The South Florida market is hot, hot, hot–in business and in real estate–but what does it mean? And will it last?
Delray Beach-based Menin Development maintains a separate phone line for businesses seeking to lease space. In mid-March, company founder Craig Menin said calls had “quadrupled” over the previous year. Most were from 917—the area code for New York City cell phones.
Early this year, a Lang Realty agent listed a house in West Boca that is “20 years old with no major upgrades.” The $750,000 listing attracted 54 showings—most of them virtual—in two days and sold for $60,000 more than the asking price.
Charen Marek is an agent with Douglas Elliman Real Estate. In late March, she closed on a small home in East Boynton Beach at a “top-dollar price.” It had been on the market for eight days. The buyer, from Chicago, never saw the house in person. Meanwhile, the sellers want to spend about $500,000 on a new home, and the closest Marek can put them to their old neighborhood is west of Lake Worth.
Each anecdote illustrates part of a real estate market that, as Agran puts it, “couldn’t be any hotter.” South Florida real estate booms aren’t new, of course, but this one is different, because of the COVID-19 pandemic and because it could transform this area.
In early 2020, conditions already were favorable for the South Florida market. Interest rates remained low. So did inventory. Because of the 2017 tax bill, residents of metropolitan New York and Chicago could deduct only $10,000 of their local and state taxes. Florida, which has no income or estate tax, looked tempting.
Then the pandemic and accompanying lockdowns stripped away amenities of urban life that had compensated for the high cost of living. Broadway went dark. Streets lost their vibe. Life stopped.
At first, however, South Florida Realtors and business groups were as worried as anyone. Would mass layoffs start a wave of foreclosures, as happened during the 2007-08 financial crisis? How would drastic cutbacks in travel and restaurant closings affect the wider economy?
“Last March and April was DEFCON-1,” Agran says, referring to the Defense Department’s maximum state of readiness. But by mid-May, things had dramatically shifted for the better.
“The velocity of the initial surge,” Agran says, “was the result of living in a COVID world.” People in the Northeast and Midwest hardly could go out even in good weather. They envisioned a bleak winter.
Meanwhile, Agran says, they saw pictures of Floridians “jogging, boating and living their lifestyle. So they figured, ‘We have to live our life.’” If they had been considering a move, “COVID was the last straw.”
As June 2020 approached, one Realtor who specializes in Boca Raton said the market was “on fire.” COVID-19, he said, had become “the new buzzword.” Buyers who might have wanted four bedrooms now wanted five, using one as an office. Lower taxes had been drawing wealthy buyers. Now the upper-middle class began coming.
Cities and developers began exploiting every possible advantage. Boca Raton touted the city’s airport, now with U.S. Customs facilities. Who needs to risk infection at Palm Beach International? Higher-end properties stressed amenities such as private gyms.
It was all working. Home sales in Palm Beach, Broward and Miami-Dade counties doubled year over year in September. Then they doubled in October and November. In February, the median single-family home price in Palm Beach County hit a record—$450,000. Prices for homes and condos increased roughly 25 percent between February 2020 and February 2021. Local buyers not offering cash risked getting shut out.
The pandemic also energized job recruitment. The Business Development Board of Palm Beach County started its Wall Street South Initiative in 2011, aimed at financial services companies. The program drew Wealthspire and Colony Capital to Boca Raton.
Boca Raton ran ads in Chicago and San Francisco. The city encouraged Californians to “trade sunsets for sunrises and keep your money in your pocket.”
Interest has been especially strong in West Palm Beach, where a lot of office space has opened. Kelly Smallridge, the business board’s executive director, believes that the 200,000-square-foot 360 Rosemary project near Rosemary Square will be fully leased when it opens this year.
Even before the pandemic, technology enabled certain businesses to work from almost anywhere. The development board’s Wall Street South Initiative argued that a Manhattan address didn’t matter the way it did 20 years ago.
If that argument hadn’t sunk in, the pandemic gave it new heft. In the last year, Smallridge says, interest has “picked up significantly. Bigger names. Bigger leases.”
Menin made that shift long before the pandemic. He started his company in New York 36 years ago. He moved to South Florida in 1996 and eventually settled in Palm Beach. Six years ago, he bought a home in Delray Beach, and his company paid roughly $50 million for three major retail properties on East Atlantic Avenue.
These days, Menin Development opened the 150,000-square-foot Delray Beach Market in April and in July plans to open The Ray Hotel in Pineapple Grove. In addition, the city commission in January approved The Linton, a Menin project that will convert part of a retail complex on Linton Boulevard to residential.
Restaurateurs are fleeing lockdown states for Delray Beach. Host Restaurants, which had eight locations in Manhattan, opened Avalon Steak & Seafood in Menin’s property at 110 East Atlantic Avenue. Clique Hospitality has locations in San Diego, Vegas and now Delray Beach.
Menin appeared recently on the NBC Nightly News to talk about Delray Beach. As those incoming phone calls show, “we’re being recruited,” he said, not the other way around. “Florida,” the network correspondent said, “is creating its own recipe.”
Menin pointed out a related aspect of the technology trend that has benefited Delray Beach and Boca Raton, which can sell themselves on lifestyle—and lower taxes. Even if the cities can’t draw an entire company, they can draw CEOs who want to live here and have enough clout with their board to receive that perk.
Rather than lease a large space, Menin says, executives will take 50,000 square feet for “family offices.” His company signed one such deal for 110 East Atlantic Avenue. “It’s a mix,” Menin explains. Such people work in that space when they’re in town. “What they have in Delray Beach is not their only home.”
