Florida is seen as the poster child for the condo conversation craze, a term that makes Jack McCabe cringe, even though he doesn’t think the market will stabilize until 2013.
“In South Florida, during the boom years, we were researching 676 complexes, totaling 177,000 units. Between 2002 and 2005, 248 of those complexes were bought for condo conversion—62,000 units, or 37 percent, of the marketplace was taken out by condo conversion,” recalls McCabe, president and CEO of McCabe Research & Consulting LLC, a Deerfield Beach, Fla.-based real estate research, analysis and consulting firm.
“Florida has been one of the top-three for foreclosures for about five years running,” acknowledges McCabe. “At many times we have been number one.”
The state currently has 330,000 open foreclosure cases, with about 100,000 in South Florida, McCabe reports. “There’s a greatly discussed and anticipated shadow inventory of distressed properties,” he adds. “We had the robo-signing debacle that has slowed foreclosures; there’s a huge wave now we expect to hit between now and the end of 2012.”
Meanwhile, Geoff Harlan, director of new business development at MyRentComps, an online apartment market survey platform, predicts that for-sale homes will not begin to appreciate in value for at least another two years.
“If you look at the historical sales numbers (from the Florida Association of Realtors), you’ll see moderate housing price growth from 1975-1995. In any 10-year period [we had] 5 percent to 10 percent growth in value,” he points out. “From 1998-2005 … real estate prices increased by 100, 200, 300 percent.”
Because of all this, he adds, “everything I am seeing shows the multifamily market will do very well over the next three to five years.”
In addition to the high foreclosure rate, Florida’s high unemployment rate—10.7 percent as of July 2011, according to the Bureau of Labor Statistics—is also driving the rental market. What’s more, adds McCabe, “we haven’t had any real new-job creation. The jobs that have been created have tended to be lower paying, service-oriented positions.”
Because of the lack of new construction of apartment communities and an increasing demand for rentals, occupancy rates are increasing statewide, notes McCabe. “We are seeing a tremendous wave of new construction in rental apartments, and a lot of the major players in the apartment industry that had sold their holdings down here and had left the state are coming back and have their land acquisition guys looking at different parcels for building new complexes,” he adds.
But each pocket throughout the state is so different, notes Jared Miller, vice president, performance and strategy at the Wellington, Fla.-based Bainbridge Cos., which owns and/or manages approximately 4,000 units throughout the state. “We’re seeing different employment, even [different] credit characteristics in each of the markets … so it’s hard to say if Florida as a whole is all getting better or if it’s just status quo.”
(Orlando-Kissimmee-Sanford’s unemployment rate was 10.4 percent in June, up 50 bps from the month prior. Meanwhile, Miami-Fort Lauderdale-Pompano Beach reported a 40-bp increase, to 11.8 percent, from May to June, and Tampa-St. Petersburg-Clearwater saw a 50-bp increase, to 11.1 percent, from the previous month.)
In South Florida, occupancy is currently about 92.6 percent, notes McCabe, who expects to see occupancy levels reach the 95 percent to 96 percent range in the near-term. Meanwhile, effective rents have remained flat over the last six months, adds Robert Smith, broker and founder of Smith Equities, who has sold about 25,000 units in the state. “A lot of people can’t justify rent increases,” he says, though there “are pockets of areas where you’ll see growth and great
opportunities,” he adds.
Because demand is increasing and supply has remained relatively flat, rental rates are projected to increase between 4 percent and 5 percent this year,
reports McCabe, “even though there hasn’t really been any meaningful increase in household incomes.”
In Orlando, concessions have decreased from 2.5 months of free rent to 1.5 months over the last 12 months, reports Tom Smith, managing director, Atlantic|Pacific Cos., which owns and/or manages approximately 16,000 units throughout the state.
In general, rents at condo units are lower than conventional rentals, mainly because there is more competition between similar condos and individual owners who are also renting out their units, reports Tom Smith. Condo-owned rentals are, in fact, getting a little less rent, according to Lastra, because they have more of a risk premium.
Some of these units were bought for between $40,000 and $50,000 a door, dressed up somewhat and then sold for between $100,000 and $200,000 per unit, reports McCabe. Now they are back down to $30,000 to $40,000.
The Tampa market, meanwhile, is not quite out of the woods yet, notes Miller, which he attributes to the lack of job growth, new apartments still being absorbed and the number of condo reversions over the last several years. And, adds Tom Smith, collections in this market are down.
In Tampa and Orlando, home prices are so low compared to what they were just a few years ago, he notes, that it’s possible to either buy or rent a house for less than a professionally managed apartment. At the same time, condo sales in Miami have picked up due to the drop in price—54 percent since 2006, according to McCabe. This increase in sales, however, stems from primarily Latin American and Canadian buyers who are renting out these units, which is “presenting some substantial competition for the long-term apartment operators that built or bought complexes specific for rental,” he adds.
New development and acquisition opportunities
In terms of new development, “We are hearing a lot of talk more than anything,” says Miller. “People are out talking about deals, but so far it’s been mainly conversation.”
