Market Updates & Insights

South Florida Largely Insulated from Interest Rate Impact

March 24, 2022

From brokers to bankers; investors to home buyers, anyone with a stake in the U.S. real estate market is keeping a watchful eye on the looming possibility of a historic interest rate hike.

By Brett D. Forman

From brokers to bankers; investors to home buyers, anyone with a stake in the U.S. real estate market is keeping a watchful eye on the looming possibility of a historic interest rate hike. With inflation at a 40-year high, immense pressure is mounting on the Federal Reserve to institute a series of interest rate hikes of at least a quarter percentage point, and possibly even a half percentage point — a measure that hasn’t been employed in more than two decades.

For many areas of the country, particularly those with stagnant growth or heavy reliance on working professionals’ dollars, the impact of interest rate changes will surely be felt. Yet, here in South Florida, aggressive demand shows no signs of letting up. Whether interest rates change a little or a lot over the next year, demand is expected to continue to vastly outpace supply, largely insulating the region from any significant impact. There will continue to be plenty of buyers eager to pay top dollar to live or invest in Miami-Dade, Broward and Palm Beach counties, and a change in financing terms won’t deter them, particularly in a region where many pay in cash.

Prices Continue to Rise

Florida home prices are expected to continue their pattern of ascent. Property intelligence source CoreLogic predicts that Florida will command the highest residential home price increases among all U.S. states in 2022 (10.7 percent), followed by South Carolina (8.9 percent) and Maine (8.6 percent). So far this year, South Florida sales are in line with this predicted trend: In January, the median listing home price in Miami-Dade County was $471,000, up 12.1% year-over-year. Broward County’s January median listing home price was $350,000, up 11.1% year-over-year, and Palm Beach County’s median listing home price was $415,000, up 18.6 percent year-over-year. January data also showed the largest yearly decline in time spent on the market among larger metropolitan areas, with the Miami market declining by an average of 29 days. Inventory continues to remain low while demand is as strong as ever.

Migration Shelters South Florida

Amid this period of economic change, why will South Florida be largely unscathed? Simply put, there’s a very different demand generator here compared to areas such as Downtown Atlanta or Charlotte, N.C., where the market is much more reliant on apartment rentals from working professionals. South Florida’s sunny climate, business-friendly governance and lower taxes are all fodder for jobs growth and corporate relocations with high-income employees.  Increased remote-work opportunities have also enabled workers to move anywhere, and many are choosing Florida.

Florida is currently the most popular U.S. state for both domestic and international migration, according to Census data released in December. The state added at least 555,710 people from other U.S. states between January 2020 and April 2021, according to Florida Department of Highway Safety and Motor Vehicles data on people who switched over their driver’s licenses during that span. Many of these new residents landed in the state’s most populous counties, Miami-Dade, Broward and Palm Beach.

Rising Costs, Reduced Cash Flow May Impact Financing

While all signs point toward a strong 2022, rising interest rates and inflation could have some impact. Examples include:

  • Refinancing may be more difficult. Developers who fully financed their transactions and have yet to hit their targets may have challenges refinancing in a rising interest rate environment.  In the multifamily sector, for example, this could be more problematic for less-institutional players who miss rental and expense projections.
  • Cash flow could decline. Inflation and rising interest rates alike can have a negative impact on income, creating a challenge for debt service coverage ratios. For new builds, everything from land and labor to cement block and wood costs more.
  • The risk of retail and office debt may rise. Asset classes that are less in favor may become harder to finance as rates rise. That would include office and retail which are very much up in the air.  Those assets that are not best-in-class will see rental incomes either languish or will not rise as fast as expenses.

Regardless of these potential impacts, changes in interest rates shouldn’t prove impactful enough to move the needle in the Southeast.   Of course, there is the fear of the unknown such as how the events playing out in Ukraine might impact global economies in the short and long terms. 

For the time being, there continues to be a proliferation of money on the sidelines and people looking for a place to put it. Tangible assets are always desirable, and real estate is the easiest one to find and be a part of. Migration isn’t slowing down and people are going to keep buying, especially residential. You can count on new residents moving to South Florida, now and in the future.

 Brett Forman is the executive managing director for the eastern U.S.  for Trez Capital, a Canadian-based private commercial real estate lender that provides short-term debt and equity financing up to $100 million-plus in loan value.