How Central Florida Investors Are Recalibrating Their Strategies
Lloyd Jones’ Chris Finlay and Starwood Capital Group's James Kane discuss market dynamics and expectations for the area's multifamily market.
Thanks to a favorable tax environment and a relatively low cost of living, Central Florida’s economy has been steadily advancing in the past few years. The COVID-19 crisis, however, has shaken market fundamentals and put the region’s growth on hold.
Nevertheless, the bumpy road ahead hasn’t intimidated Central Florida multifamily investors, who rely on the region’s favorable demographics to sustain housing demand going forward. “Despite all the challenges 2020 presented, Orlando’s population grew by 61,000 residents, which outpaced fast-growing metropolitan areas like Atlanta; Austin, Texas, and Tampa, Fla.,” Lloyd Jones CEO & Chairman Chris Finlay told Multi-Housing News.
In the interview below, Finlay and Starwood Capital Group Managing Director James Kane provide insights on Central Florida’s multifamily market and share business strategies that might help investors stay afloat under current economic conditions.
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How has the pandemic impacted Central Florida compared to other Sun Belt markets where you have a portfolio?
Finlay: Central Florida, specifically Orlando, has been impacted slightly more than the typical Southeastern market, primarily due to its large hospitality and entertainment industries.
Kane: In our market-rate apartment portfolio we have collected a higher percentage of billed rents in Central Florida compared to our South Florida portfolio. Central Florida collections are above our national average.
How has your business strategy changed since the onset of the pandemic?
Finlay: We are still looking for high-quality value-add and core-plus multifamily assets. However, our strategy has slightly changed. We are now delaying the implementation of all major property upgrades until the anticipated economic recovery, which we feel will be 12 to 18 months from now.
Kane: Early in the pandemic, we halted all value-add capital and focused on tenant retention and occupancy. We have since restarted value-add programs across Central Florida as we expect strong residential tenant demand in the latter half of 2021.
Starwood Capital Group has an extensive portfolio in Central Florida. What attracted you to this region?
Kane: Starwood Capital was attracted to Central Florida because of the relatively low cost of living and favorable tax environment that encourages corporate relocations.
Lloyd Jones has recently invested more than $65 million in a 306-unit property in Orlando and plans to continue expanding its Central Florida portfolio. Why did you decide to invest in the metro during a global health crisis?
Finlay: Although we feel Central Florida has been immensely impacted by COVID-19, we are strong believers that once we are past this pandemic, Orlando will boom. A driving force behind Orlando’s growth includes the rise in success of the health-care, finance, technology and engineering sectors present in the market. Most people do not realize the diversity of industries and jobs in the Central Florida area. Despite all the challenges 2020 presented, Orlando’s population grew by 61,000 residents, which outpaced fast-growing metropolitan areas like Atlanta; Austin, Texas, and Tampa, Fla.
Lloyd Jones is also targeting value-add investments. Why are Class B properties a good investment option now?
Finlay: Class B value-add properties were previously at the top of our list, but with the current economy, we have seen that Class B core-plus assets are the sweet spot.
Class B properties offer high-quality amenity packages and common areas, but not necessarily upgraded interiors. This allows us to focus our strategy on the enhancement of the unit interiors to better compete with Class A assets at a more competitive price point. Our recent acquisition of Grandewood Pointe, previously named Arium Grandewood, is a classic example of this strategy.
How has Central Florida performed in terms of investment in the past 12 months?
Finlay: For most of 2020, we have seen a significantly lower transaction volume compared to past years. This, paired with poor property performance during early 2020, has led to further cap rate compression throughout Central Florida.
What types of properties would you consider risky investments in upcoming quarters?
Finlay: Class C and workforce housing would be the riskiest at this time. These assets are currently struggling with occupancy rates and delinquencies since the tenant base in these types of properties has been more severely impacted by unemployment.
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What are your predictions for the Central Florida multifamily market in 2021?
Finlay: In 2021, we expect to see low transaction volume as in 2020. However, in 2022 and beyond we anticipate substantial growth in demand and performance throughout the market. As a result, there will be increased transaction volume.
Kane: Starwood Capital is extremely bullish on the future of Central Florida. As the economy becomes more diversified with the development of a world-class medical facility and potential corporate relocations, we feel Central Florida will see meaningful rent gains in the medium term. The biggest issue with Central Florida is the relative ease of development which needs to be moderated for property fundamentals to improve.