Investing in Florida: An Overview

As 2023 ends, the US economy continues to do better than previously expected. The economy avoided a recession and, in the third quarter, grew at a 5.2% annual rate, which was the largest growth since the fourth quarter of 2021. The growth rate since then has dampened, and many leading economists predict that the US economy may decelerate in 2024, potentially impacted by the inflation rate, layoffs and the presidential election. Despite the muted economic forecasts for 2024, a revival in deal-making and leveraged buyouts is expected, especially if the US Federal Reserve cuts interest rates in the wake of cooling inflation, and given the significant amount of private equity dry-powder available for deployment.

Florida has one of the most business-friendly tax and regulatory environments in the country, along with an abundance of skilled labour, a burgeoning consumer base, and the nation’s fourth largest and third fastest-growing economy. Those factors combined make it one of the best-positioned states to take full advantage of a regional increase in M&A activity. As people and businesses continue to flock to the state, it is more important than ever to stay abreast of the changing commercial, legal and regulatory environment in Florida.

Inbound Capital Flight From Latin America

Resurgent pink tide

Florida has long been recognised as the “gateway to Latin America” due to the two regions’ geographic proximity and cultural similarities. Over the last few years, wealthy and middle-class investors and family offices in Latin America have increasingly relocated to and deployed capital in Florida to hedge against political upheaval, economic turmoil and unfavourable tax treatment, and to mitigate other risk factors. People and businesses in Latin America’s five largest economies (Mexico, Argentina, Chile, Brazil and Colombia) have been directing money out of their countries at rates unseen since 2010, largely attributed to a perceived shift toward socialism or the “pink tide”. Of late, every time a left-leaning leader takes office in Latin America, money has increasingly poured into Florida. In 2022, approximately USD137 billion was pulled out of these five leading Latin American countries, in response to newly elected presidents.

Florida is an investment destination for Brazilians

On 1 January 2023, Brazil swore in its 39th President, Luiz Inácio Lula da Silva. Less than a year later, the National Congress of Brazil has now approved several changes to Brazil’s taxation framework and is expected to continue doing so in the near future. The changes include:

• the long-awaited modernisation and simplification of the way goods and services are taxed;
• the recognition of the OECD Transfer Pricing Guidelines; and
• the taxation of exclusive investment funds and foreign investment income.

As of 1 January 2024, Brazilian residents’ foreign income will be taxed at graduated rates (0%, 8%, 15% and 22.5%), depending on annual income and the type of offshore investment. Brazilian-controlled entities abroad will be taxed on their profits annually, regardless of distributions. Investments, income and entities are all defined broadly. Investments include cryptocurrencies and digital wallets, and income includes gains arising from cryptocurrency or foreign currency exchange fluctuations against the Brazilian Real. Entities include foundations, personal investment companies, investment funds, holdings, certain trusts and other unincorporated bodies.

These changes will help to stabilise Brazil’s economy in the long run but may initially drive capital from Brazil to Florida. Brazilian investors view Florida as a primary alternative destination for investments as they seek to avoid risks inherent to Brazil, enter a more stable and developed market, or simply diversify their portfolio risk. Moreover, Brazilians have used Florida as a launching pad to invest in the broader US market.

Florida’s infrastructure upgrades

Beyond politically motivated concerns, slower than expected growth in China (South America’s largest trade partner and a leading source of foreign direct investment) is leading some Latin American investors and proposed projects to look elsewhere for energy, infrastructure and debt financing partners. Florida already accounts for over a third of total US trade with Latin America and the Caribbean, and strategic investments in road, rail, airport, seaport and communications infrastructure will further promote trade and connectivity and investment opportunities between Latin America and Florida.

Florida Residential Real Estate Trends

Florida has been ranked as a top US state for US homebuyers looking to relocate. For perspective, four of the top ten cities that US homebuyers moved to through the last quarter of 2023 are in Florida. While the recent influx of people into Florida has had a largely positive impact on the state, the residential real estate market will have to wrestle with the accompanying growing pains.

