The year 2022 is one we won’t soon forget. We started the year with record-breaking inflation, as supply chain issues, labor shortages and the costs of materials all drove prices higher. At the time, we predicted a busy year for both land and development deals, thanks to record-low supply here in Southwest Florida. We also predicted that the then-anticipated interest rate hikes by the U.S. Federal Reserve would flatten prices and slow sales of both commercial and residential properties. What we didn’t predict was Hurricane Ian last September – or how the worst disaster in Southwest Florida history would impact our economy and our property market. As we look ahead to our commercial property predictions for 2023, it would be impossible to ignore this hurricane’s impact in this region.
Unarguably, Hurricane Ian changed the course of development in Southwest Florida. With more than $5 billion in estimated damages in Lee County alone, our region is focused not just on building, but on rebuilding. In many ways, the hurricane will accelerate growth in our region, thanks to infrastructure funding that will bolster our emergency preparedness as a region.
Where will we see growth in 2023? Continue reading for our three commercial property trends to watch.
1. Affordable Housing on the Fast Track
Affordable housing has been a concern across the state and particularly in Southwest Florida for years. The Florida Housing Coalition announced this year that there was a statewide deficit of close to half a million homes that are affordable for lower- and middle-income families.
Although we anticipate that rent growth and home prices will level off, we don’t foresee prices falling to pre-pandemic levels. The demand erosion caused by the national economic slowdown will largely be offset by expansion in our area due to the hurricane. With more than 5,000 homes destroyed in Lee County alone (and countless others rendered with major damage), demand will remain high for both long-term and temporary housing.
Initiatives from Fannie Mae and Freddie Mac will work to alleviate some of our affordable housing woes, and new multifamily developments coming online will add much-needed supply to our housing stock. However, our community’s leaders know that to truly solve our region’s housing crisis, we need to increase supply, and create equilibrium between supply and demand.
Unfortunately, increasing our supply of housing and rental stock will take time, and 2023 is too soon to see relief. Construction costs are high due to shortages of both materials and labor, and the cost to borrow money for development also presents a challenge. However, Hurricane Ian has made our housing conundrum more urgent than ever, and we expect that local governments will be motivated to act.
2. The Reimagining of the Office
Part of the reason for our region’s housing woes is the population explosion we experienced during the pandemic in 2020 and 2021. Office workers with newly remote positions were given the opportunity to work from anywhere in the world. Many chose to relocate to Southwest Florida.
As of 2022, 26% of American employees work entirely remotely, and nearly two-thirds of U.S. workers are at least partly remote. This creates a challenge for office-based employers, who will need to re-think their work model or face the possibility of losing employees to companies with more flexible policies.
Another, more local, factor will also force office occupiers to reconsider their models. Prior to the hurricane, our region’s supply of commercial real estate was already limited. The Southwest Florida office property vacancy rate was a shockingly low 4.8% entering the fourth quarter of 2022, according to our MarketBeats report for Q3 2022. In line with the low supply, office asking rent had climbed to $20.79 per square foot, an increase of nearly 12% from just 24 months earlier. With wages also growing by close to 8% over that same period, employers will need to find ways to cut costs.
While it’s unlikely that most employers will switch to a fully remote workforce, the need for cost containment will encourage many businesses to switch to a hybrid model to reduce operating costs and satisfy employee desires for more flexibility. And while hybrid work may reduce some demand for office space in the Southwest Florida area, we predict that some of our more antiquated commercial stock will be redeveloped into industrial space or even multifamily properties to satisfy the region’s needs.
3. Record-breaking Demand for Industrial Space
It could be said that 2022 was the year of the industrial property in Southwest Florida, with Amazon, Uline, FedEx and other companies building or leasing millions of square feet of industrial space. However, available space for those looking for existing property is limited, to say the least. At the start of the fourth quarter of 2022, the vacancy rate for industrial property in our region was a record-breaking 0.7%, a 30-basis point decrease quarter over quarter. Compare that to our national industrial vacancy rate of 3.2%, and it’s clear why industrial property is at a premium.
Hurricane Ian exacerbated this already substantial supply shortage, not only by damaging or destroying thousands of properties, but also by bringing an influx of disaster recovery companies that now occupy much of the limited available space. With power players like LaserShip and Sky Chef coming to the area, demand is anticipated to get even stronger.
Fortunately, there is relief on the horizon. About six million square feet of industrial space is currently in the planning stages. Considering the region’s entire existing inventory of industrial property is just over 45 million square feet, this new development will increase the amount of industrial space by more than 13%. While this will assuage some of the short supply, we expect that demand will remain high through 2023.
Our region is changing, in part because of the onward march of progress, but also because Hurricane Ian has accelerated several real estate trends. While these changes won’t happen overnight, savvy investors will be prepared to reap the benefits of Southwest Florida’s evolution.