South Florida multifamily fundamentals are, and will continue to be, the single biggest driver of performance in the market. Strong rent collection and occupancy performance through the pandemic, population and household growth, low homeownership rates, increasingly expensive home prices, an improving job market, higher wage growth, limited land and a wonderful lifestyle all contribute toward sustainable long-term growth.
Calum Weaver, of Cushman & Wakefield
Demand for multifamily rentals will increase post COVID-19 as South Florida becomes a hotbed of population growth from people migrating from other states due to the business-friendly environment and tele-workers who are choosing South Florida as their new home.
In fact, household formations in South Florida are expected to increase more than 44,000 each year over the next five years. Assuming this projection materializes, at 60 percent homeownership rate (consistent with historic homeownership rates) represents over 17,000 new renters per year in South Florida.
Investment sales skyrocket
In the span of less than 12 months, the South Florida multifamily market went from near-record sales activity to virtually none before rebounding again to close the year. Last year ended with 254 multifamily sales totaling $3.1 billion. Despite almost six months of virtually no investment activity from April through September, total sales volume was only down 15 percent from 2019.
Miami-Dade and Broward counties experienced record average pricing in 2020 ($233,000 and $225,000 per unit, respectively). Transaction volume is expected to increase by as much as 30 percent in 2021 year-over-year.
South Florida is awash with out-of-state private capital looking to invest in the multifamily market. Sale activity has been shifting to newer product as many of the newly constructed multifamily buildings stabilized. With almost 25,000 units under construction, we expect this shift to continue with strong sales of newly constructed multifamily communities throughout 2021 and beyond.
One of the concerns stemming from the pandemic was whether or not value-add buyers would go into hibernation. Would buyers still underwrite rent upside through value-add? The overwhelming answer is yes. There remains huge investor appetite for value-add properties, but there are limited acquisition opportunities.
Rents flatten, vacancy rises
Broward and Palm Beach counties witnessed the 12th consecutive year of record rents in 2020, however rents decreased by 1.1 percent in Miami-Dade County.
Renewal levels remain high with tenants less likely to move, and due to COVID-19, most owners are keeping rents flat on renewals. Rents for 2021 are largely driven by how quickly the job market improves or additional stimulus is provided by the federal government.
The vacancy rate in Miami-Dade closed at 7.1 percent in 2020, compared to 7.7 percent in Broward and 7.8 percent in Palm Beach. This is attributable to 12,605 new units being delivered to South Florida during 2020.
Net absorption for the same period was 7,049 units, which resulted in the vacancy rate increasing. There are another 14,758 units scheduled for delivery in 2021. Short-term new supply will outpace absorption so vacancies are expected to increase. This will likely be confined to more urban markets and Class A product. Class B and C properties have the lowest vacancy levels but have lower collection amounts.
Construction climbing
There are 24,702 units under construction in South Florida, representing 7.9 percent of the current apartment inventory. In the past five-years, net absorption in South Florida averaged 7,200 units per year, meaning upcoming completions will outpace absorption, causing certain submarkets to experience slower lease-ups, higher concessions and downward rental pressures as several new buildings will be delivered in a short duration.
However, we do not believe multifamily faces an oversupply because new rental supply is quickly absorbed. In the last five years, there were 44,275 units built. During this time, we have experienced record rents and near-record absorption. The new supply thus far has not adversely affected the market and most of the new supply has already been delivered.
The market is playing catch-up from the 1990s and 2000s when developers focused on condos and the market was starved of new multifamily supply. New multifamily construction is needed to fill the void in the marketplace. Condo conversions in the mid-2000s eliminated over 20,000 net rental units in South Florida.
Additionally, in the past four years South Florida’s population increased by 167,760. During the same period, 34,081 new apartment units were built. This means one unit has been built for every 4.9 net newcomer. Over the next five 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 rental units to keep pace with the population growth.
Looking ahead
The vaccines are here and the job market has improved tremendously, though not equally. While the region has still not recovered all the jobs lost from COVID-19, the V-shape recovery model does apply to the South Florida multifamily market. We are not out of the woods, but there is a clear path forward, and the general sentiment is that the worst is in the rear-view mirror.
The good news is the market is ideally positioned for continued long-term growth. Multifamily and industrial are the two commercial real estate sectors that benefitted as strong performers amid COVID-19. With bubble territory in the stock market and other commercial real estate sectors facing challenges, South Florida multifamily will benefit from investment activity. Positive market fundamentals coupled with realistic underwriting and financing analysis should keep the market in equilibrium.
— By Calum Weaver, Executive Managing Director, Cushman & Wakefield. This article originally appeared in the May 2021 issue of Southeast Real Estate Business.