Rising real estate, insurance and construction costs

As of December 2023, Florida’s home prices are still hovering near all-time highs while combatting higher interest rates and increased borrowing costs. Add in rising home insurance costs, and many Floridians are facing significant housing affordability challenges.

Insurance rates skyrocketed in the wake of Hurricane Ian, the category four storm that battered Southwest Florida in September 2022 to the tune of over USD100 billion in damages. Fifteen major insurers left the state in the last year, citing extreme weather. Floridians now face the highest rates in the country – more than triple the national average. Voters recently ranked housing costs as the number one problem facing Florida today, ahead of the economy, jobs and inflation; education; and immigration.

Florida’s new home construction market is also experiencing some turmoil. Wait times can now be more than 12 months in certain cases, versus the more typical seven to nine month build time (from initial contract to close), due to delays caused by labour and supply shortages, among other factors. Construction costs will continue to rise due to strong demands for labour and supplies relative to availability, while 30-year fixed mortgage rates are holding steady in the 7-8% range heading into 2024 (but any interest rate cuts by the Federal Reserve should result in lower mortgage rates).

Since the majority of existing Florida homeowners have a mortgage rate well under the current nearly 7% rate, they are choosing to remain in their current home with their low monthly payment, versus moving and taking on a higher payment, and this means fewer listings hitting the market each month. Be it domestic snowbirds escaping their state’s cold weather or international migrants escaping political instability, those who are relocating to Florida are often eager to put down roots, opting for homes in the resale market and paying a premium above asking price to secure a deal.

Rising real estate prices are predicted to persist as both domestic and international arrivals drive a demand for housing that is outpacing supply, which will continue to be a primary driver for continued housing development in the year ahead. 2024 will be a terrific market for Florida home sellers until the low supply, high demand dynamic changes. Listings of new constructions, baby boomers looking to downsize and desperate home sellers may all coalesce to increase the supply of homes for sale and possibly decrease housing prices.

Florida’s suburbanisation

Long-time Floridians bothered by rising prices and worsening traffic who still wish to stay in the state are moving from bigger cities to smaller suburbs, creating new opportunities for local developers and businesses. Winter Haven and Lakeland are welcoming transplants from Tampa and Orlando, and Palm Beach – once seen as a slower-paced and more affordable to Miami or Fort Lauderdale – has seen median sale prices for single-family homes in the county more than double over the past year. As a result, many residents have percolated north to destinations along the Space Coast, such as Palm Bay and Melbourne.

Florida’s newly enacted Foreign Ownership Law

Governor DeSantis signed SB 264, codified at Fla Stat. §§ 692.201-205, into law on 8 May 2023. The law restricts certain foreign purchasers and investments in specific types of real property in Florida. That month, a group of Chinese citizens living in Florida and a real estate brokerage firm sued Florida’s Commissioner of Agriculture, Wilton Simpson, claiming that the law was unconstitutional and seeking a preliminary injunction (Shen v Simpson, No. 4:23-cv-208 (N.D. Fla. Aug. 17, 2023)). The trial court denied the injunction in August, and the plaintiffs appealed to the U.S. Court of Appeals for the Eleventh Circuit (Shen v Simpson, No. 23-12737 (11th Cir. Aug. 26, 2023)). The Florida Department of Commerce and the Florida Real Estate Commission released proposed rules relating to the law’s implementation in September and October respectively, and the Department of Agriculture and Consumer Services held a workshop to receive public comments on its forthcoming rules in November. Until the lawsuit plays out, however, ensuring compliance with SB 264 and analysing its effect on Florida’s residential real estate market will remain elusive.

Florida’s Ongoing Growth as a Fintech Hub

The post-pandemic economic downturn, together with the shocks augmented by the FTX implosion, the Silicon Valley Bank failure and the venture capital pullback, triggered market corrections, starting with lofty valuations for fintech and other start-ups finding their way back down to earth. Despite these challenges, there is much to celebrate in the Florida fintech ecosystem.

