Orlando Investment Market Seizes Distressed Assets

Orlando, Fla.--The high unemployment rate in Orlando continues to be the greatest factor impacting the local apartment market.

Orlando, Fla.—The high unemployment rate in Orlando continues to be the greatest factor impacting the local apartment market.

“We are seeing a positive movement for the first time,” points out Joe Lafleur, an associate in Marcus & Millichap’s Orlando office. While the unemployment rate has started to drop, it’s still higher than the national average, with the latest numbers from the Bureau of Labor Statistics reporting a 9.9 percent rate in May 2011.

Marcus & Millichap’s 2011 Orlando Metro Area Outlook projects that about 7,000 jobs will be added in the first quarter. For 2011 overall, employers are expected to add 23,500 jobs, a 2.3 percent gain.

As single-family home foreclosures continue to push through, people are no longer able to live in their homes rent-free and are thus forced to move into apartments, adds Lafleur.

“I have reasons to think that 2013 will be a different market,” Lafleur tells MHN, attributing this primarily to “mortgages making their way through … and you’ve seen the peak of our shadow inventory as far as houses being held.

“If you’re able to survive the next two years, you’re going to make it,” he predicts.

However, bulk condo sales continue to be prevalent throughout the market, and investors continue to target the same renters as those seeking conventional apartments.

Meanwhile, vacancy declined 70 bps, to 7.9 percent, in the first quarter, according to Marcus & Millichap’s report, which predicts this trend to continue, declining a total of 150 bps this year.

Currently 800 units are under construction, with only half of those slated for delivery this year, reports Marcus & Millichap. While 8,000 units remain in the pipeline, none of these are scheduled to break ground this year.

The investment market, meanwhile, has seen mostly distressed deals trade. In fact, the median price of properties sold declined 29 percent, to $35,000 per unit, according to Marcus & Millichap’s report.

Most of these buyers, says Lafleur, “were in the market and sitting on the sidelines. … Financing is cheap for quality buyers; right now you’re looking at interest rates that are unheard of. If you can lock in five-year money at 5 percent, it’s tough to beat that.

“The end of 2010 was the first time you had occupancy going up and rent rates going up, so if you’re buying today on numbers that work, you’ll have a great investment,”  Lafleur adds. “We are seeing cash-on-cash returns heading toward 20 percent,” he tells MHN.

Class A properties with stable operations may be able to achieve cap rates in the low- to mid-6 percent range, while lesser-quality assets are trading between 8 percent and 9 percent.

Properties in the southern part of the metro, near employment centers, as well as those in close proximity to the University of Central Florida on the east side are the most favorable.