Our firm recently closed on a refinance of a newly constructed Class A multifamily property in South Florida. We reached out to several different lenders and like any debt assignment, once we sent out our loan request package we started to receive questions from the various lenders. We got the typical questions one would normally expect, “What concessions are being offered?”, “How many storage units are there?”, “Why is the insurance so high?” But the new question we had to address was “How has COVID impacted the market?” This was a much broader question and I had to do a little more research before responding, this wasn’t something I was going to find in the standard P&L’s. Like I said earlier, we did close on this opportunity so I feel like our response to the COVID question was informative and acceptable. Since our firm is part of RECA, a national alliance of firms like ourselves, I thought it would be beneficial to share our thoughts.
Florida and the entire Sunbelt Region have been the recipient of an influx of population gains over the last several years. Thanks to COVID, this trend accelerated because remote working provided the flexibility to relocate and work from home. While official figures have not been released, it is expected that South Florida will have one of the largest population gains during the COVID era. We anticipate increased demand for multifamily rentals as South Florida realizes the growth from people migrating from other states. This migration is primarily due to the business-friendly environment and those who can work remotely choosing the southern states as their new home while they take advantage of a high quality of life. Young adults are choosing the Sunbelt Region where job availability is greater than in markets that are recovering at a slower pace. Multifamily operators will benefit from this as household growth will impact demand for rental housing. Places that offer lower costs of living and doing business will attract residents and businesses that are looking to tighten up their budgets. We are seeing this in South Florida with firms such as Kayne Anderson, Wexford, AMG and Tudor which have realized the many benefits of relocating from the North East.
With the southern migration we have also seen a huge increase in demand for single family homes. During COVID we have witnessed a phenomena called “Involuntary Savings”. Families that typically went out to dinner several nights a week and took extended vacations were now staying home and not spending that additional disposable income. They could now afford a down payment on a home and were able to take advantage of all time low interest rates. However, this surge in home purchases has driven up the price of single-family homes. In South Florida the median home price increased by 9.5% in 2020 to $395,289. In fact, average home values are increasing at a rate greater than apartment rents, making home ownership for many extremely challenging. Because of this we are continuing to see significant demand for apartments.
There is a question around vacancy in the South Florida Market. In 2020 we did see an increase in vacancy rates but that can mostly be attributed to 12,605 new units being delivered to the market. Net absorption for the same period was 7,049 units which did result in a vacancy increase. However, in the past 4 years the South Florida population increased by 167,760. During that time 34,081 new apartment units were built. This means one unit has been built for every 4.9 net new people to the region. Over the next 5 years, South Florida is expected to see 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 the population growth for the next 5 years. Keep in mind that in the 1990’s and 2000’s there was very little multifamily development. Developers focused on condo development and condo conversions which eliminated over 20,000 net rental units in South Florida. During this time the market was starved of new multifamily development. I realize we have recently seen a significant increase of new multifamily development, but it is important to point out that new rental supply is quickly absorbed. In fact, over the last 4 years we have experienced record rents and near record low vacancies. Thus, the new supply has not negatively impacted the market.
Even with COVID, the Southeast investment sales market has realized a strong performance. Apartments in this region may be top of mind for investors transferring capital from more challenging markets. The in-migration trends along with the financial markets with lenders that still favor multifamily over most other asset classes have brought new investors into this market. In South Florida in 2020 there were 254 multifamily sales totaling $3.1 billion. Despite almost 6 months of no sales activity from April through September, total sales volume was only down 15% from 2019. Miami-Dade and Broward counties experienced record average per unit sales in 2020 ($233K and $255K per unit respectively).
So in the end, the South Florida multifamily market has faired the COVID pandemic extremely well. We will see if it continues to play out that way now that business is opening up and the majority of the population is getting back to work. From my own perspective, I go to the office when necessary but otherwise I work from home and I don’t have to worry about wiping snow off my car.
References:
Marcus & Millichap Research Services (2021). U.S. Commercial Real Estate Investment Outlook Multifamily.
Cushman & Wakefield (2021). South Florida Multifamily 2021 Forecast
Christopher Romer | Dockerty Romer & Co. | (407) 694-4550 (M) | (561) 330-8000 (O) | cgromer@dockertyromer.com