A Landlord’s Market

By Philip Shea, Associate Editor

While many markets across the country have responded to industry recovery by ramping up new development, multifamily in the state of Florida has seen a significant decrease in the amount of new completions in recent years. Hendricks and Partners’ first quarter reports for Miami, Jacksonville, Tampa Bay and Orlando all show low or declining deliveries, and this coupled with surging demand has had a sizeable impact on rents and vacancies over the last year.

“Vacancies are dropping and are very, very low throughout Florida, especially in South Florida, and rents are definitely on the increase,” says Jack McCabe, founder and CEO of Deerfield Beach-based McCabe Research & Consulting LLC. “We’re looking at double-digit rental increases this year, I think, especially for the Class A properties.”

Another dynamic that has affected available inventory in the Sunshine State is the condo-conversion craze that took place before the financial crisis, which was previously reported on in the October 2011 issue of MHN. Many high-end properties that had offered rental units instead opted to sell in the early- to mid-2000s, yet with increased rental demand post-recession, this trend may be reversing.

“The thing that makes it tough to measure down here in Florida is we had so many major apartment complexes that were sold as condo conversions, and some of those have come back as apartment complexes in their entirety, and some have come back as fractured where they may have 250 to 300 units in a project and 100 or more are being rented out,” notes McCabe.

Steve Buck, president and CEO of ZRS Management in Orlando, says that the return of the rental market is a positive development and that the previous trend toward condos was largely unsuccessful.

“Just about all of the failed condo conversions have been rented now, mostly eliminating the shadow market that was a serious issue just a couple of years ago,” says Buck. “We are seeing occupancy rates continue to climb, with average rates across our portfolio of 94 to 95 percent.”

As might be expected, the asset class that has benefitted the most from this development has been the high-end luxury and Class A apartments, which are especially prolific in markets like Miami and Fort Lauderdale.

“The new condos I would say have especially bled over into the A group,” says McCabe. “We’re seeing some rents now in Miami in some of the newer upscale condo buildings… between $2 to $3 per square foot, which wasn’t heard of just a few years ago.”

Chris Finlay, chairman and CEO of Jacksonville-based Finlay Management Inc., highlights the current dynamics for the various asset classes and draws a particular distinction between the A’s and C’s.

“The A has done the best of all, there’s no question,” says Finlay. “The A properties are probably in the 95 to 96 percent range, and I would say the C properties are probably in the 92 to 93 percent range, so there’s definitely three points of difference in the vacancy between A and C, and the B is somewhere in between the two.”

While high-end properties have been performing considerably well across the state, Finlay points out the effect that federal budget cuts for the National Aeronautics and Space Administration (NASA) have had on multifamily in the central and northern parts of the east coast.

“Down on the ‘Space Coast’, that area was obviously impacted by cutbacks at NASA and the economy, and I think they have a little higher vacancy rate—they’re probably still in the 6 percent range, as is Jacksonville,” says Finlay. “I think Jacksonville is probably the next softest market, but in the rest of the area, occupancies are pretty much in the 95 to 96 percent range, which is very strong.”

In terms of fundamentals that will keep the state moving forward over the next couple of years, McCabe highlights what is perhaps the single-most important factor in terms of long-term sustainability of the industry.

“Florida is one of the few states in the country that, for the next 20 years, will continue to see population increase,” says McCabe. “The majority of that is going to be fueled by the approximately 75 to 85 million Baby Boomers coming of retirement age now that will either buy a home down here as a primary residence, buy one as a second home, or opt to rent.”

The trend of retiring Baby Boomers opting to rent instead of buying a second home is obviously one of the key factors behind the state’s growing demand in recent years, and increased occupancy rates are already beginning to have an impact on how property management companies initiate and maintain leases.

“Concessions have been grinding down everywhere, allowing for strong improvements in effective rents,” says Buck. “The lack of appetite for home buying has been a key factor in the occupancy improvements we have seen. The imperative to buy a home and avoid ‘throwing away money on rent’ has disappeared, at least for now, and this is evidenced by the continuous drop in the home ownership rate.”

Yet even while population will continue grow due to the unique appeal the region holds for retirees, there is another crucial factor to consider when prognosticating the state’s economic future.

“To me, there are two big drivers for apartment growth—population growth and job growth,” says McCabe. “We’re definitely going to have the population growth… but we don’t have the job growth right now to attract companies, and we don’t have the educated labor force that’s in demand in this high-tech age, so I don’t really see job growth as one of the big drivers.”

Says Buck: “Most of us did not expect that such a rapid improvement in apartment fundamentals could occur without strong job growth, which we all know has been anemic.”

Indeed, according to Hendricks & Partners’ most recent market reports, employment growth across the state has been either negative or nonexistent since 2010. Yet as long as the region continues to serve as a hotspot for tourism and retirement, it’s plausible to assume that the certain multifamily fundamentals, especially rents, will continue to maintain their strength.

Chris Finlay of Finlay Management believes that such strength will be witnessed across all asset classes over the coming years, but points out that investors might be more heavily drawn to lower-tier products to take advantage of higher returns.

“I think with the supply relatively constrained and really being in the A product, I foresee a situation where rents are going to climb higher,” notes Finlay. “So from an investor point of view, unless you’re an institution where you want to own the best product in town and be happy with a 3 percent increase, you could be investing in a B or C and be looking at a 6 or 7 percent increase.”

In terms of overall sustainability of the market, McCabe highlights the unique, international appeal that the state has and why he continues to be optimistic about the future.

“I think people will always want to get away from the cold in the Northeast part of this country, in Canada and in Europe, and for that reason we’re always going to see increasing demand,” notes McCabe. “It’s one of those rare markets in the United States that is truly growing, and seeing what we think is a long-term trend for increased demand, increased population growth over the next 20 years.”