The Real Deal Miami

Building momentum

Thousands of new apartments are under construction as rents rise — but is this the tipping point?

June 15, 2017
By Mike Seemuth

Rockefeller Group and Stiles have developed Amaray Las Olas, a 30-story, 254-unit luxury apartment building in downtown Fort Lauderdale.

Demand remains robust for rental housing in Miami and the rest of South Florida, among residents and real estate investors alike. But despite the area’s population and employment growth, some market watchers say South Florida’s extended, postrecession rise in monthly rents could slow or stop if overbuilding floods the market with units.

National brokerage Marcus & Millichap predicts developers this year will finish construction of 15,200 new apartments across South Florida, including 5,700 units in Miami-Dade County, 5,000 in Broward County and 4,500 in Palm Beach County.

Even with all the added inventory, Marcus & Millichap forecasts the annual rent hikes in 2017 will accelerate in Miami-Dade to 4.4 percent (from 3.9 percent in 2016) and in Broward to 4.7 percent (from 4.6 percent) while slowing slightly in Palm Beach to 3 percent (from 3.3 percent).

But “luxury rents are going to start coming down as more and more individual investors put their condos on the market to rent,” said Joe Lubeck, the North Palm Beach-based CEO and co-manager of Robbins Electra, which owns and manages about 23,000 units in multifamily developments in Florida, Georgia, Maryland, North Carolina, Texas and Virginia.

“That probably will be most problematic in Miami, but we’ll also be seeing it in all the major metropolitan areas, because so many of the new condominiums are being bought to rent out,” Lubeck says, calling a rent range from $4,000 to $6,000 the “sweet spot” for owners of condo units in luxury buildings.

Rents at less luxurious locations in South Florida are bumping up against their upper limits, too, said Mike Pappas, president of South Florida residential brokerage firms Keyes Company and Illustrated Properties.

“There’s no question there has been a skyrocketing of rents in the last five years that has peaked,” Pappas said. “We’re starting to see rental prices wane, or at least pause.” Half of Miami households are rental residences, which is one reason the metro-area rental market is still “very strong,” he said. “Homeownership hovers right around 50 percent. In the country, it’s 63 percent.” But many working-class residents of South Florida who can’t afford to own a home also face affordability issues in rental housing.

“You’re hitting a ceiling on price for that midtier market … the teachers, the firemen and other people who can’t pay anymore,” said Pappas, a veteran broker and observer of the South Florida residential market.

Marcus & Millichap estimates that monthly rents this year (excluding condos leased by owners) will average $1,530 in Palm Beach County, $1,562 in Broward and $1,410 in Miami-Dade. The brokerage firm expects South Florida apartment vacancy rates this year to descend in the geographic order of the counties, from 6.3 percent in northernmost Palm Beach to 4.2 percent in Broward to just 2 percent in Miami-Dade.

Getting dense downtown

In downtown Miami, the rental market is getting particularly intense. Thousands of apartments and condos under construction there are expected to test the pricing limits of South Florida’s rental market.

Developers this year will finish building 3,575 rental apartments and 2,774 condos in Miami’s urban core, reversing a long-term trend of delivering more condos than rentals, according to a report by Integra Realty Resources for the city’s Downtown Development Authority.

Competition in rentals downtown is so intense that megadeveloper Related Group sidestepped the surge in downtown apartment construction to concentrate on condos. “We decided to step out of the rental side of the market in downtown Miami because we didn’t want to create competition for our condo projects downtown,” said Steve Patterson, who runs the multifamily rental and mixed-use development arm of Miami-based Related.

Condos constitute a “shadow inventory” of downtown rental units that compete, to some extent, with multifamily properties, and Integra recently reported declines in condo leasing prices in downtown Miami.

