Chairman Stephen Bittel talks real estate, trends, and building better communities.

2019 Enters With a Storm

January 2, 2019 – I continue to get asked where we are in the commercial real estate cycle, with a good bit more urgency after the last tumultuous weeks.   So much of where we are going as an economy is better understood by a quick explanation of where we have been.

2018 experienced the long anticipated increases in interest rates throughout the year.  While rates are still low compared to historic levels since 1979, when I began my career, we have been spoiled by short term rates at almost zero and long rates, under 4 percent.  Cash deposits have earned almost nothing compared to over 2% today.  Low borrowing costs motivated both corporate and individual borrowers to drink deeply at the debt trough for a long period, increasing the amounts of government, consumer and corporate debt, all over the world, to record levels.  When borrowing costs go up, commercial property values tend to decline as investors still rely on debt for 50 to 80% of their capital stack.  Properties have reduced cash flow after servicing more expensive debt. Conventional bank and life company lenders have become more selective on both borrowers and collateral, while there has been an explosion of new lenders for higher proceed loans and less than super core assets, injecting a bit more risk in the market.   The REITS have been mostly out of the acquisition business for much of the year as their stock prices have declined and dividend yields increased.   Professionally managed funds are loaded with cash awaiting placement, but slow to deploy capital given the cloudy future.  No one wants to time new investments incorrectly, but the funds cannot sit on the sideline forever.

The sticker shock of new higher rates, even given the recent slight decline, has slowed the purchases of bigger ticket items like homes and cars.  When buyers pull back from new home buys, apartment rents and occupancies rise as demand grows.  People have to live somewhere, and our housing affordability crisis continues to grow.

The long prophesied retail apocalypse was delayed this season as retailers experienced the best holiday sales in six years.  We still need a serious culling of retailers, but brick and mortar retailers who are enhancing their online and delivery strengths did well, while digitally native or online retailers keep adding more brick and mortar stores.   Consumers had extra money generated through wage growth, gas price reductions and tax breaks.  More cash quickly turned into more sales especially for clothing and home décor.  Demand for restaurant space and service users continues to be strong as our economy shifts, while online retail sales keep growing.   Top tier malls are performing well but secondary and tertiary market malls are suffering along with a declining department store industry.   All retailers and retail property owners are rushing to enhance the experiential component of shopping to continue to capture consumer participation.  Those that do are prospering and expanding, while those that don’t are withering. Our retail world is evolving, as it always has.

Industrial real estate continues to be the shining star amongst the asset classes with the continued expansion of demand for distribution capability of online retailers.  Fulfillment and logistics centers continue to absorb space at a rapid pace with growing demand driving rental rates and development.  Last mile sites like our District 79 project in Doral, are poised to succeed even amidst a slowing overall economy.

Limited office development has seen office occupancy increase, with the only giant demand increase coming from co-working facilities that today are probably the largest office space users in the nation.   Even growing office users are shrinking their footprints as individual offices continue to decline in size.

Operating businesses with a real estate component like hotels and self-storage performed well, but both have seen huge additions to supply over 2018 likely leading to some pricing pressure in the year to come.

The stock market decline and volatility in December seems to have had little impact on short term consumption, but clearly is driven by caution regarding of what lies ahead.  Professional money managers just aren’t sure how many more of the political “bombs” the economy can withstand.  The government shut down, the fight about funding the wall, Cabinet exits, trade wars, a shift in House control, the Mueller investigation, the Twitter war, and on and on and on cause people to worry about what comes next in the United States. Leadership in so many other countries is highly unpredictable as well, causing concern as investors exit the public markets and hold cash, which now can earn a little yield, while waiting out the period of uncertainty.  Political instability may be the driver of the next market correction, even while the economy continues to perform fairly well, with low unemployment and strong profits.  The nightly news has turned into a daily horror movie with journalists taking sides in a way never seen before at anywhere close to this level.

After a peace time economic expansion now well in to at least the tenth year, the public equity market volatility is clearly telling us that bigger money investors are nervous and might watch for a while until they get some clarity on the future.  Trees really don’t grow to the sky, and after long periods of growth, our economy tends to regroup and consolidate and even soften, as one cycle ends and another begins. Asset prices have certainly come down in many cases, and that is tempting many back into the market, just like there are often buyers just after big market declines.  The question is what’s next and when?

