Cushman & Wakefield's latest report on the Southeast Florida multifamily market: findings and future trends
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In less than 12 months, Southeast Florida's "Multifamily" housing market went from near-record sales activity to near-zero, back to near-record sales. Miami-Dade and Broward saw record average sales per lot in 2020 ($233,000 and $225,000 per unit, respectively), and Palm Beach recorded its second best average ever ($170,000).
While the region has yet to recover all of the jobs lost due to the pandemic, the V-shaped recovery model applies to South Florida's multifamily market. Indeed, the area is awash with domestic and foreign private capital seeking to invest in the "Multifamily" market, and this trend will increase further throughout 2021.
While bullish conditions prevail, challenges remain. This week, we analyzed and summarized key points from the latest Cushman & Wakefield report on the South Florida "Multifamily" market.
Analysis of sales levels
In 2020, there were 254 multifamily sales totaling $3.1 billion (in Southeast Florida alone). Despite nearly six months without sales activity, from April through September, total sales volume was down only one-third. Miami-Dade and Broward had record average sales per unit, while Palm Beach had the second highest average.
Overall sales are down for a fourth consecutive year from the record high of 2016. There are fewer transactions available on the market which has slowed sales volume. The biggest challenge is finding viable acquisition opportunities with more buyers than sellers on the market. For the third year in a row, Broward County dominated sales activity in the region with a total of 46.7 percent or $1.44 billion. Sales volume will increase in 2021, particularly as out-of-state buyers become more active in the market.
Approximately 75% of sales activity is in product built after 1980. Sales activity has begun to shift to newer product as many newly constructed multifamily buildings have been stabilized and sold to investors. With nearly 25,000 units under construction, this shift will continue.
The potential for added value is still there, especially through rent increases.
Massive influx of out-of-state investors
In early 2020, data highlighted the number of New York investors looking for opportunities in the "Multifamily" segment in South Florida. Whether relocating or investing, New York capital is arriving at unprecedented levels. The same principle applies to other out-of-state investors, including California, Washington, New Jersey and Illinois.
Outside of the state, private equity investors are the most active in the market. Deals under $50 million are seeing the highest level of activity. Investors are looking for returns on investment of 6%. IRRs are 12-14%.
Return on assets and interest rates
As of March, the 10-year Treasury rate is approximately 1.4%. With an LTV (Loan to Value Ratio) of 70%, overall interest rates are between 3.3% and 3.5%.
Record low interest rates in 2020 put downward pressure on cap rates. Although they fell to near-record lows during the summer of 2020, cap rates are aligned with what they were before the pandemic. Investors are optimistic about a return to the "new normal" and are factoring in rental growth. Cap rates today range from 3.7% to 4.1% for Class A properties, and from 4.25% to 5.25%. for Class B and C.
A solid increase in rents
Broward and Palm Beach counties had their 12th consecutive year of record rents. Rents declined 1.1 percent in Miami-Dade in 2020.
Renewal levels remain high as tenants are less likely to move. Due to the pandemic, most landlords are holding rents steady at renewals.
Rents for 2021 will be largely determined by how quickly the labor market improves or by additional stimulus.
Analysis of the increase in vacancy rates in 2020
All three counties experienced increases in vacancy rates in 2020. Miami-Dade's vacancy rate is 7.1 percent, Broward's 7.7 percent, and Palm Beach's 7.8 percent. The increase in vacancy rates is due to 12,605 new units coming to market in 2020. Net absorption for the same period was 7,049 units, resulting in an increase in vacancy.
Another 14,758 units are scheduled for delivery in 2021. In the near term, new supply will exceed absorption and vacancies will likely increase. This increase will likely be limited to more urban markets and Class A product. Class B and C properties have the lowest vacancy rates.
It is important to consider the region's history on this topic. New rental supply has historically been rapidly absorbed. In the past five years, 44,275 units have been built. During that time, the region has experienced record rents and historically low vacancy rates. To date, the new supply has not had a negative effect on the market.
The market is also catching up. In the 1990s and 2000s, there were very few multi-family projects. Developers focused on building condominiums during that time and the market was deprived of new multifamily offerings.
Population growth must also be considered. Over the past four years, South Florida's population has grown by 167,760 people. During the same period, 34,081 new apartments were built. This means that one unit was built for every 4.9 net new residents in the region. Over the next five years, South Florida is expected to experience a positive net migration of 310,715 people. Using the same ratio, the region would need over 63,000 new rentals to keep pace with population growth over the next five years.
Demand for rental housing is fueled by the region's strong population growth
Demand for multifamily rentals is expected to increase after the pandemic crisis as South Florida becomes a hotbed of migration of people from other states.
Household formation in South Florida is projected to reach over 44,000 per year over the next five years. Assuming this projection materializes, and if 60% move to homeownership and 40% move to rental (consistent with historical homeownership rates), that's over 17,000 new renters per year in South Florida.
The job market in full recovery
South Florida's unemployment rate is now 6.7%, up from 2.3% in early 2020. In the span of six months, South Florida's unemployment rate went from a 50-year low to a record high of 13.4% in April 2020. The unemployment rate has since dropped by half from the 2020 record. Encouragingly, much of the job loss that occurred in 2020 was not permanent.
Median incomes still increased by 0.6 percent in Miami-Dade, 0.4 percent in Broward and 7.3 percent in Palm Beach.
Statement of Rental Collections and Evictions
Florida's "open for business" mentality has contributed significantly to the ability of businesses to reopen and provide employment. Recoveries for most properties are in the 90% range.
Eviction moratoriums remain in effect in South Florida. When these are lifted, Class C properties, which have the highest number of unpaid rents, caused by a disproportionately negative effect of the pandemic on low-income households, could suffer the most.
Conclusion
The economy is changing rapidly: vaccines have arrived in droves, the job market has improved dramatically (but not equally). The general feeling in Florida is that the worst is now over.
The good news is that the market is ideally positioned for continued long-term growth. The "Multifamily" and industrial segments in South Florida are the two commercial real estate sectors that will come out on top during this period. Indeed, the fundamentals of South Florida multifamily real estate are, and will continue to be, the primary driver of market performance. Strong recovery and occupancy performance during the pandemic, strong population growth, low homeownership rates, higher housing prices, an improving job market, rising wages, scarce land, and the region's quality of life are all positive factors over the long term.
To conclude this article, we have listed the key market trends expected for 2021:
- Private equity investors are expected to continue to dominate the market. Their portfolios will include more multi-family housing and less office and retail.
- Interest rates are expected to remain low. Although they have been rising since mid-2020, there is no fear in the short term that they will increase significantly.
- South Florida is expected to be one of the biggest winners in terms of population growth.
- The volume of multi-family transactions is expected to increase by 30%.
- The ability to complete transactions quickly and without suspensive clauses will become a differentiating factor for many buyers.
- Many hotel and retail conversions to multi-family buildings are expected to occur.
Sources: Cushman & Wakefield, South Florida Multifamily 2021 Forecast.
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