By Keith Loria, Contributing Editor
It’s not uncommon to mention the word “hot” when discussing Florida, but these days that description is less about the weather and more about the boom in multifamily that virtually all cities around the state are experiencing.
Rents are going up, availability is coming down, and there’s been so much new development starting in the past year that industry insiders joke the state bird may just have to be changed to the “construction” crane.
Dick Donnellan, principal, ARA Florida, is seeing a bounce back all over the state in the primary markets these past 12 months, with strong rebounds relative to occupancy and rent growth.
“A decline in home ownership has pushed more renters back into the market place. The economy is starting to recover, jobs are increasing, and there’s more demand for apartments,” he says. “A lot of these jobs will be obtained by younger people and they are starting to get out of living at their parents or in a two- to three-roommate situation, and they can rent an apartment for the first time because they’re employed.”
Andrew Roark, senior client manager at Forum Architecture & Interior Design Inc., Altamonte Springs, Fla., says the Tampa/St. Petersburg area continues to demonstrate sustainable growth and consistently ranks among the top in terms of multifamily projects completed.
“Jacksonville is also quietly steady, while the Orlando area seems to run hot and cold,” Roark says. “Now that subsidized affordable housing programs are once again assisting developers, the Miami-Dade and Broward County areas of South Florida will be a hotbed of multifamily development.”
Larry Stockton, senior vice president for Colliers International South Florida, agrees that all the larger metropolitan areas are doing well, but Miami is leading the way.
“Southeast Florida (Miami in particular) is highly sought-after for development. Coastal cities along the west coast of the state have seen some improvement but have not benefitted from international demand to the same degree as South Florida,” Stockton says. “Orlando and Central Florida continue to see moderate demand. Existing product has been one of the better performing asset classes over the last 12 months with vacancy rate declines and strong year-over-year growth, especially in the urban core.”
Landy Toledo, senior broker associate, National Multi Housing Group for Marcus & Millichap, sees the biggest buzz in the multifamily market occurring in Miami’s Dade County, with an emphasis on Brickell because of its waterfront.
“Wherever you see water, that’s where all the land plays are being made for multifamily,” Toledo says. “After that, you’ll see it more inland in urban infill markets like Coral Gables. You’re seeing this in downtown Fort Lauderdale as well as near the river.”
When it comes to new construction, South Florida is very strong, with Miami leading the way and the urban areas of Miami (Brickell in particular) being the strongest of the strong.
Ron Brock, CEO and founder of Pierce-Eislen, says there are two distinct categories the company examines in the multifamily sector—lifestyle renters who no longer want to own any more, and young, professional singles and couples without kids, who are not ready to settle down so they rent upper-end properties.
“Almost universally, everything under construction is being geared towards the latter demographic,” he says. “Miami is on fire as far as new development growth, and there’s no question that there is a really strong interest in Orlando and Tampa.”
Brock cites a recent company report that shows currently 5,940 units are under construction in Miami, 5,140 in Fort Lauderdale, 3,366 in West Palm Beach/Boca Raton, and 2,010 along the Southwest Florida Coast.
Brock adds that although 7,814 units are being built in Orlando and another 6,563 in the Tampa/St. Petersburg region, percentage-wise, they’re at the low end of the spectrum of total units, coming in at 4.0 and 3.2 percent respectively.
Donnellan says that new developments are starting to occur in virtually all markets, with the exception being Southwest Florida.
“The good news there is that occupancy has recovered, rents have grown nearly 10 percent over the last 12 months and it may not be too far out before we start to see new construction there as well,” he says. “Maybe as soon as next year or 2015.”
According to Roark, since other consumer-driven sectors such as retail and hospitality were slower to rebound and labor prices plummeted in the construction industry, developers and investors moved to fill that demand, in the multifamily sector.
When things started going bad in 2008, a number of projects were put on hold and never saw the light of day. While it is easy now to say that many of the projects on the drawing board prior to the onset of the recession may not have been viable in the long term, the housing bubble frenzy caused market analysts and lenders to corroborate developers’ unsustainable revenue projections.
“The downturn brought a sharp market correction that effectively killed many projects for the foreseeable future,” Roark says. “Many projects, however, are now enjoying a reincarnation by means of more conservative, scaled-down designs. We have noticed that old office building sites are being rezoned to multifamily garden sites.”
