The apartment construction boom continues in Miami as rapid demographic and employment growth foster rental demand. Employers expanded staffs by 25,900 personnel year over year in February, roughly 6,900 more than in the preceding annual period, which has kept the unemployment rate below 4 percent for 12 consecutive months.
Hiring during this period was led by the professional and business services sector, due in part to a growing tech sector. The relatively higher salaries in this segment helped boost the median household income 6.8 percent year-over-year in March, among the top five growth rates in the nation.
Available employment is helping draw new residents and produce population growth above the national pace. Over the past 12 months, the metro has gained nearly 28,000 residents, generating a strong need for additional housing options, and many are opting to rent.
These factors are contributing to robust apartment demand and maintaining minimal rental availability in several submarkets, including Downtown and North Central Miami, despite the increase in deliveries over the past few years. The rise in household income is providing demand for apartments with luxury amenities in walkable urban neighborhoods.
During the first quarter of 2019, apartment deliveries remained above the five-year average as more than 1,100 apartments were completed, raising the year-over-year total to 5,300. In addition, 2019 is setting up to be the most active year for construction in more than 15 years as an estimated 6,100 apartments are expected to be delivered.
Much of the new development is focused in the Downtown Miami/South Beach neighborhood as developers open towers with numerous amenities, ocean views and short walks to transit and entertainment options that are desired by many residents. Even though more than 6,700 rentals have been finalized in the neighborhood over the past five years, vacancy in the submarket ended the first quarter at 3.6 percent, which is below the metro average.
The area is expected to receive roughly 2,300 units in 2019 and another 2,500 units are under construction, with deliveries scheduled into 2021, which will likely push vacancy up in the area. Many of the new buildings are mixed-use high-rises with ground-level retail options that add to the neighborhood’s urban vibe.
Marketwide, the heightened level of construction has driven supply above demand. After vacancy bottomed out at 2.7 percent in the first three months of 2015, the rate has escalated to 4 percent in the first quarter of 2019, an annual rise of 30 basis points.
The highest submarket vacancy rate in the metro is West Miami-Doral at 5.6 percent as an elevated supply over the past few years has overtaken rental demand, resulting in new inventory taking longer to lease. Nearly 40 percent of Class A apartments are offering concessions to help fill units and an additional 2,100 underway rentals in the submarket will likely keep the rate above the metro average in the quarters ahead.
The tightest vacancy rate is found in North Central Miami at 1 percent in March, down 40 basis points from a year ago. This submarket benefits from minimal deliveries over the past five years and the lowest rent in the metro as the need for more affordable housing mounts. The average effective rent ended the first quarter at $1,041 per month, up an annual 4.7 percent.
The need for workforce housing throughout the metro has moved vacancy in Class C rentals down 40 basis points over the past four quarters to 1.8 percent in March. In comparison, Class A vacancy rose 10 basis points to 6 percent, while Class B vacancy climbed 50 basis points to 3.9 percent during the same period. Tight vacancy in Class C rentals has bolstered rent growth in this vintage.
Effective rent jumped 5.8 percent year-over-year to an average of $1,068 in March, followed by Class B at 4.1 percent and Class A with a 3.3 percent gain.
Since the last recession, Miami apartments have appealed to a broader range of investors and fueled new levels of trading activity. The underlying factors that contributed to this change, including in-migration, corporate expansions and strong operations, will continue to keep both local and out-of-state buyers active.
Many investors are drawn to the high occupancy and strong rent growth many Class C buildings provide as affordable housing becomes a growing concern. During the past four quarters, older properties in the Little Havana neighborhood with fewer than 20 units were the most often traded.
— By Arthur Porosoff, Senior Vice President of Investments at Marcus & Millichap. This article originally appeared in the May issue of Southeast Real Estate Business.