South Florida’s economy is likely to continue growing at a gradual pace in 2014 despite a widely anticipated increase in interest rates as the Federal Reserve tightens monetary policy. That is the general view of seven South Florida professionals with a diversity of expertise in commercial banking, capital markets, law, mergers and acquisitions, real estate, technology-based business development and wealth management.
Daily Business Review interviews with these professionals suggest, among other 2014 scenarios, that a stronger U.S. economy will give the South Florida economy a lift, that the area will remain fertile for innovative technology companies, and that home construction will be a contributor to the area’s economic momentum.
South Florida’s unemployment rate dipped to 6.3 percent in November, the lowest in five years, thanks to a combination of increased job creation and reduced participation in the labor force. The last time the area’s jobless rate was under 7 percent was in September 2008, the same month investment banking firm Lehman Brothers filed for bankruptcy, freezing inter-bank lending worldwide, deepening an economic recession in the United States, and paving the way for regulatory reform of the banking industry.
Year to date through October, the number of South Floridians in Miami-Dade, Broward and Palm Beach counties with full-time jobs increased by almost 20,000. The number of South Floridians who are unemployed and actively seeking work declined by about 32,700 during the first 10 months of the year. The area’s total labor force, including the number of South Floridians who are employed plus those actively seeking employment, declined about 26,000 during the January-October period. In October, area industries that had the fastest growth in employment over the previous 12 months were leisure and hospitality (3.6 percent), trade and transportation (3.3 percent) and professional and business services (2.2 percent). Employment declined year over year in construction (-1.8 percent), government (-0.7 percent) and manufacturing (-0.4 percent).
Francisco J. Cerezo,
Law firm Latin America practice leader
The pace of economic growth has slowed in Brazil but probably will remain solid there and in much of Latin America next year, said Cerezo, a partner in the Miami office of the law firm Foley & Lardner.
Cerezo, chair of the Latin America practice and co-chair of the international practice at Foley & Lardner, expects the region overall to sustain solid economic growth next year, supplying stimulus to South Florida.
“I continue to be bullish on Latin America and how Miami is benefiting from it,” said Cerezo, who represents wealthy Latin American families and U.S. companies that invest in Latin America. “Miami just increasingly continues to be a center for economic activity with ties to Latin America.”
He said foreign direct investment in buildings, machines and other business assets in Brazil has decelerated, putting a drag on the pace of economic growth in South America’s largest nation. The pause may have been inevitable, though.
In recent years, “you had companies rushing into Brazil. Well, at some point, they’ve already rushed in. At some point, there’s got to be a tapering off,” Cerezo said. “That certainly impacts us here in South Florida. There has been a lot of Brazilian activity in South Florida … It’ll have a trickle-down effect [on] us.”
Foley & Gardner already has seen a dip in demand for legal work to support acquisitions of Brazilian businesses by U.S. companies.
“We have seen a slight tapering-off of that; 2013 has not been as booming in that space as 2011 and 2012,” Cerezo said.
But he also said the 2014 economic outlook is promising for such countries as Colombia, the Dominican Republic, Ecuador, Peru and some “nice bright spots in Central America as well.” In addition, “Mexico is one of the untold stories. Mexico is doing really well,” he said. In general, “We’re still feeling great about Latin America.”
Jaret L. Davis,
Law firm co-managing shareholder (Miami)
Davis, who helps direct Greenberg Traurig’s operations in Miami, expects general uncertainty among business owners to recede in 2014 amid sustained economic growth and stable borrowing costs. “The one thing the markets absolutely detest is uncertainty,” Davis said, but doubts about monetary policy and other economic variables have subsided.
For example, the Federal Reserve is likely to keep short-term interest rates low until the national unemployment rate falls to 6.5 percent, and “we’re not going to hit that for a year,” he said. “So we may find ourselves in this rarified period of no Fed policy at all: no additional quantitative easing but no rise in interest rates … which from the standpoint of uncertainty is great.”
Companies that have reduced debt and accumulated cash may be more inclined in 2014 than in 2013 to put capital to work in job-creating investments. “You have a lot of dry powder out there, a lot of capital to be deployed, and I think you’re going to see that being deployed in 2014,” Davis said. “We were still suffering a little PTSD [post-traumatic stress disorder] when it came to the capital markets. Folks were still skittish. I think that’s all gone now.”
The South Florida economy, in particular, could gain momentum in 2014 from a mix of technological innovation and infrastructure improvement. Davis cited the scheduled August 2014 completion of twin underwater tunnels between Interstate 395 and PortMiami for trucks only, which will reduce vehicular traffic on downtown Miami streets while making the port more accessible to cargo shippers.
He said innovative companies in Florida and Latin America will get a new showcase this spring at the inaugural eMerge Americas technology conference, which will be held May 2-6 in Miami Beach. “The concept there is to do for technology what Art Basel did for the arts,” David said. In particular, the conference may convince more providers of venture capital and private equity to open offices in South Florida, filling a financing gap for development-stage companies that already have raised money from friends, family members and financial “angels,” or wealthy individuals.
