Holding Tight

Southern Florida is often looked at as one of the worst apartment markets in the country, primarily because of its tremendous shadow market, as well as its above-average unemployment rate. While the national unemployment rate is currently 9.7 percent, the Sunshine State’s 11.8 percent was among the highest in the nation as of December 2009, according to the U.S. Bureau of Labor Statistics.

As a result of these problems, “There’s no question that the whole market has become softer as far as occupancy and rent,” asserts Ron Roan, vice president of acquisitions for the Laramar Group, who recently acquired two failed condo projects in the South Florida market.

But Richard Giles, chief operating officer of Wellington, Fla.-based The Bainbridge Companies, which owns and/or manages approximately 2,000 units in the Southern Florida markets, notes that occupancy is not the problem in his properties. “We’ve found that managing occupancies for the last year has not been the challenge…In the South Florida market, we never saw an extremely big hit to occupancy; the hit was to rents.”

According to Marcus & Millichap’s 2010 National Apartment Report, effective rents in Broward County are expected to decline 5.2 percent in 2010, while they are forecast to fall 6.8 percent in West Palm Beach. Effective rents in Miami, meanwhile, are anticipated to decline 3.5 percent.

However, according to the report, vacancy in Broward County is anticipated to surpass 9 percent this year—and over 1,200 units would have to be absorbed for the vacancy rate to return to its long-term average of 6.3 percent. Meanwhile, Class A assets in North Miami Beach/Bal Harbour are expected to reach a vacancy level of 10 percent in 2010. West Palm Beach vacancy is projected to climb to the mid-9 percent range this year.

Despite all this, Roan notes that the market has not been hit quite as hard as other Florida markets. “It’s still not what anyone had projected when people were buying deals a few years ago, but it has maintained better than other markets,” he asserts. “South Florida has been [historically] one of the strongest markets in the country, and we anticipate that there will be a strong return of growth rates once others get absorbed.”

In spite of his optimism, one word of caution from Giles, though: jobs continue to be lost throughout the state. “It doesn’t look like there will be much in the way of growth in 2010—there might be some more loss in most markets,” he notes. “Whereas other parts of the country have already gotten through the worst of the job markets and now they’re stabilizing, we don’t expect to see any significant job growth in 2010.”

Has the market stabilized?

Regardless of the experts’ opinions that the market has stabilized somewhat, it continues to have a long way to go in the next few years. For the year to come, for example, “the biggest challenge for the entire industry is getting a grip on rental rates because concessions got so prevalent and so high,” Giles explains.

He has observed that rental rates are down approximately 15 to 20 percent from their peak, but he points out that this decline is mostly in the form of concessions, which, he says, “is kind of good news, because when the market goes to a month free, two months free, three months free, what a lot of people don’t think about is, although it’s painful on the way down, it can jump up quickly.”

“There is an opportunity, when the market strengthens, that rents will pop back at a rate that will surprise people. Our business works in increments of 8 percent in the form of concessions. That works to our advantage when the markets begin to turn around,” Giles adds.

At the same time, Ryan Severino, CFA, economist, Reis Inc., does not believe the Southern Florida market will recover in the next year, but he is hopeful that by 2011, “with the economy having enough quarters of GDP growth and the private sector starting to grow on its own, we [will] see job numbers turn,” which would, hopefully, result in a market rebound.

Giles is somewhat more optimistic than Severino about the year ahead. “What we’re seeing in our own properties in South Florida is relatively stable occupancy with diminishing concessions. I’d say for ‘09 our rents were flat, which to us was a pretty positive indicator,” he reports. “After coming off a year or two of decreasing rents, we ended the year where we started the year, in terms of effective rent.” He adds, “Our properties in Broward County are finally getting some traction because we’ve seen a stop in a decline in rents.”

The good news for everyone in the market is that construction has virtually come to a standstill. “At this point, most of the projects that haven’t started coming out of the ground have stopped,” Roan notes, adding that “one of the saving graces is the amount of product that is going to be built in the next year or two is at an all-time low.”

