Fort Lauderdale Multifamily Sector Offers Investors Shelter from the Viral Storm
Many multifamily real estate investors have moved to the sidelines until price transparency returns and the trajectory of property performance becomes clearer. It is a prudent strategy. Indeed, this period of forced inactivity is, perhaps, better used to reflect on the future and consider which U.S. apartment markets will offer the most attractive opportunities when the moment arrives to test the waters again.
Conventional wisdom holds that markets with significant reliance on leisure travel employment will be hardest hit by the pandemic, particularly those with outsized exposure to the cruise industry. It’s hard to refute the logic. But investors who interpret it too literally may miss potentially attractive options.
Take Fort Lauderdale, for example. The Broward County labor market has one of the highest exposures in the country to the leisure, hospitality and cruise sectors. More than 3.9 million cruise passengers embarked from the port last year, generating direct employment for about 15,000 residents and indirect employment for tens of thousands more in the lodging, dining and entertainment, air transportation and retail sectors.
With the cruise industry taking on water surely investors would be well advised to steer clear of the Gold Coast? Perhaps not.
In fact, the statistical impact of Broward County payroll employment growth and the rate of occupied apartment stock growth has been low historically. Since 1990, the quarterly change of county payroll job growth accounts statistically for only about 9 percent of respective change in occupied stock growth among professionally managed apartments. By contrast, the coefficient of apartment inventory growth in a one-independent variable predictive equation is 49 percent. In other words, Fort Lauderdale’s apartment supply is a much larger influence on absorption than payroll job growth, at least within the economic parameters that were observed in the last 30 years.
In most American cities, the decision to rent an apartment is intrinsically connected to a tenant’s employment status. This relationship is not as clear in Fort Lauderdale, especially in the large tier of space targeted toward the “renter-by-choice” demographic. Rather, occupants often are retired, self-employed or utilize the space as a vacation home or a more strategic primary residence for tax purposes. For these reasons, metro apartment performance is less affected by economic disruption than most U.S. markets.
Indeed, Broward County multifamily market performance was constructive through March 2020, exhibiting few signs of COVID-19-related stress to that point. A sample of 513 stabilized, same-store properties surveyed by Yardi was 94.66 percent occupied in March, representing a 3 basis point (0.03 percent) increase from December and a 2 basis point increase from February. With respect to rent trends, unit-weighted average rent growth over the 12-months ending in March 2020 was 3.18 percent, representing accelerations from December 2020 (2.72 percent) and March 2019 (2.47 percent), not the data points one would expect from a market beset by mass layoffs.
In other words, Fort Lauderdale occupancy and rent conditions were largely influenced by endogenous supply trends and less affected than most markets by exogenous pandemic-related economic shocks. Broward County is not immune to the economic effects of the on-going crisis, and as time passes the impact surely will grow clearer. But, if history is any guide, Fort Lauderdale will weather the tempest better than most.
RED Capital Research (RCR) forecasting models may provide an empirical basis for this conclusion. Under RCR’s pre-COVID-19 base case macroeconomic forecast anticipating slow GDP growth and low inflation over the five-year forecast interval, unlevered multifamily returns from Fort Lauderdale investments were projected to be below average at about 6.5 percent annually, hindered by sluggish rent growth and low going-in cap rates. Among the large markets that make up the RED 50 (RCR’s peer group of the 50 largest U.S. multifamily markets), this ranked only 46th, 30th when considered on a risk-adjusted basis.
But Fort Lauderdale’s low performance volatility will elevate it among its peers under the recessionary conditions expected to prevail over the next 12 months. Indeed, under RED’s COVID-19-stressed macro forecast (2020 GDP = -7.3 percent) contemporary Fort Lauderdale investments are projected to generate 4.3 percent annual returns, ranking as the 30th highest in the RED 50 peer group, and eighth highest among the group with respect to risk-adjusted returns.
Patience will be a virtue for investors seeking to re-enter the multifamily property market. But when the time arrives, buyers should not reflexively dismiss markets with leisure travel and cruising exposure like Fort Lauderdale — or San Diego and Orange County for that matter — markets that arguably will be among the most likely to produce advantageous returns in unsettled times.
— 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.