Keith O’Donnell is a commercial real estate broker with Boca Raton-based Avison Young. He also sees the early shift as large firms establish local branches “in Boca Raton, Delray Beach and West Palm Beach. They’re mostly small, a lot of private equity.” Though many are from the Northeast, there also are “more from Chicago than I might have thought.”
O’Donnell notes two other aspects of this regional shift. “These families in their 40s that are coming are bringing a lot of education with them. There’s new talent coming in.” It’s a transfusion of intellectual capital.
More recently, O’Donnell has received inquiries “about development deals. Mostly from Manhattan. They’re just starting to learn the market.” Serious investor money would mark a new stage in the pandemic-influenced market.
Every major institution in Boca Raton and Delray Beach is helping to exploit this moment. Example: Smallridge said Florida Atlantic University touts the local workforce emerging from FAU’s regional-aligned course offerings. Smallridge said President John Kelly attends recruitment meetings.
Boca Raton officials emphasize the Research Park at FAU and Boca Raton Regional Hospital. Backers of the proposed performing arts center at Mizner Park point to the new arrivals, who expect cultural offerings that match those in New York and Chicago.
As Boca Raton and Delray Beach look for new jobs, this boom also may establish Delray’s attractiveness to high-end residential buyers. During the Great Recession, Delray Beach suffered because so many lower-end homes went into foreclosure. Some of them became badly run sober houses that churned patients and dumped them onto the street, creating the city’s opioid overdose epidemic.
Perhaps fittingly, the city is especially benefiting from this boom. “Delray Beach is exploding,” Marek says, and that includes new luxury projects.
In late March, all but three units in the 19-unit Ocean Delray had been sold. The unsold units were named for famous artists—Matisse, Picasso and Calder. The developer, U.S. Construction, had just launched its next project in the city—1625 Ocean.
Ocean Delray replaced the Wright by the Sea Hotel, the family-run inn that catered to middle-class tourists. In contrast, prices at Ocean Delray and 1625 Ocean range from $3.9 million to $10 million. Residences at 1625 Ocean are named for famous musicians, such as Bruce Springsteen and Janis Joplin. U.S. Construction says owners can ride their golf carts to East Atlantic Avenue and the city’s nightlife.
But will this run last? Bob Graham, the state’s former governor and U.S. senator, once called Florida “the mistress state.” Though people have homes here, their hearts remain elsewhere. Is this moment just another fling? A recent Bloomberg News headline read, “Wall Street A-Listers fled to Florida. Many now eye a return.” The article stated that, with the arrival of COVID-19 vaccinations, “ebullient talk of South Florida drawing Wall Streeters en masse is already beginning to fade.”
Jason Mudrick runs Mudrick Capital Management. “New York,” he says, “has the smartest, most driven people, the best culture, the best restaurants and the best theatre. Anyone moving to Florida to save a little money loses out on all of that.”
Then there’s the general craziness. Carl Hiaasen has used actual news to write books satirizing South Florida. The state ranks second in the number of hate groups.
Most important is the environmental threat. In December, a study by America’s Trust for Public Health and the Johns Hopkins Bloomberg School of Public Health rated Florida the most vulnerable to public health damage from climate change.
Warming oceans can produce more frequent and more powerful hurricanes. Homeowner insurance rates went up between 20 and 25 percent this year. Owners of expensive homes may be able to absorb ever-rising costs, but others may not.
A second hit could come if Congress allows flood insurance rates to rise. Floridians may face billions in costs to protect roads from rising seas. The author of a 2018 study on regional infrastructure and sea level rise rated his worry at eight on a scale of 10.
A Wall Street Journal headline in March reported that even as many homebuyers come here, almost as many are moving out. In 2020, Florida’s population growth was the lowest since 2014. Some émigrés cited hurricane fears.
Even if the Florida Legislature refuses to act on climate change, cold-eyed financial types understand what’s at stake. Larry Fink is CEO of BlackRock, the investment company that manages nearly $9 trillion in assets. In his recent letter to shareholders, Fink acknowledged the pandemic. But he stressed that climate change remains the greater long-term danger.
Fink said of BlackRock’s investors, “They have begun to see the direct financial impact as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system. … No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.”
Despite the challenges and lure of a reopened Manhattan, Menin believes much of the corporate shift will be permanent. “You’re moving companies,” he says. “That can be expensive to unwind. As for going to New York, people still have plenty of opportunities. Maybe someone buys a small place there, but the work stays here.”
O’Donnell agrees. Taxes and high construction costs elsewhere, he says, will keep South Florida more attractive. He notes that private clubs in the area have waiting lists. Newcomers will get involved with charities. “One friend comes, then another, and soon you have a party. Get a studio in Manhattan and visit.”
Agran says home prices will reach a point at which “buyers will pause.” It will take “three or four listing cycles for equilibrium, and prices will come down. I’ve seen this many times. The question is when.”
Marek watches interest rates. When we spoke in March, she guessed that he current market has “about three years to run” before rates rise enough to cool things.
For all of the dramatic growth in the last half-century, South Florida has struggled to be taken as seriously as New York and California. Boca Raton is an emerging technology startup hub, but can it be another Silicon Valley? Will the pandemic make enough people give this area a longer, more thoughtful look?
We won’t know for a while. This wave was unexpected, and developments are still sorting themselves out. “Nobody,” O’Donnell says, “could have guessed it.”