High liquidity amongst investors will likely temper any major downward pricing adjustments, but some continued softness is expected in 2019.  A crash is less likely than a continued slow down. Capital is raised and primed for deployment quickly as real investment yields after the cost of debt service improve, and especially in higher growth markets where a story can be told about what is driving the potential for over performance.  So yes, I’m a bit concerned and nervous, but as a brand new grandfather for the first time, that is a distinct part of my job description.  Nervous markets make investors of debt and equity capital more selective and we can expect choppy waters in 2019, with special opportunities awaiting the best prepared investors.  The year ahead will require even more patience, discipline and focus than normal, but buying when others are watching is always an opportunity.


At Terranova, we acquired a large industrial property in the last days of 2017 leased back to the Fortune 500 user for two years as we prepared for a major development.  The deal was a clear recognition that investments over the next few years would require us to create value through development activity versus many years of buying existing assets.  We sold a new McDonald’s scraped and rebuilt land lease, refinanced our gas station portfolio as we got ready to do one of our own scrape and rebuilds, adding a full tunnel car wash.  Our Lincoln Eatery food hall just off Lincoln Road is poised to open in the next weeks. At year end we added one more building to our Coral Gables Miracle Mile portfolio and refinanced all the buildings as well.  Leasing was better in 2018 than the prior year, and we have several large developments in the pipeline.  Debt and equity capital have been readily available on our projects but closing the transactions have been a lot more work, we think as a result of overall nervousness.

Stephen Bittel

Bittel Announces Parkinson’s Foundation Centers of Excellence

October 15, 2018 – Amidst a real storm in the Florida panhandle and a tornado of political activity all over the country as the midterm elections quickly approach, we took time out recently to visit the Cleveland Clinic in Cleveland and the Medical University of South Carolina (MUSC) in Charleston to see our investment in the Parkinson’s Foundation Centers of Excellence program come to life.  Both facilities are at the leading edge of the diagnosis and care of Parkinson’s and related movement disorders.  They provide a single facility for patients to see neurologists, occupational therapists, speech therapists, and all the related specialties, easing the care process while providing a remarkable research data gathering opportunity to utilize in research for a cure.

The Cleveland Clinic facility houses some remarkable cutting-edge technology on movement disorders and provides telemedicine opportunities for interim patient contact.  Care in door width, corridor size and easy front door parking access make this a special one stop place for Parkinson’s patients to get all their needs addressed in a single visit.  After the designation ceremony and tour, we dined with Cleveland area supporters in the evening to discuss what we have been doing and what lies ahead.

The next morning, we flew to Charleston, South Carolina with professionals from the Parkinson’s Foundation team to name the next Center of Excellence at the MUSC, housed at the James Clyburn Research Center.  That night at dinner, a local leader who has been living with Parkinson’s said that the same drugs have been used to treat the symptoms for the last forty years.  This comment made clear the need for far greater urgency in our push to change the trajectory and timing of progress in understanding the cause, care, and eradication of this disease.

University President Cole said we all had chosen to be there for the plaque unveiling. When I stood to speak, I differed and said that none of us came by choice, but instead were chosen by having people we care about get diagnosed. I never planned to engage in this fight, but when the President of our company got the call to say she had Parkinson’s, there was but a single path forward, to go all in to try to make a difference at an accelerated pace.

At the end of this week we head out for a day and a half to Las Vegas to name one more Center of Excellence at the Cleveland Clinic Lou Ruvo Center for Brain Health.   The next morning, we will walk with in the Las Vegas Moving Day event before coming back home.  We look forward to keeping the pressure on to keep progress driving forward on a cure and better care.

If former Vice President Joe Biden can create his “Moonshot” project to cure Cancer, why can we not do the same for Parkinson’s. Regular people from every walk of life have been diagnosed as have leaders like President George Bush, Governor Ed Rendell, Senator Johnny Isakson, Alan Alda, Neil Diamond, Jesse Jackson, Brian Grant, Linda Ronstadt, Jerry Lewis, and the list goes on endlessly. Senator Cory Booker’s father and former Attorney General Janet Reno all had Parkinson’s. It seems everywhere I go, someone has a friend or relative who received that same call, and there are many more that have the condition and never have seen a doctor for it.  Doing something is not a choice, it’s an obligation to those for whom we care who had the bad luck to be diagnosed and for those not yet diagnosed. Many thanks to all of you have helped. A massive federal funding of research is what it will take to have our own Moonshot. It’s time to start talking to our elected leaders about making this funding a priority in every state and in our federal budgets.  If we can send a man to the moon, we surely can find a cure for Parkinson’s.

