Orlando Sustains High Level of Multifamily Demand, Leading to New Construction
Fundamentals in the Orlando multifamily market are exceptionally strong and should remain healthy as long as this economic cycle continues. Following a period of no construction after the recession, new supply is finally starting to catch up with pent-up demand held in check during the downturn.
Even with over 7,000 units projected to be delivered annually for the next several years, occupancy rates should hold strong between 95 and 96 percent. Supported by continued economic expansion in the Orlando metro area as well as strong population and job growth, we remain bullish on the multifamily market and do not see the potential risk of oversupply any time in the near future.
The justification for continued new construction makes sense given Orlando’s history. As in most markets throughout the country, the recession halted new multifamily development in Orlando. From 2007 to 2009, there was virtually no new supply added to the market. It was not until 2010 that construction picked up again, and by that time, post-recession job creation had already taken off, causing a tremendous amount of pent up demand for housing. Each year since, new supply has been quickly leased, and it has not yet slowed.
As of July 8, research firm Axiometrics identified 7,100 apartment units scheduled for delivery in 2018, 3,100 of which had been delivered by mid-year. The number of units delivered in 2017 was almost identical.
The sustained demand for multifamily units in Orlando is due primarily to the market’s notable job and population growth over the last few years.
According to the Bureau of Labor Statistics, job growth in the Orlando-Kissimmee-Sanford MSA was 3.5 percent in May 2018, reflecting 44,000 jobs added in a 12-month period. This is well above the national job growth rate of 1.6 percent. Axiometrics predicts the growth will continue at a rate of 3 percent in 2019, with approximately 38,913 jobs created in the market.
All of this job growth has allowed Orlando to boast one of the lowest unemployment rates in the state (3 percent in May), which is more than a full percentage point lower than the national rate.
Further, with plenty of employment opportunities and an increasingly diversified economy, Orlando’s population is growing at the second-fastest rate of all major Florida markets, surpassed only by Fort Myers. According to Cushman & Wakefield research, the Orlando MSA’s population will exceed 2.51 million in 2018, and the market will welcome 388,000 new residents by the end of 2022.
It also helps that so many Orlando residents, both new and native, are renters by choice. With a median age of 33, Orlando residents cover a wide range of age demographics, and each group has its own set of motivations for renting. For example, while some millennials rent while saving up for a home, many simply enjoy the flexibility that renting affords them.
Baby boomers have similar motivations, as renting comes with less upkeep and more mobility for travel. Somewhere in the middle, Gen X-ers rent to avoid finding themselves upside-down in their mortgages, as they likely did during the recession.
These trends, of course, are not specific to Orlando, but they are an important factor in the market’s success.
Another contributing factor is that apartments in Orlando remain more affordable than some denser urban markets throughout Florida. As of June 2018, average asking rents in the Orlando MSA were at $1,304. That’s compared to $1,708 in Miami, a 31 percent premium for the same size and quality apartment.
Effective rents increased by 2.7 percent from first quarter to second quarter, which will result in an annual growth rate of 7 percent for 2018. For the second quarter, Axiometrics ranks the Orlando-Kissimmee-Sanford metropolitan area at 28th in the nation for quarterly effective rent growth, and fifth for annual effective rent growth.
Newly built properties are achieving a significant rent premium, at an average asking rent of $1,529 per unit, while existing properties in the market have an average asking rent of $1,295 per unit.
As rents climb and the Orlando metro area becomes better known as a dynamic market with a diversified economy, investor perceptions are changing. There is a greater potential for returns, which is leading to increased transaction activity and a more diverse pool of capital.
Whereas, historically, a majority of capital in Orlando came from private and foreign groups, we are now seeing more institutional investors enter the market, as well as a broader range of foreign investors.
We expect this period of equilibrium between supply and demand to sustain for the foreseeable future. While occupancy may drop slightly as more deliveries are completed, new units should be quickly absorbed as new residents continue to migrate to the region.
— By Jay Ballard, Senior Director, Cushman & Wakefield. This article originally appeared in the August 2018 issue of Southeast Real Estate Business. Ballard is a 34-year veteran of the commercial real estate industry and has handled multifamily, land and investment sales of over 200 properties in Central and North Florida valued in excess of $5.4 billion.