With a triple net lease, the tenant agrees to pay for all expenses, including real estate taxes, building insurance, and maintenance, in addition to rent. This means that the property essentially runs itself, with the tenant handling all expenses and operations. Rent typically increases by 3% per year, and the underlying value of the asset appreciates as a result. For example, Miguel is involved in a deal where a Starbucks was purchased in 2020 for $2.9 million and is now valued at $5.2 million with a tenant in place for the next 20 years. Five-year rentals are normal in the retail market, although bigger corporations like Starbucks or Mcdonald’s often sign for 20 years.

Land for retail

Buying land for retail space with proper zoning can be another profitable investment opportunity. Investors can purchase land and construct a shell for a future retail space, such as a CVS or a fast food chain, then lease it back to the corporation. This provides a guaranteed tenant for several years.

Identifying the need for Commercial Real Estate

Some Miami areas are growing rapidly and as a wealthy crowd moves in there is not enough to serve them. This infrastructure needs to be created especially in areas that are emerging. If you are looking to invest, I see such an upside in commercial real estate. If you know the demographic moving in, you know what they are going to need. We are dealing with buyers on a daily basis, and can advise on that.

Savvy investors often create commercial infrastructure and by it being a pivotal part of the community or infrastructural necessity other things will develop around it which then further increases the value of the asset. We see more mega malls and when they are built, residential communities are following.

How to buy and sell Miami commercial real estate

As mentioned before, multifamily is probably the easiest or most accessible for first-time investors as it can be done with a residential loan as well. Miguel closed on a four-plex in Little Havana with a 5% down. A Tenplex can be bought with 20/25% down, while some banks require 30% down. When looking at these loans, banks will focus on the property and rent rolls. They will look at the current rent but also at market value and adjust for that. Maybe the units were rented for a long time for $1,000 while the actual market value is $2,000 these days.
Regarding mortgage rates for such projects, the current rate is 6.5%, so in reality not that different than the residential market. In addition, many sellers will offer owner financing with 35% down.

The Risks

As with any investment, commercial real estate involves a degree of risk. Nevertheless, the risk is usually minimal as it is a numbers game.Even if the market drops, owning ten units means the loss can be offset by other units still producing income. While investment markets can be fragile, people have to live somewhere whether the market is up or down. In the last 20 years, Miami has not experienced any big commercial drops beside a slight drop in 2005/2006.

Taxes

Taxes are another advantage of investing in commercial real estate. Depreciation is a technique used by real estate investors to reduce their income taxes. Under the IRS rules, businesses can deduct a specific portion of a property’s value every year until it reaches zero. Working with a knowledgeable CPA can help you take advantage of this opportunity.

In addition, commercial investors often use the 1031 exchange, a well-known technique for deferring capital gains as they expand their real estate portfolios.

Where to Buy Commercial Real Estate in Miami right now?

There is a lot of opportunity in emerging markets. Allapattah for example is a low-to-medium-income area. Up till 5 years ago nobody touched this area. People jumped en masse on Wynwood. Someone bought a commercial building for $3M in Wynwood and sold it 3 years later for $25M. An Allapattah warehouse sold 3 years ago for $2.1M and is now under contract for $8M. We are now seeing more investors going west and north. Lemon city between Little Haiti (which is blowing up) and Allapattah. We also see some of the bigger fast-food chains established there now. Also towards the south, we see lots of developments. Miguels is working with investors who see opportunity in the area just before entering the keys! There is only one way in or out of the keys with little development along the way.

Conclusion