The 800-pound gorilla

Most would agree that Southern Florida has proven to be a poster child for the shadow market’s effects on apartment communities. But with the shift toward renting a single-family home or condo comes the risk of being foreclosed on, even if residents make their rental payments on time. “What happened was, all of a sudden local papers were publishing horror stories about renting privately, and residents were getting evicted because their landlords hadn’t paid their mortgages,” and people realized that it was riskier than renting from a more traditional institutionally owned property, explains Giles of the phenomenon.

But despite this, and despite the fact that the experts are observing some relative stabilization in the market, they also acknowledge that there is a risk of a reemerging shadow market.

“The 800-pound gorilla is, will condos be rentals or reconverted into rentals?” Severino questions. “No one knows. It’s a fragmented market, anything from one-off investors who bought condos and will rent or an institutional investor whose deal fell apart, might sell a project and buy a completed or mostly completed project to turn into a fully serviced multifamily property.”

In Miami, for example, several condominiums are still under construction, and Marcus & Millichap estimates that an additional 500 units will be delivered, up from 340 units last year. In West Palm Beach, 400 units are slated for delivery this year, following a year without any completions. At the same time, only 300 units are slated for delivery in Broward County this year, following the delivery of 432 apartments in 2009.

“I do think that there is risk that the shadow inventory does come back,” Severino maintains. “In terms of the variable that we can’t predict that would have a direct impact on multi-housing, that’s it. It’s a significant component.”

Despite the warning, though, Giles points to what he believes may be the light at the end of the tunnel. “Most Florida submarkets will not see any new development once the current pipeline is absorbed,” he points out. “In 2012-2014, we are expecting to see a pretty significant spike in rents in all Florida markets,” because the Sunbelt markets tend to rebound quickly.

“The fact is, the weather is still great, people will still move and the price of single-family homes will be recalibrated,” forecasts Giles. “It’s a pretty affordable place to live, compared to other metro areas,” he adds. “It got to a point that it wasn’t affordable so costs skyrocketed, but now you’re back to having an affordability that has always been the story in Florida.”

Let’s make a deal

The state’s climate and job opportunities—relative to other parts of the country—are certainly two things to look forward to as the economy begins to turn. “Longer-term, those things are fundamental characteristics of the state that aren’t likely to change,” maintains Severino.

“Miami, in particular along the lines of the weather and being a growth market, is a great hub to connect to Latin America. For people who are interested in having economic links to that part of the world, it’s one of the places to be. It’s pretty compelling in that respect,” he adds.

But are there any opportunities for investment? “For people who are well-capitalized, who can come out-of-pocket with a decent percentage of contribution in equity, for people who are discriminating because prices are down, there are some good projects—new projects that just hit the market at the wrong time,” asserts Severino. But “the days of short-holding and flipping properties are gone. People who have a longer-term perspective on things, can go out and get good quality construction. You just have to be realistic about underwriting expectations because it will be some time before stabilization” occurs.

As Roan points out, “The majority of people selling right now are people that are lenders that had properties come back; banks and special servicers have the lion’s share of distressed property.”

But for those who can find a seller, now may very well be a good time to buy. “Now you are looking at trading at half of what was proposed back two, three years ago. It’s specific to location and product, but especially for condo product, you’re down about half,” asserts Roan.

In terms of where the deals might be, Severino acknowledges that clients are looking for assets in the CBD/urban core or in the suburbs. “A lot comes down to opportunity,” he says. “There aren’t that many deals out there.”

But perhaps it is precisely the lack of deals in the marketplace that is driving investor interest. “There is a significant amount of investor interest but a significant shortage of product available to buy,” Giles observes. “I think the opportunity is in recapitalization projects that need to be refinanced or acquiring the loans.” He also notes that where customers used to be willing to pay a premium—$200 to $300 per month more—for brand-new, strongly amenitized, well-located properties, residents are only willing to pay about $50 to $100 more for top-tier apartments today.

Giles advises those with the opportunity to do so should take a close look at the available deals. “There’s an opportunity to buy in great markets for prices you would never believe a few years ago.”

To comment, e-mail Erika Schnitzer at [email protected]