Excerpted from August issue of Southeast Real Estate Business.
The Orlando multifamily market may have an appearance of being oversupplied and on shaky ground, but it is actually thriving and has a long runway for growth ahead.
The Orlando MSA has an inventory of approximately 165,000 rental units and about 10,000 units under construction. While that new supply approaches historical high-water marks, the lack of inventory of entrylevel, single-family homes and the complexion of the household formation leads us to the conclusion that we are undersupplied in the multifamily space.
That being said, within the overall numbers there is likely an oversupply of Class A inventory and an undersupply of workforce housing. Vacancies are hovering in the 6 percent range and rent growth has slowed to around 3 percent after having stronger years. The undersupply of workforce housing is being exacerbated by the value-add business model being employed on most of the Class B and C buyers over the last five years, catapulting the average rents and straining the ability of the working-class to keep rent as a percentage of income at a healthy level.
Overall, single-family homebuilding is at a 10-year high, but still well below the pre-recession days. Permits are also soaring, but the makeup of the housing is not ideal for the workforce segment of the population, with many new homes being marketed to the middle or upper end due to construction costs and margins. Also, many homes are being developed a fair distance outside of the downtown area, leaving difficult commute times for the workforce segment.
While lending for single-family has certainly loosened, there is still more restraint than there was in the Great Recession. Many renters will be forced to rent for longer periods of time due to lack of ability to qualify for their first home purchase. We anticipate an increase in townhome development, as it allows developers to preserve margin, and homebuyers can get something of their own that is new construction at slightly more affordable numbers than single-family homes.
Job growth in Orlando remains strong — above 3 percent — ranking No. 1 in the nation for the fourth consecutive year, according to the Bureau of Labor Statistics. Annual job growth is in the 40,000 range, which makes it a force to be reckoned with as far as an economic driver. While tourism certainly adds to the numbers, traditional Sunbelt growth of professional services is healthy and indicates the strong ability of Orlando to continue to move up the charts of many when looking at the most desired cities in the country to live in, move to and/ or locate a business in.
While being in the heart of an income tax-free state that is showing significant growth relative to other parts of the country, adding to its international reputation is that it’s a great place to live. Downtown Orlando, Creative Village, Orlando International Airport, Lake Nona Medical City and other major area job centers are firing on all cylinders.
From an investment standpoint, debt and equity is flooding the space, compressing cap rates and causing heavy bidding activity. While we have noticed an increase in “new money” to the space, there are still experienced buyers with strong capital that are pushing the market forward. Fannie Mae and Freddie Mac dominate the lending environment, with almost 100 percent market share on new acquisition debt. Even the agencies’ small balance multifamily program is giving them significant market share on the sub-100-unit space. Equity consists primarily of syndicated money or 1031 exchange buyers.
Private clients using closely held funds are not willing to pay the cap rates deals are trading for and most buyers are basing their valuations on the ability to project higher rents after implementing a value-add strategy. In many cases, we are on to second — and even third — generation of value-add to a property since the recession.
Overall, we look for challenges to the market, and while there are certain warning signs, particularly for renters trying to keep rent as a percentage of income at a good level, the health of the market appears to have a long runway ahead for future growth.