According to Stockton, in Southeast Florida, almost all the previously shelved projects have been put into the hands of those capitalized enough to make them happen. Outside of Southeast Florida many projects have been transferred to second-round developers to finish what others have started, with some reconfiguring plans to address current rental versus for-sale product demands at the neighborhood level.
During the recession, the bar for homeownership was raised considerably, and private development of all types slowed to a crawl. Those factors created a pent-up demand by the time the economy began showing a pulse.
“Most of Florida is firing on all cylinders economically. The auto industry is roaring back, but since tourism is likely our number one economic driver, I’d say that as the world economy picks up, Florida’s business picks up,” Stockton says. “Conversely, in Miami we benefit from the countries in South America that are doing poorly for any number of reasons because the wealthy there become motivated to buy in Miami (condos) but also like to send their children to school here, all of which drives housing.”
Donnellan is seeing employment growth across the state and a population growth that was stalled from 2008 to 2010.
While the economy is picking up in general, debt is still not that easy to come by for home purchases. Rental affordability (versus ownership) varies across geography and is affecting short-term trends differently. South Florida ownership affordability remains out of reach for many, putting upward pressure on rents and keeping vacancies low.
“In Miami, there was a large amount of rental inventory taken off the market during the conversion boom, which was not replaced due to the crash,” Stockton says. “New construction is limited, however, as many developers are opting to build for sale product to capitalize on international demand. Traveling north, the rent vs. buy answer becomes less obvious, with financing constraints keeping many on the sidelines.”
Rents are going up as vacancy rates decrease throughout the state, with the Brickell area of Miami leading the way. According to Stockton, outside the CBD in South Florida, rent growth continues to push upwards of five to seven percent year-over-year growth, although growth rates are more muted as one moves further north in the state and outside the CBD.
A recent report by Pierce-Eislen shows average rental increases across the board. Brock shares that in the past five years, average rental rates have increased 9.1 percent in West Palm Beach/Boca Raton, going from $1,126 to $1,228; 7.1 percent in Ft. Lauderdale, with an increase from $1,150 to $1,232; 5.3 percent in Orlando, rising from $894 to $941; 5.2 percent in the Tampa/St. Petersburg area, increasing from $853 to $897; and 4.8 percent along the Southwest Florida Coast, rising from $858 to $899.
Meanwhile, average rents in Miami have changed from $1,169 to $1,246 in just two years, accounting for a 6.6 percent increase.
Industry insiders predict up-and-coming cities such as North Tampa, Zephyrills, and the Orlando/Lake Nona area to make a lot of noise in 2014 and beyond.
From January 2012 to August of 2013, investment activity has been on the rise in the state, with 106,736 units in 470 properties being sold.
Orlando and Tampa/St. Petersburg have each seen 100 properties go to investors, with 27,208 and 25,028 units respectively. Another 22,905 units in 91 properties were sold in Jacksonville, 12,533 units in 48 properties in Fort Lauderdale, 9,771 units in 49 properties in Miami and 9,337 units in 37 properties in West Palm Beach/Boca Raton.
Stockton says cap rates are compressed to historic lows in the major cities of Florida, like almost all of the major cities in the U.S., due to monetary policy.
“Adding to the compression is the lack of product, because there were so few,” he says. “If any new projects developed after the crash, there was a major supply decrease in rental housing (due to all the conversions) leading up to the crash.”
Donnellan reports that it’s urban centers in major markets that are being absorbed. Plus, many investors are buying communities built in the ’90s and putting $5,000 to $10,000 per unit in improvements and getting “happy returns on those investments.”
“We’re seeing these older assets repositioned in all markets, especially Southeast Florida, Orlando and Tampa,” he says. “Florida is a good story right now as investors are taking position all over the state.”
Toledo adds that there was a tremendous amount of money sitting on the sidelines and chasing deals, and now banks are throwing money at multifamily because that’s the preferred sector right now.
Additionally, subsidized affordable housing is beginning to make a slow comeback at both the state and municipal levels, while institutional investors and developers seeking to diversify continue to drive new student apartments and assisted living communities.
To comment on this market report, e-mail [email protected]