“The big talking point these days is what’s called the ‘Series A’ crunch,” Davis said, referring to a shortage of equity financing for companies exiting the start-up phase. “There’s a number of angels out there and incubators and accelerators. But what happens when you gain traction and you’re ready for that $10 million Series A round?”
Bruce S. Foerster,
Independent investment advisor
The private sector and the federal government are getting into better financial shape, but excessive regulation of financial services could offset the economic benefits of these trends, said Bruce S. Foerster, president of South Beach Capital Markets Advisory Corp. in Miami.
The withdrawal of U.S. troops from Iraq and the shrinking U.S. military presence in Afghanistan are creating a fiscal “peace dividend” in the form of reduced federal spending on war, Foerster said.
“That’s going to have a profound effect on the federal budget in a positive way,” he said. Federal deficits “are coming down as a percentage of GDP,” or gross domestic product, the standard measure of U.S. economic output.
Low interest rates have helped companies strengthen their balance sheets by refinancing and retiring debt, a key trend that “has been extraordinary and unnoticed,” he said. With so much focus on the quarterly earnings per share of public companies, “you don’t hear [stock] analysts talking about balance sheets.”
Foerster said another trend that will become more apparent in 2014 is the underlying strength of U.S. capital markets. “The capital markets continue to rebuild themselves, and that’s good news,” he said. “The markets right now are accommodating.”
But heavy regulation of financial services could weigh on the economy. “I worry about over-regulation,” said Foerster, citing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the sweeping reform of the financial services industry that regulators are still implementing. “Banks are supposed to take risks.”
Foerster said he recently obtained a loan to buy a home and experienced firsthand the impact of tougher regulation of the mortgage application process: “I don’t care to go through it again. … They looked at everything I had ever done in my life.”
Federal lawmakers enacted the Dodd-Frank Act in 2010 to address risks that led to a massive decline in inter-bank lending and triggered a global financial crisis in 2008. But the crisis “happened in a regulated industry,” said Foerster, “so it’s hard for me to believe that regulation squared or cubed is better than regulation.”
He singled out the so-called Volcker Rule, a regulatory product of Dodd-Frank that will limit proprietary trading and investment by banks: “I’m incredibly worried that the Volcker Rule is an overreach.”
Howard M. Gitten,
Law firm specialist in intellectual property, technology development
South Florida probably will become more fertile for growing technology companies next year despite a lack of venture capital firms with a presence in the area, said Howard M. Gitten, a registered patent attorney who serves of counsel at the West Palm Beach office of the law firm Edwards Wildman.
Gitten said South Florida is spawning more viable technology companies with the help of so-called “incubators” and “accelerators,” organizations that guide the development of new business ventures.
“It’s gotten much more active,” he said. “Going forward, I think that’s a bright spot on the economic landscape.”
Gitten said startup businesses with a competitive edge based on technical superiority have sprouted in South Florida, giving business incubators and accelerators more young ventures to choose from and better odds of helping them succeed.
“What I’ve seen is a real bubbling of activity that I haven’t seen before in the incubator-accelerator community,” said Gitten, who serves on the executive board of Enterprise Development Corp., a nonprofit organization on the Boca Raton campus of Florida Atlantic University that assists science- and technology-based businesses.
Among the South Florida entrepreneurs who graduate incubator and accelerator programs, “the quality has really improved,” he said. That is one reason why EDC has been “working with incubators in Miami-Dade and Broward. We’ve got our hand in three or four incubators.”
But Gitten also said funding for young technology ventures is limited by a scarcity of venture capital firms with a presence in South Florida.
He said technology ventures with enough promise to attract equity financing from “angels,” or wealthy individuals, usually must look outside South Florida to find institutional funding from venture capital firms.
“There is a real gap between the angel round and the next round,” he said. “I still think that is a missing piece, getting people to invest in the Florida economy at the venture-capital level.”
Real estate development advisor
Single-family home construction in South Florida is expected to increase next year as developers respond to pent-up demand, said Maxwell, managing partner of Miami-based Maxwell + Partners, a provider of real estate development and advisory services.
“You’re going to see a lot coming out of the ground and being announced in ’14,” Maxwell said, and residential real estate development is likely to give South Florida and the rest of the state an economic lift next year.
“Overall in Florida, I think ’14 is going to be a good recovery year,” he said, citing better access to credit among other reasons. “Banks have begun to open things up a little bit more … We’re seeing higher loan-to-value ratios.”
Maxwell is part of an investor group that is planning to build a gated community with 18 single-family homes along the Biscayne Boulevard corridor just north of the Miami Design District. He said prices will start at $675,000.
Following the steep decline in South Florida housing values from 2007 to 2010, “you’re going to see some resurgence of single-family” next year, he said. “As there is more confidence in the market, things will begin to stabilize, and we will go into ’15 really solidly.”
