Second Half Slow Down in Office Investment in 2022 due to Rising Cost of Capital
Following a record breaking year in 2021, office investment activity in South Florida decelerated in 2022. This was especially the case in the second half of the year, with more than 70 percent of deals occurring in the first half of 2022. Sales volume in South Florida totaled $2.9 billion in 2022, a decrease of 45 percent from 2021’s record volume of $5.2 billion. Furthermore, 77 percent of the $2.9 billion sales volume closed in the first half of 2022, demonstrating the effects of rising borrowing costs and uncertainty in the capital markets that elevated in the second half of the year. Despite the uncertainty, South Florida is a resilient market that is insulated better than most from macroeconomic forces making it an appealing market to seek invest opportunities.
Strong market fundamentals in South Florida, including the newto- market activity, return to office movement, rising rental rates, positive net absorption and compressing vacancy rates were major factors in attracting investor activity in the beginning of the year. This activity created a competitive market driving prices up throughout the year as deals closed; sales price per square foot increased 13.7 percent year-over-year, ending 2022 at $325. Following muted activity throughout the pandemic years, crossborder investment picked up in 2022 accounting for 19 percent of buyers in 2022, as compared to 3 percent in 2021.
Additionally, private investors accounted for 65 percent of buyers in 2022, as compared to 54 percent in 2021. Following robust activity in the first half of the year, most investors had met allocations already and felt comfortable taking a pause on new investments in the second half while interest rates continued to rise and borrowing became more difficult. While investments were on pause in the second half of the year, significant capital has been raised and is waiting on the sidelines to be deployed when the time is right in South Florida’s strong market.
Throughout 2023, South Florida will see complicated deals with rescue capital and recapitalizations along with more flexible borrowing like mezzanine financing. With turbulent financial markets, 2023 is expected to be the year of the structured deals and smart money, selling or bringing in new partners as needed to make the deals worthwhile. While expensive debt at lower leverage will affect pricing, rising rental rates have been increasing net operating incomes (NOI), so significant distressed product is not likely in South Florida. To begin the year, 2023 is expected to offer off-market opportunities to gauge pricing, accompanied by creative and opportunistic deals throughout the remainder of the year.