Orlando Multifamily Could Suffer Multiyear COVID-19 Recession Contraction
Since the end of the Great Recession, Orlando has been among the country’s fastest-growing economies and strongest multifamily markets. After 2014, metro payroll employment increased at a 3.7 percent compound annual rate, 120 percent faster than the national average. Only Austin surpassed Orlando for payroll growth among the peer group of 50 large metropolitan markets, according to The RED 50, a proprietary econometric model developed by RED Capital Research.
Personal income grew about 6.8 percent annually, 45 percent faster than the national average. Apropos of the apartment sector, effective rents advanced at a 5.9 percent annual rate, according to Reis data, surpassed only by Atlanta (6.9 percent), Dallas (6.0 percent) and Nashville (6.2 percent) among growth markets — and not by much.
All the while, the sources of Orlando’s prosperity grew more diverse and its labor force more highly skilled. In the past five years, the fastest growing segments of the metro economy were professional, technical and scientific services, air transportation, manufacturing and construction. Indeed, employment growth in the sectors most popularly associated with Orlando — arts and entertainment plus food services and lodging — was outpaced by the finance and insurance industry.
Nonetheless, theme parks, resort hotels, leisure service and conference infrastructure remain the mainstays of the metro’s economic ecosystem. Over 250,000 workers are employed directly in the tourism sector, giving the Orlando labor market the third-highest relative exposure to leisure travel among U.S. metros after Las Vegas and Atlantic City.
For this reason, the impacts of national and global economic health changes are magnified in Orlando’s local economy. It is no mere coincidence that spending on domestic and international travel in the U.S. increased on a 3.6 percent annual pace from 2014 to 2019, mirroring almost exactly Orlando’s observed rate of employment growth.
The plunge of world output associated with efforts to contain the SARS-CoV-2 (COVID-19) contagion poses a serious threat to this metro’s economy. Leisure travel expenditures will plummet over the next 12 to 18 months solely on economic grounds, and traveler anxieties regarding air travel and casual human contact are likely to further depress travel spending until the pandemic begins to recede in the collective memory.
In 2009, Orlando job losses were nearly 50 percent more intense than the national average. Although greater employment diversification and powerful demographic trends will cushion the blow in this cycle to some degree, RCR project that metro job attrition will compare to the national average (about 2 percent over the 12 months ending in March 2021). Unlike in 2010 and 2011, metro job recovery will tend to lag the nation by a quarter or three.
Prior to the pandemic, Orlando multifamily market performance already was showing some wear and tear due to moderating economic growth and intensifying supply pressures. Occupancy among a sample of 589 Yardi-sampled same-store properties stabilized for at least 12 months was 94.61 percent in December, a decrease of 0.61 percent from 2018, and the lowest level observed in 67 months. Rent growth over the 12 months ended in December was only 2.14 percent, down from 5.89 percent in December 2018, and 7.82 percent on the cycle apex the previous June.
The latest data from the first few weeks of the pandemic convey a sense of further weakness. Sample occupancy slipped to 94.52 percent in February, representing a 12-month decrease of 0.72 percent; annual rent growth tumbled to 1.17 percent, the slowest pace reported in the five-year history of the sample. Portfolio average rent fell to $1,310, the lowest level since April 2019, suggesting that 12-month comparisons are likely to turn negative at some point this spring.
RCR’s historically specified models never were kind to Orlando. Linear models always bear a tendency toward mean reversion, and this tendency was never greater than in Orlando’s case as its long-term average growth rate is only 3.2 percent, even after half a decade of growth of 4.5 percent or faster. Under our pre-COVID-19 slow output growth/low-inflation macro forecast our projection for Orlando rent growth generated a five-year compound annual growth rate of only 2.6 percent. Under our relatively optimistic new projections the metro’s forecast CAGR falls to just 1.1 percent.
Investor returns are likely to be commensurate. Under base case circumstances we calculated that a late-2019 investor should expect to earn an annual IRR below 6.5 percent on a five-year hold, in the lowest decile of the RED 50 peer group. Under initial COVID-19 projections annual yields closer to 2 percent are likely.
Regardless, investors remain active in the Orlando market (a $105 million transaction was closed on April 6 at a mid-4 percent cap rate). But patience will be the order of the day as longer hold periods will be required to achieve hurdle rates of return unless cap rates decrease from recent aggressive levels.
— 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.