In our digital world, things rarely stay the same for any extended amount of time. In industries such as commercial real estate (CRE), there is a constant tug-of-war between tradition and innovation. Events such as the rapid adoption of tech and big data have already transformed the real estate industry, while other up-and-coming trends like virtual tours are starting to leave their mark as well.
To analyze where commercial real estate stands amid the COVID-19 pandemic, how it’s been transformed and which of the industry’s elements have remained a constant, we sat with James Hawkins, principal broker of Miami-based Hawkins Commercial Realty. He was previously senior vice president of Morgan Stanley, with over 15 years of experience on Wall Street.
Q: Could you start by telling us a little bit about your background and why you chose a career in commercial real estate?
My professional life prior to being a commercial real estate broker encompassed financial services and entrepreneurship. As a Senior Vice President of Investments and a Chairman’s Council Member at Morgan Stanley, I honed my financial analysis skills and developed high level selling skills necessary for working with entrepreneurs and high net worth individuals. As an entrepreneur, I came to appreciate the demands on and responsibilities of a business owner and gained invaluable customer-side commercial brokerage experience while negotiating dozens of commercial property and M&A transactions as a principal. Finally, prior to founding Hawkins Commercial Realty, I was a top producing commercial broker-associate at Florida’s largest independent real estate firm. Combined, these experiences led me to a set of beliefs that power my firm’s guiding principles: always be responsive; be effectively, steadily assertive; continuously develop and engage superior competency; be sensibly creative; always seek to add value to the process.
Q: Considering the current COVID-19 pandemic, what are your thoughts on the CRE market in the US today in terms of trends and challenges?
When COVID-19 first hit, everybody was stunned. Deals in the pipeline blew up, then the phones went eerily and uncomfortably quiet. Then, all of a sudden, the phone rang, then rang again, and has been ringing since. So far, effects seem to vary significantly by property type, with retail and hospitality seemingly bearing the brunt of the blow. To a significant degree, however, effects seem to have been largely offset by the lower cost of capital and a not so light dose of American-style this-too-shall-pass optimism.
Considering this more analytically, any effects on values should come by way of changes in current and anticipated future net operating income (NOI) by way of changes in vacancy and rent growth. Any increase in vacancy tends to cause a larger drop in NOI as not only is revenue lost but expenses are not covered. This NOI decline to revenue loss ratio varies; 1.5 is a general rule of thumb I use. Thus, if cap rates were unchanged, values would be expected to drop from this one effect by about 1.5 times the increase in vacancy, assuming that 1.5 rule of thumb ratio. I think most market participants expect some increase in vacancy overall, but, naturally, with some property types and locales affected more than others. A question that remains is how long any vacancy increase will last. If it is a year, it really is just a bit of lost income for a short period, small potatoes in the big scheme of things. At this early stage, with things still uncertain, one would expect any anticipated increase in vacancy to result in less than a full drop in valuation. So far, that appears to be the case.
Offsetting these negative effects, however, would be anticipated changes in cap rates. Interest rates have dropped with COVID-19. Over time, cap rates tend to move with interest rates, but about a third as much. It is safe to say that five-year rates have dropped by a full point, if not more, with the variance depending on how one defines rates prior. One could debate different effects on cap rates, changes in rent growth expectations being a notable one. An investor expecting less rent, i.e. lower rent growth, at a future date would pay less now, thus lower rent growth rates should result in higher cap rates, meaning lower prices. At this stage, however, it is likely that the result of all this would result in a change of about one third of the rate, in line with historical ratios. If we assume a basis point decline in cap rates of 33 basis points — one third of an assumed full point drop in interest rates — and a beginning cap rate of 5%, this would translate to a 7% increase in values, an offset to the negative effect of values due to changes in NOI.
Q: What differentiates the commercial real estate market in Florida from other major markets in the United States?
The ongoing growth in population and the economy are different here versus most of the country. It is hard to describe an area of the county without noting some promise for it in the coming years that it is likely to partially meet if not surpass. As much as Miami has transformed, there is much more to come. The city, which now boasts the third most dense skyline in the United States, is gradually becoming a kind of tropical Manhattan, with ever-growing public transit systems and exciting transit-oriented development projects around stations. Miami is happening.
Q: How have you seen the industry evolve in the past years?
As French critic Jean-Baptiste Alphonse Karr said long ago, “the more things change, the more things stay the same.” That could certainly apply to the practice of commercial real estate brokerage. Though it has become more digital over time such that technical proficiency is a competitive advantage if not a necessity, it nonetheless remains a business of relationships and deal making prowess. In the end, it is all about navigating the turbulence between the needs, wants, and concerns of buyers and sellers.
Q: Where do you see it going in the future?
Some of the emerging technologies for presenting a property to the market will become the minimum standard, and other technologies will surely be developed. Nonetheless, as much as it may seem like technology is going to do this or that to the business of commercial real estate brokerage, I would expect that it instead will remain a business of interpersonal skills and deal making capabilities for the foreseeable future. Commercial real estate is so dynamic, with each property being unique, the prospect of an algorithm replacing the role of the broker anytime soon seems miniscule.
Q: Are there any lessons from the past few years that you would impart as an absolute must for those looking to get into the CRE industry?
To be successful in commercial real estate sales requires a high level of comfort with business concepts. A commercial real estate broker needs to be able to speak to owners with a level of confidence that helps lead owners and buyers to better outcomes.
Being empathetic is important, exceedingly so. This business necessitates the ability to discern the feelings of clients, then use that to help them do what you would do in the same position but with the benefit of your knowledge, experience and capabilities.
Q: What is your general assessment for the commercial real estate market in 2020? Have you spotted some interesting market trends, especially considering the current pandemic?
In general, I think the effects of COVID-19 on values will likely be more muted than some more excitable types expect. I also think we will pop back into prior form more quickly than people realize, that the demise of office, replaced by Zoom, is overblown, and that people will quickly return to the cities once it is safe. However, I suspect that retail, particularly shopping malls, has had its ongoing evolution fast-forwarded by the pandemic. Retailers that have left are surely not coming back. As the main street shops went before them, they have too.
Q: How has the evolution of online marketing impacted the commercial real estate industry?
Being online is a minimum requirement now. For those of us that are technically adept, the increasing importance of technology has been an opportunity, but for others it has been marginalizing.
Online marketing tools and techniques allow for more targeted effective marketing, and can be used to pull qualified buyers from a view of an offered property through to a negotiating process. Indeed, marketing of commercial real estate is about the pull-through of the few qualified buyers with matching objectives that exists for any commercial property as much as it is about traditional marketing efforts to get them to notice it. I think this is missed by many brokers.