Stephen Bittel


Take a look into Stephen Bittel’s real estate crystal ball

August 20, 2018 – WHERE ARE WE IN THE CYCLE????

This seems as recurrent a daily ask as brushing my teeth in the morning.   I keep my crystal ball perfectly dusted off to give me the clearest view possible looking into the future, while cognizant of the past. Amidst a rising but choppy stock market, increasing interest rates, 6 months of growth in retail sales, and the start of inflation, we should pause and assess where we are and what might lie ahead. So here I go:

When asked a few weeks ago on a NAIOP panel in Miami as to where we were in the real estate cycle in soccer match terms during the world cup games, I responded, “penalty time”.  Judging by our actions at Terranova, we have been a huge net seller over the past few years, while continuing to buy opportunistically on a much lesser level, there is a message.   If typical cycles last seven years on average, we are definitely in overtime, with the last downturn commencing in the 3rd quarter of 2006, bottoming out in the second quarter of 2008, and starting an assent in the 4th quarter of 2009.  By my simple math, this recovery is in its 9th year, with different asset classes performing differently.

Retail claims the black eye of the moment, with big box players and department stores suffering the most, along with the centers they anchor.  Supermarkets and their shopping centers are withstanding attacks from all sides, while experiential retail seems to be doing the best.  Somehow the Amazon purchase of Whole Foods, titled the book that had already been written about the commoditization of retail and its move on line.  Retailers always had a limited life. The dominant retailer when I arrived in Brunswick, Maine for college in 1974, was W.T. Grants.  By 1976, the seventy-year-old over 1200 store chain had gone bankrupt and disappeared, the first of many retail bankruptcies we would experience in the next 42 years. When I began in this industry in 1979, K-Mart was the power player, and Sears and JC Penneys were immense chains.  New stores emerged like Blockbuster, Circuit City, and Toys R Us, and grew and prospered and then went away.  Retail and retailers evolve just like the properties and communities they occupy.

Multifamily development has experienced a national surge in development volume in record numbers.   Spurred on by the foreclosure crisis of 2008 and the next few years, millennials partnering later in life, and the growing cost of housing, developers have raced to meet demand.  After a recent slowing of rental rate increases, recent higher interest rates have pushed residential consumers back to rental opportunities.  The rush to all places urban continues.

Office supply has been substantially fixed for years, as even growing users take less space with smaller offices, open floor plans, and greater efficiencies.  Changed work patterns with people working from home or in coworking creative office environments have held demand down and kept rental rates constant except in some tighter markets. WeWork has become the high growth consumer of office space, joined by local shared space users nationally.

Industrial real estate has been the darling of our real estate space over the last few years with e-commerce spurring space demand and rental rates being driven up, while cap rates have fallen.  Who would have dreamed 10 years ago that industrial parks would trade at cap rates below 4 percent. Our planned development in Miami of the Pepsi distribution facility, the final last mile distribution opportunity by Miami International Airport is all about this trend.

The overall commercial real estate market has been supported by the nearly trillion dollars raised and unspent searching for real estate opportunities worldwide.  With money in the bank earning almost nothing for several years, yields of four to six percent seemed appealing.  When adding appreciation to cash flow, sophisticated investors could obtain yields of 8 percent and higher with relative ease and safety, especially when adding some leverage at an interest rate cost much lower.  With interest rates rising, that positive spread began to disappear, and asset pricing began to flatten out or fall with the expectation of future interest rate increases.  Still the pent-up capital demand has continued top pricing for the best assets in the best markets. Opportunistic plays have become harder and harder to find, with a build to core strategy often making the most sense.

So the market has continued to be a quieter stable, with risk being more about political instability, both in the United States and in several “hot spots” around the world than about market risk.   As investors we like stability of markets and laws.  Trade wars cause instability just as shooting wars do. Changing technologies have always caused disruption like the move from the horse and buggy to trains and cars, but we embraced the change and life improved.  Industrial automation has replaced workers but will be little compared to what is coming from artificial intelligence just around the corner.

The best locations in the best markets will continue to perform depending on asset class and market.  The continued evolution of real estate users and the buildings they occupy will drive future values. Getting ahead of change has always been good if you make the right investments or bets, as they are often called.  Entering a predicted softer market with liquidity, enables us to take advantage of repricing and be poised for the next up market.  Timing cycles has always been tricky.   Our core business continues to be seeking generational quality assets to ride through cycles, while simultaneously always keeping our eyes “peeled” for value opportunities.

Stephen Bittel