How Will Tampa’s Multifamily Market Compare to Other Growth Markets Post-COVID-19?
It may be premature for multifamily investors to come off the sidelines and back into the acquisition fray. Still, the outlines of the post-pandemic landscape are growing clearer, and the hour draws near when owners and buyers must consider the buy/sell/hold mathematics of the future. Tampa presents a model for the unique economic factors likely to influence the nationwide multifamily sector.
The initial phase of the post-pandemic analysis is likely to focus on the anticipated performance of “growth markets.” This category of metropolitan areas is characterized by a relative dearth of spatial and regulatory barriers to entry, lower land costs and lower business operating costs than the primary markets, as well as a demonstrated ability to support faster sustained employment and population growth than the national average.
Historically, growth markets (e.g., Atlanta, Dallas, Phoenix, Tampa) have facilitated volatile real estate cycles, featuring rapid growth during boom times, followed by often painful supply-driven corrections during periods of economic weakness. Apartment capitalization rates discounted the relative riskiness of their NOI streams accordingly, pricing growth market assets to going-in yields 75 basis points or more above comparable assets in the primary markets.
The long multifamily bull market of the passing decade altered this dynamic. The larger growth markets demonstrated newfound capacity to challenge the primary markets for business investment and talent, establish a sense of “place” that previously proved elusive and maintain construction discipline that kept occupancy in equilibrium and catalyzed the kind of rent growth that formerly was associated only with the Gateway City elite. Investors responded enthusiastically, narrowing the cap rate spread between the primary and growth markets, in some cases to as little as 25 basis points.
The Pandemic Recession of 2020 will redefine these relationships. When capital begins to return to the multifamily property market, the yield spread between the growth and primary markets initially will grow wider; but the change may not be long lasting. Indeed, the growth markets are well-positioned to benefit from household and economic trends likely to emerge during the U.S. 2021-2022 recovery. Many householders will reconsider the benefits of the thinner population density, manageable commutes and larger floorplans typical of secondary markets, and the rise of work-from-home options will accommodate relocation. By the same token, repatriation of the industrial supply chain may usher in something of a manufacturing renaissance in cities with the space, transportation infrastructure and labor forces to support it.
Which growth markets are likely to recover earliest and with greatest strength? Each will experience deep and often painful job losses this year: by definition the group is more exposed to thinly capitalized small businesses and cyclical industries than the primary markets. The regional economies that recover fastest will possess skilled, protean labor forces that can be redeployed with a minimum of friction and those operating in regulatory environments that facilitate rapid repurposing of abandoned assets. RED Capital Research models suggest that Austin, Cincinnati, Nashville, Phoenix and Salt Lake are likely to be among the first metros to exceed pre-COVID levels of employment—most likely in Spring 2021 — along with primary market stalwarts San Francisco and San Jose. Dallas, Charlotte, Portland, Raleigh, San Antonio and Seattle are likely to lag a few months behind.
Based on historical experience alone, one would expect Sunbelt growth markets like Fort Lauderdale, Orlando and Palm Beach to feature prominently on the list of early recovery metros. But this cycle may diverge from the historical pattern. Metros with substantial exposure to the leisure travel industry may lag their historical recovery patterns should Americans remain wary of air and sea travel. Conversely, metros with highly developed engineering-intensive manufacturing bases may benefit from the supply-chain repatriation phenomenon. Among the chief beneficiaries will be Kansas City, Pittsburgh and the aforementioned Cincinnati.
Slower recoveries are likely in metros in the Mid-Atlantic, Northeast, Southern California and parts of the Midwest. Las Vegas may experience the longest return to pre-COVID form among the growth markets as it is particularly sensitive to changes in American personal consumption behavior, almost certainly impacted for a long time by the Pandemic Recession.
Tampa will be a bellwether. A Sunbelt growth market with less exposure to the leisure travel industry than its primary Florida rivals, Tampa may represent a safe harbor for investors seeking lower risk multifamily investments in the Sunshine State. RED Research models aren’t very supportive of the notion, however; Tampa employment is unusually exposed to declines in U.S. industrial production, and metro rent trends are sensitive to payroll and personal income downshifts. Indeed, Tampa lost more than 150,000 (-9.6 percent) jobs in April, better performance than Orlando and Fort Lauderdale and comparable to Atlanta, but on track to reach RED’s -18.4 percent year-on-year decline for the spring quarter. With heavy supply in the pipeline, Tampa property NOI may not recover before late 2021, and our calculation of expected investment total returns is near the bottom of the RED 50 large market peer group league table.
— 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.