Among other South Florida sub-markets, Doral is emerging as a “hot spot” for single-family home construction, Maxwell said. “Other hot spots continue to be downtown Miami and other downtown urban-core locations.”
He worries, however, that political fighting among federal lawmakers could undo positive momentum in real estate and the overall economy. “I think the political risk is really the greatest we face,” Maxwell said.
Polarized debates between Democrats and Republicans have unveiled a prevalent political attitude of “my way or the highway,” he said, “and I think that’s causing a tremendous amount of angst in the business community.”
Community bank CEO and president
Seleski, president and chief executive officer of Fort Lauderdale-based Stonegate Bank, said the South Florida economy is apt to stay on its current track of gradual growth next year even if borrowing costs rise. “I don’t think there’s going to be much change next year,” he said. “I think it [the economy] is going to continue to have good momentum.”
Higher interest rates actually may encourage Stonegate and other banks to lend more. “We will be celebrating when rates rise,” Seleski said. “The interest-rate environment makes it very difficult to make money right now.”
Exactly how soon the Federal Reserve would increase short-term interest rates is unclear, but “we don’t bet on interest rates,” he said. “We just make sure we have the right balance [of assets] whether rates are high or low.”
Prominent among 2014 economic growth catalysts is area population growth, Seleski said, particularly the growing presence of business owners from other parts of the United States and beyond who choose to relocate to South Florida.
“There are more wealthy people with businesses moving to Florida all the time,” he said, noting the absence of personal state income tax and the post-recession affordability of Florida real estate. “They’re seeing this as a value proposition.”
Seleksi said the trend toward mergers and acquisitions in the banking industry is likely to persist if not intensify next year. Stonegate itself is preparing to take over Florida Shores Bancorp, a Pompano Beach-based bank with branch offices in the southeastern and southwestern regions of the state. The closing is expected in the first quarter of 2014.
“There’s going to be some more acquisitions that are going to happen,” Seleski said. “A lot of bankers are tired. It was a very rough recession.” Some bankers also are struggling with the ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the sweeping federal reform of financial services enacted in 2010.
Seleski said the impact of the Dodd-Frank Act is “unevenly weighted” because it affects consumer-oriented banks more than commercially oriented ones like Stonegate.
“The impact on us is less than on a retail bank that deals with consumers on a regular basis,” he said. While the Dodd-Frank Act has almost transformed such consumer services as residential mortgage lending, “there are some lines of business that it hasn’t changed at all.”
Increasing federal regulation also could affect many of the companies that Stonegate serves. Seleski said the federal Affordable Care Act could slow the growth smaller businesses as they adjust to the requirements of the landmark law. “For businesses with 50 to 75 employees, it is a big issue. It’s very expensive whether they are opting out or opting in,” he said. However, “I don’t think we’re going to know for a few years what the ultimate effect of this thing is going to be.”
Economist, former business school dean
Economic growth in the United States and Latin America probably will help to propel the South Florida economy next year even if interest rates rise a bit, said Tony Villamil, founder and principal of the Washington Economics Group in Coral Gables.
“We’re getting better tailwind in the economy,” said Villamil, who also served dean of the business school at St. Thomas University in Miami Springs since 2008. He resigned Dec. 31 to focus on his Coral Gables-based consulting practice.
“I think the economy in 2014 looks good for many of our major industries here,” he said.
Rising stock prices reflect investor expectations of better U.S. economic growth and higher levels of personal income among Americans, he said, “so we do see the U.S. economy providing a moderate push to the South Florida economy.”
Villamil also said the economies of Brazil, the Dominican Republic and other major U.S. trade partners in the Latin America region will grow 3.5 percent to 4 percent next year. In addition, Europe is “coming out of recession at a modest pace,” he said.
Sharply higher borrowing costs could redraw the economic landscape, though. A gradual increase in interest rates next year is widely anticipated. But the South Florida economy could slow down “if rates shot up higher than we expect,” Villamil said. “South Florida is very capital-flow and interest-rate sensitive, so it’s very important for us.”
The Federal Reserve eventually will start tapering monetary stimulus to the economy in the form of bond purchases totaling $85 billion a month. The purchases are part of a third round of monetary stimulus from the Fed under a program known as “quantitative easing,” or QE3.
“The unwinding of the Fed’s QE3, that to me is what we really need to watch,” said Villamil, a former presidential appointee as U.S. undersecretary of commerce for economic affairs and chief economist of the federal Department of Commerce.
Villamil also said Janet Yellen, who is expected to succeed Ben Bernanke as chairman of the Fed, probably will taper bond purchases in the QE3 program at a gradual pace. “She tends to look at things more from the point of view of the need for growth in employment,” Villamil said. “A modest tapering will not create a significant problem. … A rise in medium- and long-term rates has already been priced into the [bond] market.”