When development does pick up again, though, the focus will be mostly on urban infill opportunities, predicts McCabe. In Miami, for example, units are filling up with younger renters from the area or from Latin America who previously had lived in the suburbs and were driving to work in downtown Miami. “Because of that,” says McCabe, “there is definitely a new pulse to Miami; there’s a late-night atmosphere that we didn’t have in Miami before,” adding that this is also taking place in Tampa and Orlando where a lot of condominiums were built downtown. “I don’t think we’ll see the urban sprawl-type of development in the future of Florida,” adds McCabe. “I think it is going to be more new urbanization development.”
While he doesn’t expect the market to hit bottom for at least another year, McCabe is advising some of his clients to move forward with development plans. “It makes sense for some projects to go ahead and have them ready for two to two-and-a-half years from now,” he points out.
The majority of new development will certainly be focused around employment bases, adds Alex Lastra, vice president of development, Atlantic|Pacific Cos. He observes that, while not as many retirees are currently moving south, there will soon be a large influx of young renters “who want to be in the urban core rather than suburban rentals.”
That being said, however, “high-rise rentals are extremely difficult to make function on a pro forma. … In South Florida you would need upwards of $2.50 a foot to make a high-rise deal start making sense,” he adds.
With the economy remaining unstable, however, “there’s some hesitation on both sides to move forward [on new development],” points out Miller. However, he does see “a lot of companies out there chasing potential acquisition deals.”
Transaction velocity is beginning to pick up again, agrees McCabe. “It doesn’t compare to the pace it was back in 2002-2005 when a lot of the condo converters were buying complexes, but compared to 2008-2009 and the first half of 2010, this year there has been a few more transactions. Complexes are selling at better prices now and … institutional investors are definitely back in the marketplace.”
The most interest, he adds, is for Class A assets, which are trading in the
5 percent to 6 percent range, and the value-add opportunities that may be bought for an 8- or 10-cap.
In addition, the value-add story is beginning to make sense once again, notes Miller, “but you also have the companies trying to swoop in and buy development deals for less than they cost to develop.”
In Miami-Dade, for example, Miller observes “foreign money pouring in to buy properties.” Other markets are seeing interest from both those already in the markets as well as the bigger players who are reentering the market.
Robert Smith also sees interest in land deals. “There’s all kinds of money out there for the right deals, but a lot of areas are not seeing that value appreciate.”
Struggling for job growth
One of the positive signs for the multifamily industry in the state is the lack of single-family home building, though Miller does point out that there is some activity in the western suburbs of South Florida.
Additionally, the state is beginning to see an uptick in development outside of residential, notes Miller. “There’s some commercial building happening; the labor pool is less expensive than it was during the boom, and materials have come down in cost, so you are seeing some development outside of multifamily that’s bringing construction jobs to town,” he says.
But the state continues to watch for signs of job growth. One negative in general for Florida as a whole is the lack of true industry, points out Lastra. “If we only had job growth, and we had the population growth we had in the first part of the last decade, this place would really be booming,” asserts McCabe.
In South Florida, Lastra points out that the widening of the Panama Canal combined with the Port of Miami’s Deep Dredge project, which will make it the “first port of call” for ships coming through the canal, is expected to expand trade and generate more than 30,000 new jobs. Furthermore, a large Malaysian casino and resort operator recently purchased a 14-acre parcel in the heart of downtown, and, according to the Miami Herald, the new project is slated to include residences, a hotel, convention space, restaurants and retail.
In Orlando, Robert Smith points out that there will be a number of jobs coming down the pipeline for the high-speed SunRail, where there will also be huge demand for A+++ land.
“If gas prices go back up, you’ll have locations that are out in the suburbs that won’t get rents because people can’t afford rents and drive to work,” notes Robert Smith. “Transportation will drive development.”
The state economy overall, however, remains fragile. “Our taxes [went] through the roof in the 2000s. Insurance companies and state legislatures were allowing companies to separate their policies by state and divided the country [so] Florida, as its own part of the company, is a lot higher risk than others,” recalls Robert Smith. Under Governor Rick Scott’s administration, however, the state is seeing lower property—and corporate—taxes.
Last year, the state passed an amendment mandating a balanced budget without raising taxes, which has “amounted to cutbacks in a lot of different services,” notes McCabe, including NASA’s ending of the Space Shuttle program, which is predicted to cut about 9,000 workers, with the impact on ancillary businesses still unknown.
At the same time, the state doesn’t see much job growth in its future, and there aren’t “any major companies that are moving down to Florida or home-grown [companies] sprouting up and adding hundreds of employees,” McCabe notes, though he does point out that Governor Scott is making efforts to make Florida “the most business-tax-friendly state in the country.” While this has worked to some degree—he points to the $560 million in tax breaks given to California’s Scripps as an example—he notes that the real results won’t be felt for 10-15 years.
Despite this, McCabe believes that population growth will continue. “Our population flattened out between 2008 and 2010, and we had a net loss of 20,000 in population.” But, he adds, “There are still between 75 million and
85 million baby boomers in the country, and a lot of them will migrate south either part- or full-time in the future. In a market like Florida you’re guaranteed [that] over the next 20 years you’ll have millions who will need rentals, and that trend is going to continue for 15 to 20 years.”
Despite all this, McCabe still thinks the state remains in a down market. “A lot of folks call it a weak recovery, but I think [we’ll be] back in a second recession in the next several months.”