The multifamily market in South Florida is gaining strength but not velocity due to converging market and demographic forces. Sales topped $400 million for the third year in a row in 2016, largely because the average price per unit jumped 13 percent to $185,300 per unit.
The vacancy rate fell below 4 percent at the end of last year, and rents climbed almost 4 percent on all types of units to an effective rate of $1,351 per month.
It’s clear the current upcycle will continue beyond the usual period as immense demand from investors is causing an incredible scarcity of Class A product, and the lifestyle preferences of millennials are intersecting with the luxury condo boom.
In 2005 and 2006, adequate inventory kept the multifamily market in balance. Today, buyers are plentiful, capital is available and interest rates are affordable.
What we don’t have is product, a phenomenon not exclusive to Miami and Fort Lauderdale. Why? Sellers have few options. They’re thinking, “If I sell at a premium and I want to stay in a similar market, I’m going to pay a premium. So, what’s the point of selling?”
Therefore, owners are putting properties on the market for one of three reasons: a problem that may involve financing; cashing in on their equity; or rebalancing investment portfolios with a potential downturn in mind.
Owners are also becoming more financially savvy. Rather than predict the top of the market, they’re locking in low borrowing rates and planning to hold through the next downturn that may be three to seven years away.
The condominium market, which created minor havoc in the last cycle with apartment conversions, is playing less of a role this time. This is the first year ever in Miami-Dade County that more apartment units, 3,500 in all, than condo units are scheduled for delivery.
The Millennial Factor
Most condos under construction in South Florida are high-end properties that only a small percentage of the population can afford. That impacts the new blood in the marketplace: millennials. Research shows that they don’t want to own homes and can’t afford them. Millennials are comfortable paying higher rents, as much as 55 percent of their income in Fort Lauderdale.
Millennial and investor demand intersect in sub-markets such as Brickell because younger people want a place to live, work and play. Multifamily developers can’t accommodate them because they can’t or won’t pay as much for land or construction as condo developers. So, apartment construction is being squeezed out of urban cores.
Shifting to the Suburbs
That’s sending developers and investors to suburban downtowns. In downtown Coral Springs, a city of about 127,000 in north-central Broward County, more than 400 units are being built. In Plantation, a similar city at the southern end of the county, four multifamily projects totaling about 600 units are underway.
We will see more developments like those and the redevelopment of urban fringes. In Little Haiti, which sits between Miami’s downtown and its Design District, Design Place Apartments is being planned with a mix of retail, office, hotel and residential.
Developers not interested in suburban cores or urban redevelopment are sitting on the sidelines. So are investors uncertain about changes in interest rates and federal fiscal policy.
However, lenders are not being shy. Recently, we had investment banks and financial institutions putting extremely low interest rates on the table for a downtown Fort Lauderdale development. Multiple lenders offered rates just above 4 percent, and a few went below that bar.
Why? Banks want to capitalize on any opportunity, even if that means shaving their margins. But they’re not making the same mistakes we saw in the last real estate cycle. Lenders are asking for more documentation, which is why deals with qualified buyers are easier to finance.
Going forward, a mix of investors will buttress the multifamily market. We’ll have the traditional international sources of capital: Latin America, Canada and Europe, plus new money from Russia, the Middle East and Asia.
Add to them out-of-market property owners within the United States. To complete a 1031 exchange, a New York investor that just sold at a 1.5 to 2 percent cap rate will outbid locals on a Miami deal with a 5 percent cap rate.
Finally, corporations that own a lot of property outside Florida want to capitalize on the South Florida market. They are creating funds to buy properties.
Those companies will likely be disappointed when they find few Class A properties available for investment. Their opportunities will lie with Class B and C products priced from $4 million to $20 million, which tend to be garden-style apartments.
And given the economics of rents and land, those properties may be workforce housing. In the Allapattah neighborhood, the city of Miami rezoned a section of 20th Street to encourage mixed-use development at affordable prices. Areas like this, where land prices are a third of those in established neighborhoods, will create the next investment opportunities.