Entrepreneurship on the rise

The Miami area ecosystem ranked 23rd in the world in Startup Genome’s 2023 Global Startup Ecosystem Report, skyrocketing ten spots. Florida was recently ranked number one in the United States for entrepreneurship, boasting the highest percentage of residents who have started a business. Small businesses are major contributors to Florida’s economy – employing 40% of the state’s workforce – and Florida-based start-ups create the highest number of jobs per resident of any state. In addition to fintech, many of the bubbling start-ups focus on high-end technologies such as virtual reality, augmented reality and artificial intelligence, positioning Florida to serve at the forefront of these emerging industries.

Corporate giants set sights on Florida

In addition to a robust start-up and entrepreneurial environment, tech giants and big-name companies have established headquarters in Florida in recent years, in some cases migrating from Silicon Valley, San Francisco, Chicago, Barcelona, London and elsewhere. Kaseya, Citadel and Citadel Securities are just a few of the established companies that have moved their headquarters to South Florida, with Blue Origin, Subway, Ryder and Bacardi USA expanding their corporate presence in the region. Kaseya recently announced it would create 3,400 tech jobs in South Florida, paying an average salary of USD107,000 over the next few years.

Sharing the spotlight

Notably, the emergence of new businesses in the state is not restricted to the Greater Miami area. Tampa and Jacksonville join Miami as three of the top ten cities in the United States for corporate headquarters relocation. Tampa has thousands of fintech employees employed across industry leaders and start-ups alike, and Jacksonville is home to Fidelity National Information Services Inc., the world’s largest fintech company by revenue. Jacksonville is also ranked towards the top of the list nationwide in job growth, wage growth, labour force growth, unemployment rate and labour force participation rate.

Local talent pipeline to fill tech job demands

Florida community builders, local government and business leaders recognise Florida’s evolution into a fintech and technology hub, and are eager to create a robust pipeline of local talent. This trend is expected to continue with full force into 2024.

• The Miami Dade College (MDC) has received approval from the State Board of Education to offer Florida’s first Bachelor of Science in Applied Artificial Intelligence (AI), starting in 2024. MDC opened its second AI Center in 2023 to provide classes, workshops and collaboration spaces, and has been training all of its professors in the basics of AI.
• The University of South Florida’s FinTech Center is in its second year of education, as is the University of Central Florida’s Master of Science in FinTech programme, which is the first of its kind in the state.
• Miami Tech Works, an initiative to grow the tech talent pool funded by a USD10 million grant from the US government, kicked off with the formation of the industry-led Tech Talent Coalition. Workgroups of tech employers, academic leaders and other stakeholders began working on initiatives aimed at training, upskilling and matchmaking to fuel the talent pipeline, expanding opportunities for under-served communities.
• Florida Memorial University, South Florida’s only HBCU, opened an innovation centre, focused on providing access to tech, innovation and entrepreneurship resources, funded in part by music executive and philanthropist Ted Lucas.
• Governor DeSantis announced a USD50 million award for a workforce initiative to support Florida’s semiconductor industry. The Florida Department of Commerce and the Florida Department of Education will dedicate USD25 million each to projects and workforce education opportunities supporting semiconductor manufacturing, advanced packaging, and research and development in key industries.

Conclusion

Since 2020, Miami and the state of Florida have been viewed as especially vibrant economies and as global investment destinations. The influx of inbound and outbound capital flight and the deluge of transplants will continue to generate growth and investment opportunities throughout Florida. This growth will be supplemented by the expected increase in M&A activity in the state, which will be driven by an expected stability (and perhaps a decrease) in interest rates, and a backlog of prospective buyers and sellers that postponed deal activity due to soaring rates.

A variety of risks are pushing a growing number of Latin Americans to invest in and relocate to the Sunshine State, which will further strain a residential real estate market that is struggling to keep up with local demand. Suburbs and rural areas will continue to pique the interest of loyal Floridians uninterested in the swelling hustle bustle of metropolitan life.

As individual entrepreneurs, emerging start-ups and established corporations settle down in the state, they will be greeted by a strong pipeline of local talent that is well versed in high-end technologies and supported by a variety of public and private initiatives, which are expected to lead to more investment in Florida and M&A opportunities. It could not be a better time to do business in Florida.