For its part, when it comes to rentals, Related is looking north. “We’re very bullish on Broward County,” Patterson said. “Broward is the job-growth king of South Florida,” he said, calling the county’s rental apartment market “undersupplied.” Related has developed and sold several new rental apartment properties in such Broward markets as Davie, Pembroke Pines and the Flagler Village neighborhood near downtown Fort Lauderdale. And the company is pursuing new rental apartment developments in all three of those Broward markets. Plus, “in Fort Lauderdale, we’ve got a project we haven’t announced yet,” Patterson said in a May 19 phone interview.

Market fundamentals

Though it’s true that thousands of new apartments will hit the tri-county area this year, Still Hunter, a South Florida-based executive vice president at CBRE, is confident the market will “easily absorb those units,” citing the solid growth in the area’s employment and population.

The InTown Apartments in Miami’s Little Havana neighborhood started as a condominium project.

CBRE market research shows that the tri-county population grew over the last eight years by 700,000, and the new arrivals probably included more than a quarter  million renters.

South Florida employers, meanwhile, created 411,000 new jobs in the six-year period ended in 2016. CBRE research also shows that inflation-adjusted personal income in the tri-county area has increased by 26 percent since 2010.

“It all sets up a market that is undersupplied,” Hunter said. “Going into this cycle, South Florida was very undersupplied in rentals across the spectrum, from luxury to lower quality.”

He added that much of that had to do with rampant condo conversion in the 2003-to-2008 period. By CBRE’s count, condo conversions slashed the number of South Florida rental apartments to 315,000 from the 2003 peak of 400,000. So with recent and ongoing apartment construction, “you’re really getting back to the previous peak as far as the number of rental units,” Hunter said. “But you’ve got a hugely inflated population and good fundamentals in terms of income and job growth.”

Hunter said he expects the lease-up period for new rental apartment properties to lengthen as the development cycle ages but sees little cause for alarm.

“As we are getting later in the market [cycle], we’re seeing lease-up go a little slower, and there are pockets that have seen intense [apartment] production where the lease-ups undoubtedly will get even slower,” he said. “But I think it’s a temporary phenomenon … The demand is there and growing.”

Indeed, some residential developments in South Florida that started as condominium projects are now being converted to rental apartment projects. One, for example, is InTown Apartments in the Little Havana area of Miami.

Owner-operator Greystar bought InTown, a twin-building, 312-unit property, for about $285,000 per unit after developer Astor Companies returned deposits on about 100 units. After Greystar’s $89 million acquisition of the property closed in November 2016, the company launched a lease-up effort and boosted occupancy to about 60 percent by late May. Monthly rents start at about $1,700, and Greystar has been offering new tenants the first month for free.

“That’s pretty typical for a property in lease-up,” Sam Moore, managing director-investments for Greystar, said of the one-month-free incentive, adding that with nearly two-thirds of the units rented, “we’re pretty far ahead of where we expected to be at this time.”

A maturing cycle

Brokerage firm Cushman & Wakefield calculates that developers have about 17,000 apartments under construction in South Florida, on top of about 30,000 deliveries over the last four years. But occupancy rates remain high at all classes of residential rental property, allaying some concerns about overbuilding at this stage of the cycle.

“We’re over 65 percent of the way through this development cycle,” said Boca Raton-based Calum Weaver, who heads a multifamily property investment team in South Florida  for Cushman & Wakefield. Yet occupancy rates at Class A, B and C properties “are still 95 percent-plus, with the exception of a property in lease-up … But so far, on the new product that has been delivered, the lease-up period has been pretty short.”

Weaver says a trend among South Floridians to avoid homeownership in favor of renting, especially in urban-core locations, has plenty of momentum because the area’s single-family home prices are rising faster than apartment rents. “A lot of them want to live in the urban core, and the only way to do that is to rent,” he said.

But Weaver also said some South Florida developers with apartment projects in the preconstruction phase will fail to break ground: “The question how is, many of those are going to come out of the ground, and how many are going to get put on hold?”

