South Florida’s multifamily investment sales market has been on fire since the effects of Covid-19 stimulated the economy in 2020. Lately, however, the market has started to feel the pressure of rising insurance and capital costs, not to mention a highly active hurricane season. These factors have led to a slowdown across the commercial real estate industry, but we are here to discuss what Franklin Street is doing to stay ahead and ensure execution for clients in these uncertain times.
To help demonstrate the effects on the market, let’s look at some of the numbers. In the fourth quarter of 2021, South Florida saw the biggest quarter our region has ever seen in terms of multifamily transaction volume, with 227 transactions totaling $7.4 billion. 2022 started with the same trend with Q1 and Q2 showing historically high transaction volumes. We heard rumblings of interest rate increases at the beginning of the year and by the time Hurricane Ian hit in September we had already seen interest rates jump from an average of 4% to above 6%. As rates increased, multifamily investment sales volume in South Florida fell to $2.7 billion in Q3-22, compared to $3.4 billion in Q3-21.
With rising interest rates and record inflation causing momentum to slow in South Florida, many are wondering – is this the end of the road for one of the hottest markets in the country?
Historically, the last quarter of the year has always been among the strongest quarters in South Florida’s multifamily market. As we sit at this inflection point, it’s hard to not stare at the impact the above has made. With only a few weeks left to close out 2022, we have seen here locally only 44 transactions totaling $667M for the fourth quarter.
Despite this, we at Franklin Street believe there are several reasons for investors to be cautiously optimistic.
First, it’s important to look at the factors that led to last year’s record deal volume. In 2021, people flocked to Florida, with as many 1,100 people a day moving to the state for a period of time. This surge in demand resulted in significant rent growth throughout the state. For South Florida, a land constrained market with limited opportunity for new large-scale development, the supply and demand discrepancy resulted in 30%+ rental rate increases in most submarkets. The dramatic increase in rents along with extremely low interest rates allowed multifamily sales pricing to skyrocket. In Q4-21, the average per unit price for multifamily hit $289,519, up from $215,417 per unit in Q2-20, during the height of the pandemic. While pricing may not be growing at the same rate it was a year ago, the strong demand for multifamily will persist.
Factors such as rising interest rates and insurance costs will continue to encourage people moving to South Florida to rent instead of buy, while certain families may be priced out of the single family housing market.
Going forward, we expect multifamily properties in our region to remain attractive investments, but the market will become more complex to navigate and will require a more nuanced investment strategy. South Florida will continue to attract residents and business, and pressure from rising interest rates and inflation will keep multifamily units in high demand. The shifting environment is also sure to create new opportunities for investors, especially those with cash on hand who can quickly capitalize on smaller deals without financing.
In today’s economic environment, it’s imperative to look at more than just the deal on the table. At Franklin Street, our collaborative, full-service platform provides investors with an advantage in the South Florida market. Our investment sales professionals work closely with Franklin Street’s capital advisory and insurance brokers to develop the smartest and most profitable approach to your next multifamily investment.
So far, every deal our team has lined up to close in early 2023 is being collaboratively handled by multiple lines of business, allowing us to provide our clients with the best and most informative experience in a changing market.