December Outlook: Sunshine State Boom Continues

Florida’s strong economy keeps rolling and, month after month, the Sunshine State’s job market outpaces that of the nation as a whole. The jobs picture is a key part of the office market, and Florida continues to turn in solid numbers on this front.

State labor officials announced in late November that Florida’s seasonally adjusted unemployment rate was just 2.8% in October 2023. That was well below the national average of 3.9%. Florida’s jobless rate has been lower than the national level for 36 consecutive months.

Florida’s private sector year-over-year job growth rate came in at 3% in October, well above the national pace of 1.7%. In another superlative for the Florida economy, the state’s job growth has outpaced the nation’s expansion for 31 consecutive months.

The stats themselves are interesting, but there’s a bigger picture at play: Florida once was a low-wage state dominated by jobs in construction, tourism and agriculture. But the state is evolving beyond the old narrative. In another example of this shift, Florida wages finally are catching up with those elsewhere in the U.S. In the second quarter of 2023, the average wages in Miami-Dade and Palm Beach counties topped the average national wage of $1,332, according to the Bureau of Labor Statistics’ County Employment and Wages report. That is notable because, for decades, even the highest-paying counties in Florida trailed national wage levels.

Attracted by Florida’s combination of abundant sunshine, a manageable regulatory burden and comparatively low taxes, financial firms from New York and Chicago and tech companies from California have been bringing high-paying, office-using jobs to Florida. The result is sustained momentum for the job market – and a boost for office demand. The U.S. Labor Department reports that Florida’s one-year pace of job creation through October 2023 was a robust 2.9%. Florida tied Texas, and it beat out other large states. California, Georgia, Illinois, Michigan, New York and Virginia all showed job growth readings below 2%.


A turning point for interest rates

While we have been focusing on the Florida economy, there is a broader story at play, too. The Federal Reserve might finally be ready to stop raising interest rates and instead begin cutting.

The Fed began hiking rates in March 2022, a strategy designed to fight the most intense wave of inflation experienced by the U.S. economy since the early 1980s. Since then, the Fed has lifted its policy rate target from 0.25% to 5.5%.

In the post-pandemic boom, central bank policy was essentially designed to slow down the real estate market. The strategy worked. Valuations of commercial properties have cooled, and some landlords (not us, but some) are facing distress as they are forced to refinance expiring mortgages at much higher interest rates.

Fed policy also has succeeded at reining in inflation. The pace of price hikes has eased from a year-over-year rate north of 9% in mid-2022 to 3.2% in October 2023, according to the most recent consumer price index.

In a welcome piece of news, 10-year Treasury yields pulled back during November. In late October, 10-year yields hit 5%, a sign that investors expected the Fed to continue boosting rates. However, as inflation has calmed and the job market has cooled (nationally, at least, if not in Florida), bond investors bid 10-year Treasury rates all the way down to 4.4%. This could be a sign that the Fed will begin cutting interest rates in 2024.

Indeed, some economists say the combination of slowing inflation, a cooling job market and lower Treasury yields are predicting the Fed will pivot away from rate hikes and toward rate cuts in the coming months. Some even say the bond market is forcing the Fed’s hand. At Feldman Equities, we do not try to predict the Fed’s next move but however central bank policy plays out, we are well-positioned to benefit from office market trends in 2024.


The Florida success story

Back to our geographic target area of Florida: Population inflows and job growth are important drivers of office demand. No doubt you have read the headlines about defaults and rising vacancies in many U.S. cities, where vacancy rates of 30% are not uncommon. Rest assured that Tampa’s office market is still thriving.

New tenants are moving in, and office vacancy remains low, especially in Class A buildings in downtown markets. As of the third quarter of 2023, office vacancy was 11% in the Tampa central business district (CBD) and just 5.2% in St. Petersburg’s CBD, according to commercial real estate brokerage Avison Young. Many of the Tampa region’s suburban markets, by contrast, had vacancy rates above 20%, with some approaching 30%.

As employers and employees gravitate toward amenitized buildings in bustling downtowns, Feldman Equities remains hyper-focused on our strategic sweet spot. We reposition struggling office space, and we build new space in downtown markets. The trend is clear: Employers and workers are gravitating toward Florida’s combination of sunny skies, low taxes and common-sense regulation. And once they’re here, they want to work in vibrant downtowns, with plenty of access to restaurants and entertainment.

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