A few short years ago, Florida was the poster child for the overheated apartment market. Its standing was fueled in large part by a potent combination of the residential bubble, unprecedented investor demand, easy financing, conversions of thousands of units into condos, and overbuilding in key markets. Once the party was over, the path of destruction left behind was unlike anything the sector had seen. Longtime industry veterans, albeit dazed, were also already talking about the incredible buying opportunities that would soon come—just like in the RTC days of old.
Fast forward to today, and the clouds over the state are starting to dissipate. Multifamily is again the preferred asset class among investors both large and small as the recovery gains traction. While the opportunity to acquire properties for pennies on the dollar never materialized, the market is as strong as it has been in recent years, with metrics pointing in the right direction for a protracted recovery.
In fact, the demand for these assets is unrelenting, and there is far more capital chasing deals today than there are deals to be had in the market. This sentiment is echoed throughout the region from distressed Class C value-add to institutional-quality Class A product. With more and more money flowing into the state every day, this trend is expected to continue. This makes it difficult for everyone to find suitable acquisition opportunities, but there are certainly many groups that have shown success in navigating these tricky waters.
Indeed, despite unemployment hovering above 10 percent after peaking at 11.6 percent in December 2010, and somewhat softer fundamentals, investors still see a silver lining in Florida, particularly in Jacksonville. While distressed sales still account for more than half of the metro’s transactions, nondistressed offerings have increased, which is expected to continue through 2012 as demand remains high.
Operating conditions remain soft in Jacksonville but are showing signs of continued improvement. Both vacancy rates and rents bottomed out in 2010 and have shown a measurable upward trend through the first three quarters of 2011. In fact, in December 2008, the vacancy rate in Jacksonville was a staggering 16 percent, compared with 9.8 percent today. Rents had fallen to $734 in December 2009, versus today’s $774.
As with any market, certain submarkets are faring considerably better than others: Vacancy rates in the Baymeadows, Beaches, Central, Orange Park, and Southeast submarkets range from 5 percent to 7 percent, while the Arlington, North, South, and West submarkets are in the midteens. (The difference reflects the former submarkets’ greater desirability, asset classes, and income and employment opportunities.) Not surprisingly, these vacancy-rate fluctuations have affected rents. The areas with the lowest occupancy also have some of the lowest rents, ranging from $0.67 per square foot to $0.76 per square foot, while the areas with the highest occupancy levels run from $0.87 per square foot to $0.96 per square foot.
While some of the vacancy issues are market-driven, others can be traced back to distressed deals that could ultimately provide significant upside to the value-add investor. And of course, continuing unemployment in banking, real estate, and construction has taken a toll. However, the transportation industry, particularly port and rail, is poised for growth and will help stabilize demand for the region.
Slow to Start
On the building front, though many developers were shut out the past few years, they’re coming back with a vengeance throughout Florida, with a pipeline that’s starting to rapidly fill up. Jacksonville has bucked the trend seen in the rest of Florida, however, as its new-construction pipeline is virtually nonexistent. Unlike South Florida, where as many as 62 new projects have been announced, developers have focused their attention elsewhere … for now. Tampa and Orlando have a large number of new projects slated to break ground over the next few quarters, so expect to see a few new projects announced for Jacksonville in the first half of 2012.
Although new construction and proposed projects point to another positive trend as building activity starts to pick up, investors should remain vigilant in monitoring new construction. Jacksonville may not be in as much danger of overbuilding as other markets, however, since many projects will simply be unable to secure enough debt or equity to start construction.
The lack of substantial development will allow Jacksonville’s vacancy rate to continue to improve through 2012, which will also contribute to additional rent growth. Job growth, however, is the real key to improving fundamentals, and it’s happening more slowly than many would like.
What’s vexing many investors in the Jacksonville market isn’t operating fundamentals or future pipelines; it’s the continued compression of cap rates, as many investors thought they’d be buying distressed assets on the cheap by now. As a result, it’s not uncommon for listings (particularly distressed and bank-owned) to see 40 or 50 offers through a shortened marketing period. This demand is keeping prices propped up and leaving many investors feeling left out.
According to market research firm Real Capital Analytics, the metro’s transaction volume in dollars increased 115 percent through the third quarter of this year versus the same period in 2010. Other metrics during this time also point to tremendous improvement: The number of properties involved in transactions increased by 138 percent, with the number of units sold increasing by 56 percent. Additionally, the average price per unit fell from $62,534 to $58,016.
Investors are also finding ways to acquire deals through nontraditional methods such as note sales, auctions, and deeds in lieu of foreclosure opportunities. While financing is becoming more readily available, the most successful investors are buying properties with all cash and then refinancing afterward.
Interestingly, most of these buyers aren’t from Florida. A breakdown of the top 20 buyers in Jacksonville for 2011 shows that only one group is based in the state. The number of out-of-state and international investors is a testament to the reliability and long-term potential Jacksonville offers for solid returns and asset appreciation. Along with Tampa Bay and Orlando, Jacksonville offers investors opportunities outside of South Florida, where activity has been “frothy,” to say the least.
Today’s investors are banking on opportunities to realize improved cash flow as the recovery continues. As sales velocity increases in 2012, that silver lining will allow the Sunshine State to shine again.