Cresting Wave of Job Losses Upends Miami Multifamily Sector
How will the COVID-19 fallout impact the Miami multifamily market? Although many investors are approaching markets known for leisure travel and cruise industries with caution these days, RED Mortgage Capital research posted last week indicates Fort Lauderdale/Broward County may offer a more attractive risk and reward profile than is commonly understood in the intermediate term, even under severe recessionary stress. Can the same be said of Miami as many of the same arguments apply?
Let us stipulate that coronavirus has struck Magic City a particularly sharp blow. Miami relies on international tourism to a larger degree than most other domestic travel destinations and has experienced greater tourism revenue and job losses as a result. Travel industry consultants STR analyzed the top 25 tourist destinations in America and noted that Miami hotels recorded the largest decline in average daily hotel room rates in April (-56.8 percent from 2019), while the metro area’s hotel occupancy plunged to 20 percent from 95 percent in 2019.
Employment data are available only through March at this writing, but even at this early stage, job losses were severe. The Miami-Miami Beach metropolitan division employed population fell 86,000 in March, a one-month decline of 6.5 percent. Job cuts in April were undoubtedly worse.
Nevertheless, available performance data suggest that the apartment market weathered the first weeks of economic disruption well. A sample of 397 stabilized, same-store properties surveyed by Yardi in late March was 95.68 percent occupied, up 4 basis points (0.04 percent) from the same month last year, and down only 5 basis points from February. Space absorption among all properties, including those in lease-up, was negative (42 units), but to an immaterial degree, and the 13 new properties in lease-up absorbed an average of 11 units, the highest March figure in at least four years.
Rent data, which are collected earlier in the month, were not as robust. Sample rents increased only 1.30 percent year-on-year and fell -0.2 percent from December, something of an anomaly during Miami’s high season. But this is the continuation of a longstanding, supply-related slowing trend and is not attributable to COVID-19 job losses.
Forward-looking rent indicators suggest that street rents declined and that concessions increased in April. Internet-offered rents fell more than 1 percent from late March to late April, and properties offering concessions increased by about one-third. Further effective rent declines are baked in as a tourist town weathers the economic pressures of social distancing protocols at beaches and other popular tourist attractions for several weeks. Cruise passengers, totaling more than 5 million in 2019, will not return to ports before late June.
But how deep are rent and occupancy declines likely to be? With COVID-related job losses coinciding with deliveries of 7,000 and 9,000 new units in 2020, some analysts have proffered forecasts of metro occupancy decreases exceeding 100 basis points and rent declines of more than 10 percent from first quarter levels by year’s end. RED Capital models, by contrast, are more sanguine.
Job losses will be substantial. We expect average monthly 2020 payrolls to decline 5 percent from last year (about 60,000 jobs), an outcome comparable to 2009. But recovery should more closely resemble the brisk 2017 post-Irma bounce than the more protracted slog after the housing crisis. Job losses this year should be reversed by mid-year 2022. More significant to the apartment market: personal income should not decline as far as employment, perhaps 3 to 4 percent.
Historically, Miami occupied stock growth is closely correlated with inventory growth but not meaningfully to employment growth. Demand won’t keep pace with deliveries in 2021, but if 30 years of history and the recent post-Irma experience are any guide, the shortfall should be modest. We expect occupancy to decline about 60 basis points by year’s end.
Similarly, payroll employment is not a statistically significant predictor of Miami rent trends. No material change in rent trends was observed in the aftermath of Irma, and rents fell only about 5 percent during the Great Recession. Rather, personal income growth is the predominate influence on Miami rents, and this metric is likely to decline less than it did in 2009. Although variance among classes is likely, we project overall rent decreases of less than 5 percent, allowing even peak price buyers to derive annual returns of 3.5 to 4.5 percent over five-year holding periods.
This metro’s exposure to the leisure travel industry notwithstanding, the volatility of Miami returns to investors is below average for large U.S. markets. This isn’t likely to change in the current environment. Investors should keep this in mind when transparency returns to the property markets.
— By Daniel J. Hogan/RED Capital Research. Hogan is ORIX Real Estate Capital’s Managing Director for Research. RED Mortgage Capital, a division of ORIX Real Estate Capital LLC, is a content partner of REBusinessOnline. The views expressed herein are those of the author and do not necessarily reflect the views for RED Capital Group or of the author’s colleagues at RED. For further analysis from RED Capital Group, click here.