Question: The recent report from the Miami Downtown Development Authority states that 6,700 new rental units are in the pipeline for the Greater Downtown Miami market. Can Miami absorb that volume of new apartment units without hurting the rental market?
Technological advancements in the last two decades have worked to make nearly every industry in the U.S. economy more efficient, due in part to a newfound ability for suppliers to deliver products on a real time basis. Think Amazon.com.
Companies realize that having just enough inventory on hand to fulfill consumer demand ensures that profits can be maximized as unsold inventory is no longer languishing around for weeks, months and even years.
Unfortunately for developers, high-rise residential real estate still requires a long lead time from the point at which the construction of the new projects begin until the residences are ultimately completed, even with the technological advancements.
The construction process for new residential towers in South Florida generally requires between a year and three years, depending upon the complexity and size of the projects.
The inability to deliver units on a real time basis in residential real estate means market conditions can change dramatically during the course of construction.
This long lead time has historically contributed to the booms and busts experienced in South Florida for the last century.
Some 3,000 of these new rental units in the pipeline are already under construction, with delivery scheduled within the next few years, according to the Miami DDA study.
By some counts, at least 1,000 additional rental units have already been built in Greater Downtown Miami since this South Florida real estate cycle began in 2011.
In addition to the rental projects, the Miami DDA report identifies more than 22,200 new condo units that have been proposed for Greater Downtown Miami, which has an annual absorption rate of about 2,000 units, according to the report.
(By our estimates at CraneSpotters.com, the number of new condos announced for Greater Downtown Miami currently stands at nearly 20,000 units as of Friday. We will be reviewing the Miami DDA study to see if any cited projects should be added to our database of preconstruction towers that have been announced since this cycle began in 2011.)
It is unclear how many of the new condo units announced for Greater Downtown Miami will be offered for lease by individual owners. The percentage is expected to be high as foreign investors account for about 85 percent of the current buyer pool in Greater Downtown Miami, according to the Miami DDA study.
No one can predict what the rental market conditions will be like in Greater Downtown Miami when — and if — all of these apartment buildings that are in the pipeline are ultimately developed.
What is known is that the Greater Downtown Miami rental market currently favors landlords over tenants with occupancy rates hovering “above 95 percent with strong (6 percent to 10 percent) annual rental rate increases” for the last four years, according to the study.
A key factor in the strong rental activity in Greater Downtown Miami has been the challenge for many would-be buyers who damaged their credit during the Great Recession to obtain financing to purchase their own units, instead of continuing to pay high lease prices.
It is worth noting, the South Florida rental market — unlike the sales sector — is extremely difficult to accurately track, as no documents are required to be recorded with the Clerk of the Court in the county where the properties are located.
As a result, analyzing the South Florida rental market depends upon a combination of factors, including blind confidence in the accuracy of the leasing statistics provided by the primary sources that range from the MLXchange, to leasing office surveys, to websites such as Craigslist.
Further complicating the issue is the fact that most lease renewals between existing tenants and the original landlords are typically completed without ever being communicated to any of the primary sources of rental statistics.
This being said, the Miami DDA report concluded that between 300 and 350 leases are now being transacted monthly in Greater Downtown Miami.
As of today, Greater Downtown Miami has nearly 1,000 condos and apartments available for lease, which represents about three months of inventory based on the Miami DDA’s leasing rate, according to the Southeast Florida MLXchange.
A balanced market is generally thought to have about six months of supply. More months of inventory suggests a renter’s market and less months indicates a landlord’s market.
Given the current real estate market conditions, Greater Downtown Miami can seemingly handle another 1,000 condos and apartments available for lease. The additional rental supply would likely be well received by prospective tenants, who are currently paying some of the highest Greater Downtown Miami rents in recent memory.
The unanswered question going forward is whether Greater Downtown Miami can attract enough additional renters — especially as mortgage financing becomes more available — to occupy all of the other new apartment units and condos that are already in the development pipeline for this current South Florida real estate cycle.
Thought Of The Week: Too Many Foreign Condo Buyers In Greater Downtown Miami?
Jorge Perez of the Related Group, South Florida’s most prolific high-rise residential developer, wants fewer foreign investors — on a percentage basis — purchasing condo units in the Greater Downtown Miami market.
Perez is quoted in the South Florida Business Journal stating that he would “love” to see Greater Downtown Miami condo ownership split on a “50/50 basis by foreigners and locals who want to stay downtown.”
It may be some time before this happens in Greater Downtown Miami.
Currently, domestic buyers account for about 15 percent of the current buyer pool in Greater Downtown Miami, according to the new Miami DDA report.
Peter Zalewski is a real estate market consultant, non-practicing licensed real estate broker and columnist for The Real Deal who now answers reader questions about the South Florida real estate market in a new weekly Friday column. Questions and comments can be sent to [email protected] The TRD editors will choose which submissions will be addressed.