By Mallory Bulman, Associate Editor
Don’t call it a comeback—Florida’s been here for years. The market, which suffered a highly publicized housing bubble in the mid-2000s, has recovered in a big way, according to Steve Patterson, president & CEO of Related Development, LLC. Patterson’s 30 years on the Sunshine State real estate scene make him well-prepared for the current overwhelming demand for rentals. With a personal track record of $2 billion in profitable real estate ventures, and a company portfolio of more than 60 completed communities and more on the way, Related shows no signs of slowing down.
What’s going on with the Florida apartment market?
We monitor job growth and permits and compare the two, and we determine whether or not there’s excess demand in the markets or there’s surplus supply. We do this two ways: one is using old metrics which involves looking back and determining, in the past, how many jobs did it take to absorb one apartment? Nationally and historically, if you look back, that number is about six jobs to absorb one apartment unit. That’s one way to look at it. If you look at it that way, there are certain markets in the country right now that are beginning to oversupply, but we think that’s wrong because there are now different dynamics influencing the renter pool than existed in the past. So if you use the figures from the past, it’s going to distort the future. We have a population swell of Millennials that are now at this renter age, so now more of the new jobs will be attained by people who are renting an apartment, just by virtue of their age. The other thing is that more people are interested in living infill, in town than historically. Infill, in town is historically more renter-rich than the suburbs. We also have people who are forming households later in life than they used to. Not only are they doing that, but they’re also forming families later than they used to.
Dogs and the need for yards wreak havoc on our apartment business, and people start getting dogs when they start having babies. You’d think that children would [cause] more significant [damage], but I personally think it’s the family dog. Even though we have a lot of tenants who have dogs, many of them can’t wait for the day that they move into a house with a yard when they have a pet. But that’s all happening later, which means these people are hanging around longer. When you look at the home ownership rate having fallen from almost 70 percent down to two-thirds, all of those things are driving rental absorption. We’re not guessing. We know it will take less jobs in the future to absorb one apartment than it took in the past. We’re in Miami, Fort Lauderdale, Palm Beach County, Tampa, Orlando, and Atlanta. Every one of those markets are undersupplied based on the current job growth and the current production levels.
Do you think pet amenities are a passing fad or here to stay?
People think that I’m mean, because I don’t [embrace] pet amenities. We do have facilities like dog wash areas and that kind of thing, but if I let my developers go out and do what they wanted to for dogs, you would be astonished. We’d probably do more for dogs than we would for people. Developers love to amenitize for dogs. My thought on this is I’m going to let my competitor be the dog magnet. Quite frankly, pets are hard on properties, especially elevator properties. It’s difficult for pets to get out of your apartment, down the hall, on the elevator, down the elevator and outside before it’s time to go. I’ll agree that pet amenities is one place where we fall short. We do have them, but we we’re just not over-encouraging [pets].
What other markets are you looking at, and why?
[Atlanta] is a new market for us. We have a high-rise in midtown and another high-rise in Buckhead, and the Buckhead deal will start mid-next year. We’re currently trying to put a couple [of] deals under contract for lower-density projects. One is suburban, and one is infill. We’re excited about Atlanta; we like it, we think it’s a good market. In a word, what’s exciting to me about Atlanta are jobs. There are a lot of them. I think Atlanta grew about 85,000 jobs in the trailing 12 months. That’s huge for Atlanta. Even though some people are concerned about the production numbers, we still believe that Atlanta is definitely underserved, so we are going to continue to be there in a big way.
With all these people in need of apartments, what kinds of trends are you seeing in terms of expectations?
They want it all. You always think there’s going to be a time when developers will stop building all these bells and whistles because people just can’t afford it, but what happens is we’re just building the apartments a little smaller while still providing all the bells and whistles. I’ll tell you the two things they want more than anything else: a strong cell signal and they want lightning-fast Internet—above pool tables, hot tubs, steam rooms, dining rooms, fitness rooms—what they want are those two things the most. We’re building buildings that are more solid, that have higher e-rated glass, and they’re just more air-tight than they’ve ever been before. It’s getting harder and harder for cell and WiFi signals to penetrate our buildings, which means that the quality of both of those is going down dramatically. It’s a huge disadvantage to be operating in a property today where people can’t get clear cell service everywhere in your property and WiFi in their unit and most common areas. The one thing we want people to know when they come to our communities is that they’re going to have a very strong cell signal and very fast internet.
Are people willing to compromise on space to afford these amenities?
I know they will, because we see what they pay. They’ll pay almost as much on a gross monthly basis for a smaller unit that’s efficient and well-amenitized as they will for a larger unit that’s not well space planned. The most important thing is that the basic rooms need to hold the basic furniture. Somebody will come in and say, “Yeah, my sofa will fit here; my king bed will fit there. I can put a dresser in the bedroom with the bed.” Some of my competitors aren’t building dining areas anymore—it’s all eat-at bars. To me, that’s a real compromise, because now, the dining room table is an entertainment area. It’s a dining table for one, but it’s also a place where people work and a place where people socialize. So a lot of things happen at the dining table. I think a lot of my competitors think you can do that at a bar, but it’s not the same. In certain markets, you may have to let that square footage go, but we’re trying to hang on to it everywhere we can.
How important are transit-oriented properties in your markets in Florida?
I will have to admit that Florida doesn’t have great mass transportation, and it’s really a bad thing because we’re growing so fast, and cities are getting bigger. It’s really kind of embarrassing when you see smaller cities doing more and doing it proactively. It’s one of those things where if you wait really late, it’s extremely expensive to add these mass transportation facilities. There are two reasons why it’s important. Number one is people are paying a bigger percentage of their income every month for housing than they used to in the past. The thing that wants to give first is auto expenses. People still want to go out, they still want to eat out, and they still want to go to the movies. There are a lot of them staying home now but they’re still buying that stuff. But, they will kind of downgrade in their car. It’s not like when I was young and renting—cars were like your currency. That’s who you were, and today people don’t really care. They’re more excited to talk to a friend about the Uber ride they just caught than about how cool their car is. Transportation facilities are extremely important, and you’ll see that the rents are higher everywhere you build adjacent to mass transit.
How important is design when building a multifamily asset? Will renters pay more for interesting design features?
I’ve been in this business a lot longer than I will admit, but I know for a fact that people will pay more for good design because it creates emotion. If you don’t create a positive emotion in somebody when they walk into your community or come to the front door…the only thing they’ll do is pay you exactly what the market says the apartment is worth. Instead, create that sizzle where somebody says, “You know, I think people will really approve of my decision to rent here because of the way this place looks.” Most people go through that exercise in their heads. Some don’t, and those are the ones who are bargain-hunters and we’ll let them go to our competitors, but the design creates the positive emotion.
Where are we in the real estate cycle?
We definitely don’t think we’re coming to the end of the cycle. The cycles typically start in the recovery mode, and then you go into the expansion mode, and then you expand until you over-supply. The over-supply mode then leads to the recession mode, and that’s the cycle that we’re at. If you look at the point where you go from expansion to over-supply—which is the peak of the cycle—if that’s twelve-o-clock on a clock face, we think that we’re probably not even to nine-o-clock yet. Some people are saying we’re over-supplying on a national basis, and we’re now over-supplying the markets. But the occupancies and the rents don’t agree with that, because the occupancies are growing and so are the rents. Once you get to a point where you’re over-supplying, those two numbers stop growing. There are more people than there have ever been in the 18-35 year-old cohort, which is a prime renter cohort. There’s a higher percentage of those people still living at home than ever in the history of keeping records.