Demand for Higher-End Markets in Southwest Florida Helps Class B Market
As job growth supports a healthy economy in Southwest Florida, the region is experiencing major population growth, causing a surge in new Class A multifamily construction. The number of new construction Class A units in Southwest Florida has increased by nearly 150 percent year-over-year. In first-quarter 2018, there were 257 Class A units completed, and in first-quarter 2019, that number rose to 622.
With this increased supply of Class A properties, there is now more demand in Class B properties among renters, and ultimately from investors. Class B properties tend to have more affordable rental rates, and investors have now noticed the potential for higher investment returns.
Illustrating this demand, in the first quarter of 2018 in Southwest Florida, there were 17 Class B properties sold that totaled nearly $39 million. In first-quarter 2019, the sale volume increased to $68 million with nine properties sold. Also, investors were willing to pay more for these assets if they had a value-add component
With Class B vacancies being tight at 4.6 percent, investors are making interior and exterior improvements to properties and gradually raising rental rates to increase their returns.
For example, a value-add Class B multifamily property in Fort Myers recently sold for just under $3 million to an out-of-state investment group. The 30-unit property is well maintained and the buyer plans to upgrade the amenities and make other renovations to the individual units to improve the complex and gradually increase rents.
In another example of this trend, a group of Class B properties in Venice that sold to investors had outdated features like shag carpet in the hallways. Some of these properties were built in the 1920s and fall under historic districts where owners are required to preserve each property’s structural integrity. However, the new owners remodeled the interiors to accommodate the needs of today, such as installing faux wood tile, improving common areas and providing cable and internet to tenants, filling a profitable niche in the market.
Investors are definitely seeing the potential in smaller Class B, value-add properties, with the intention to make improvements and increase rents over time to gain their investment back. While investors are keeping these properties as Class B, they are providing pressure on Class A properties increasing their rents, all while providing a cost-effective alternative to the Class A market.
For investors, of course, the key is long-term return on investment, and in Southwest Florida, Class B multifamily properties with under-market rents, outdated features and common areas are proving to match their needs.
The outlook for 2019 in the Southwest Florida multifamily market remains promising. We continue to see vibrancy in the economy, job and population growth and new construction of higher-end apartments. As capitalization rates remain compressed, limited supply and high demand for these assets will continue to fuel a healthy market.
— By Andrew Green, CCIM, associate, Colliers International. This article first appeared in the May 2019 issue of Southeast Real Estate Business magazine.