Guarded optimism regarding residential market.

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Evan P. Kristol is senior vice president of Investments and Still Hunter, III, is first vice president of Investments for Marcus & Millichap Real Estate Investment Services in Fort Lauderdale, Florida.

1. What area is your expertise
South Florida Apartments and Distressed Multifamily Properties (Broward County)

2. What trends do you see presently in multifamily development in your area?
In recent years, strong population growth and an expanding job market drove demand for apartments in South Florida. Economic uncertainty involving the residential market has created an unstable situation for local developers causing them to become guardedly optimistic regarding their future construction plans. There is not much new development taking place. Unsold condos continue to compete with apartments. The positive aspect of supply-side fundamentals is an ongoing reduction in permit issuance. In Broward County 1,400 multifamily units were issued last year, an amount that is expected to fall to fewer than 1,000 units in 2009.

3. Who are the active multifamily developers in your area?
Minto Group Inc, Altman Development Corporation, Gables Residential and ZOM are a few active developers in South Florida.

4. Please name one or two significant multifamily developments in your area. What impact will these projects have on the market?
4 Forty Flagler Village is a new luxury rental community in downtown Fort Lauderdale that features 218 units surrounding a five-story garage.

The Satori is a 279-unit apartment project being developed by Atlman Development Corporation on the northwest Side of US-1 and Sunrise Boulevard in Fort Lauderdale. Completion for the entire project is scheduled for late 2009.

Gables Wilton Park, developed by Gables Residential and owned by LG Wilton Park, LLC, is located in Wilton Manors. The community will be comprised of a four-story building featuring retail space on the first floor and topped by 72 modern apartments, and it will also contain 10 buildings of three-story apartments.

4 Forty Flagler Village and The Satori will be in direct competition with each other and will also face competition from the shadow market of recently completed nearby condos. While Gables Wilton Park is not in the same submarket as these two properties, it will still compete with them due to its proximity and it will face the same challenges posed by the shadow market. This many units coming online at the same time in such a small area would create stiff competition under any circumstances. But, throw in additional leasing competition from luxury condominiums as well as tough economic times, and it is likely that the developments will create a high concessionary market in the near term.

5. Where is the majority of development taking place? Why is this area doing well?
The majority of the development is taking place in Fort Lauderdale. Fort Lauderdale is viewed to have the best area fundamentals for the South Florida multifamily sector. There is stable job growth and a large population of young adults, many of which are renters. Fort Lauderdale’s upscale location can still command sufficient rents to justify new multifamily construction; however, there are strong supply constraints with little to no available land. Consistent with the current trend of moving towards urban infill versus suburban development, we are seeing new development close to CBDs where the residents theoretically work. Unfortunately, several developers have decided to dive into this niche at the same time, which will create some softness in the luxury rental market in the near term.

6. What area do you expect to be the next big development market? Why?
There are about six projects planned in the East Hollywood/Hallandale submarket. Developers were either able to find suitable land at a price that works or were able to get sufficient subsidies and incentives in order to justify multifamily development. The majority of the units planned for development in the East Hollywood/Hallandale market were subsidy driven.

7. What areas are doing well in terms of apartment leasing? Which areas are struggling with leasing?
In-fill locations that are close to employment centers that are not facing new competition from shadow inventory are doing the best. Downtown Fort Lauderdale faces challenges going forward with two new significant projects coming on line from Minto & Altman. Also, areas that had significant conversion activity and where rental fundamentals may be most susceptible to the effects of the shadow stock include: Hallandale, Hollywood, Miramar and Pembroke Pines.

8. Please give a measure of apartment vacancy rates.
A reduction in for-rent supply due to the condo conversion craze during the first half of the decade helped to bring down apartment vacancy, with rates bottoming out in 2005 at 2.6 percent. The conversion trend has tapered off and competition for renters from shadow stock plus a drop in demand will result in a 110 basis point rise in the vacancy rate this year to 7.9 percent.

9. What impact do current interest rates have on the apartment and condo markets? What predictions do you have for interest rates and their effect on the multifamily market in the next year?
Current interest rates have almost no impact on the current condo and rental market because lenders have become very conservative and buyers are hesitant. Rates might as well be 7 or 8 percent because many people are unable or unwilling to take advantage of today’s low rates.

10. What is the status of job growth/(un)employment rates and what bearing will it have on the multifamily market?
Although there is an improvement in the unemployment numbers from 2008, in the short-term unemployment rates will only have a negative impact on the multifamily market. South Florida has a large retiree population who are not as impacted by job losses as other demographics. The local market will take its lumps in the current downturn like all other markets. However, given its supply constraints and other positive fundamentals, South Florida should bounce back sooner and stronger than other major markets.

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