Shopping for B and C buildings

A slowdown in apartment construction in South Florida could encourage more acquisitions of multifamily properties by both domestic and foreign investors. Minimal construction of less-than-luxury apartments already has sparked investor interest in Class B and Class C properties in the tri-county area.

Though the foreign market for South Florida condos has receded, foreign investors in rental apartment buildings are “very active,” Weaver said. “Canada is probably the No. 1 buyer of apartment buildings. But there is still a lot of Latin American money and European money. And Chinese money continues to look at deals.”

Plantation-based Hernando Perez, director of multifamily investments for brokerage firm Franklin Street, said investor demand for apartment buildings in South Florida is “unlike anything I’ve seen in my life. I can’t satisfy it. There’s not enough inventory in the marketplace.” He went on to say, “I promise you if I put something on the market, it’s going to trade. It’s just a matter of what price it will trade for.”

For example, Perez said, his brokerage got the listing for a 65-unit apartment building near Interstate 95 in Fort Lauderdale’s Sistrunk neighborhood. The building is located next to an elementary school and a Salvation Army soup kitchen “where people congregate around 5 o’clock to see what they can get,” he said. The listing nevertheless attracted dozens of investors in New York and New Jersey, the Mid-Atlantic and South Florida. “We put it on the market for $7 million,” Perez said. “We showed this property over 40 times in about a three-week span and put the deal under contract with a noncontingent cash buyer at just slightly below $7 million.”

Many investors shopping South Florida want to buy Class B or Class C rental apartment properties at prices below replacement cost, then spend $1 million or more to upgrade them and make them more competitive with Class A rental apartments.

“We have a lot of investors looking at B- and C-class assets as opportunities,” Perez said. “Right now, there’s not a lot of players in the Class A airspace doing a lot of deals.”

He also said luxury apartment rents are under downward pressure: “There is a softening in the rental range in the Class A, luxury apartment buildings.  … Some people are still willing to pay $1,500 or $2,000 for a one-bedroom apartment downtown. Will that continue? That’s still to be determined.”

Some one-bedroom downtown apartments outside Miami also rent for over $1,500. In downtown Fort Lauderdale, for example, rents for some one-bedrooms are on the high end of the $1,500-$2,000 range, Perez said. Overbuilding could still cap rents, though.

“We may potentially see a concession-driven market like we did in between 2000 and 2005 prior to the condo conversion boom in South Florida,” he said. “That’s very likely if we overbuild.”

The view from Palm Beach County

Billionaire real estate investor Jeff Greene said he sees little evidence of overbuilding in West Palm Beach, where he is pursuing multiple rental apartment projects. For example, he recently paid $24.75 million for a 139-unit condominium called the Whitney in the city’s downtown area, which he is operating as a rental apartment building. The monthly rents range from $1.72 to $2.72 per square foot for penthouse units, or up to $2,720 for 1,000 square feet. The penthouse units were unfinished, so Greene is putting in such high-end finishes as staircases, vaulted ceilings and white quartz counters. “Because these penthouses were never built, we’re able to build them now with 2017 finishes,” Greene said.

Location, location, location is what drives real estate, of course, and Greene likes what he sees. “My feeling is, West Palm is a better city every year,” the investor said. He cited the February opening of the city’s spring training stadium for Major League Baseball’s Houston Astros and Washington Nationals and the ongoing expansion of the Norton Museum of Art near the city’s downtown district, among other quality-of-life upgrades.

Greene also said the planned summer startup of passenger train service between downtown stations in Miami, Fort Lauderdale and West Palm Beach will transform life in the northernmost city on the rail route. All Aboard Florida expects to start running trains between West Palm Beach and Fort Lauderdale by August and to extend the service to Miami later this year.

“You’re going to be able to hop on a train [in West Palm Beach] and be at a Miami Heat game in an hour. You’ll be able to go to Fort Lauderdale in 30 minutes and have lunch there,” Greene said. “You could live in downtown West Palm Beach and go to work in Miami painlessly.’’