The Florida economy has been on an absolute tear. By nearly every metric, the Sunshine State is firing on all cylinders, and that’s driving value in commercial real estate markets.
True, a nationwide recession could loom on the horizon. The Federal Reserve raised rates at 10 consecutive meetings through early May 2023, and the central bank’s hawkish monetary policy is having the desired effect of taming inflation and slowing the economy.
I don’t want to say Florida is immune to business cycles. The state has experienced its share of intense booms and busts, most recently during the Great Recession. But Florida is better positioned than almost any other state in the country to power through a slowdown. Let’s take a look at some of the ways Florida has been outperforming the rest on the nation, and why the state stands out as an attractive opportunity for real estate investors.
Florida’s job market is truly outperforming. Its unemployment rate as of March 2023 was a rock-bottom 2.6%, well below the national level of 3.5%, according to the U.S. Department of Labor’s Bureau of Labor Statistics. Meanwhile, Florida is posting truly impressive job growth. It added 413,000 jobs from March 2022 to March 2023, a 4.5 percent growth rate that outpaced every state but Nevada.
What’s more Florida is shedding its old reputation for creating large numbers of low-paying, low-quality jobs. For decades, Florida’s jobs machine was driven by tourism, agriculture and construction. While tourism remains an important part of the Florida economy, the job growth has shifted. Hedge funds from New York and Chicago increasingly are setting up shop in Florida, as are tech companies from California. All of that is raising the level of Florida’s labor market – and driving future demand for office space. Even if some existing companies reduce their office footprint, the new arrivals are more than making up for any demand lost to work-from-home trends.
With 22.2 million residents, Florida is the third-most populous state in the U.S., trailing only California and Texas. What’s more, that number is growing rapidly. Florida’s population increased by 1.9% from mid-2021 to mid-2022, making it the fastest-growing state, according to the U.S. Census Bureau. The influx of new residents is driving demand for housing and for commercial real estate, including office space.
What’s more, the demographic and economic profile of the new arrivals is changing. For decades, Florida attracted retirees looking for affordable housing and sunshine, along with workers seeking positions in the service sector. Today, the in-migration is driven by higher-wage, younger arrivals, many of whom are bringing families and businesses with them. Decades ago, Florida attracted retirees and people looking for low-skilled work. Today, it’s attracting professionals.
A favorable tax climate
Florida famously has no personal income tax, which is part of the reason that so many residents and business owners are flocking to the state. The lack of a state income tax also is a significant benefit for investors in commercial real estate. who can reinvest their profits without worrying about confiscatory tax rates. Additionally, Florida collects comparatively low property taxes, muting a major source of pain for real estate investors in many parts of the country.
Florida’s state and local governments do collect taxes, of course. According to the Tax Foundation, Florida had the nation’s 11th-lowest tax burden in 2022. Considering state and local taxes, the effective rate on taxpayers was 9.1%. Among other low-tax states, Florida ranked favorably. Tennessee’s effective rate was 7.6%, while Texas’ was 8.6%. New York collected state and local taxes at a rate of 15.9%, the highest tax burden in the nation.
An influx of capital
As the Fed has raised interest rates, commercial real estate in many parts of the United States has cooled. But Florida’s property market is continuing to set new records.
In a prominent example, a waterfront site in Miami went under contract in April after receiving multiple bids above $1 billion. The winning bid for the 15.5-acre parcel was $1.225 billion – and four other bidders also came in above $1 billion.
It was a sum that once would have been unthinkable for a Florida land deal – the site traded in 2011 for $235 million. But Florida’s rising prices reflect a maturing property market, along with geographic boundaries that constrain development. South Florida is essentially built out – it’s bordered by the Atlantic Ocean to the east and the Everglades to the West, limiting the supply of land.
The flow of capital into Florida accelerated during the pandemic. Miami Mayor Francis Suarez boasts that his region is becoming a “capital of capital” – and considering the money flowing in from institutional investors, it’s hard to argue with that conclusion.
Real estate appreciation
Betting against Florida real estate has been a losing move. Going long on the Sunshine State, on the other hand, has rewarded investors. In the fourth quarter of 2022, Florida had the nation’s highest year-over-year home price appreciation, at 15.2%, according to the Florida Housing Finance Agency. North Carolina was second, at 13.4%.
Among metro areas, the Florida market of North Port-Sarasota-Bradenton was the nation’s hottest, with 20.1% appreciation. In fact, Florida metropolitan areas dominated the list – they accounted for six of the nation’s seven hottest markets. Fort Lauderdale was No. 2 with 18.2% appreciation, West Palm Beach was third at 17.8%, Orlando was fourth at 16.9% and Cape Coral-Fort Myers rounded at the top five at 16.2%. The Tampa Bay region placed seventh with 15.8% appreciation.
Houses are distinct from commercial real estate, of course. But the rising values in Florida’s residential real estate market are a useful proxy for what’s going on in the overall state economy, and in the commercial real estate market. In-migration of people and money is causing values to snowball in a way that drives long-term wealth creation.
In sum, Florida real estate offers a powerful way for investors to drive strong returns and create long-term wealth. With a booming economy, a favorable tax environment and an influx of capital, Florida offers attractive opportunities for real estate investors.