Turns out looks can be deceiving. The Sarasota-Bradenton, Fla., apartment market has always seemed like a sleepy community with old money and limited growth. But in reality, these two cities, located 30 miles south of Tampa, contain pockets that have experienced double-digit growth in the past decade. Additionally, the area offers a great deal in terms of lifestyle and opportunity, boasting a rich amount of arts and culture combined with a variety of outdoor activities.

Employment is driven by the government, service, manufacturing, and construction industries. Publix Grocery Stores is the county’s largest employer, with Wal-Mart and PGT industries running second and third, respectively.

Like all secondary markets, the area was affected by the downturn. But the region—and multifamily properties—have shown resilience in the past year. And long-term projections for the area look good, with an estimated population gain of nearly 200,000 between 2000 and 2020.

A Tale of Three Regions

Sarasota-Bradenton is predominantly divided geographically into three distinct regions—the Beach or Barrier Island, the Mainland Core market, and East of I-75. Each region carries a distinct set of challenges as well as rewards.

The Barrier Island market is exactly what its name implies. Crossing the Intracoastal Waterway brings you to Holmes Beach, Longboat Key, or Lido Shores. The product type tends to be limited to local, investor-owned properties with a more affluent resident base. In fact, rents in this submarket average $0.10 to $0.20 per square foot higher than the rest of the MSA.

Despite this, the area has not been immune to current economic conditions. Vacancy rates are averaging between 10 percent and 12 percent. This market was hit particularly hard by the condo conversion frenzy of 2002 to 2007. Estimates say that nearly one-third of the apartment product in the Barrier Island submarket was converted to condos. Many of these properties have returned as bank-owned REOs.

The Mainland Core market is the area between I-75 and the Intracoastal Waterway. This market makes up the majority of institutional product, with 10- to 20-year-old, garden-style construction. The overall Core market is not as densely populated as most major MSAs with regards to site density. The majority of complexes were built on 20 unit-per-acre sites and are more horizontal than vertical.

Lastly, the East of I-75 market has experienced the largest increase in opportunity during the past decade. The availability of cheap land and government-funded infrastructure led to a dramatic increase in development and population in this market.

For decades, the East of I-75 market was a sleepy, rural cattle town with Timber tracts that rarely traded hands. However, the easy money real estate boom changed the face of this region forever. Several thousand multifamily units were constructed along these East-West corridors, with countless small condo and townhome projects popping up.

Unfortunately, several of the larger planned urban communities have been severely impacted by the market downturn and now sit idle. It is estimated that there are as many as 5,000-plus undeveloped single-family lots waiting to either trade hands or be taken back by lenders.

Signs of a Slowdown

New multifamily construction has ground to a halt. The barrier to entry is already elevated for new product in this MSA, due to high impact fees coupled with tepid demand. In fact, there are only two new market-rate projects that have come out of the ground in all of Florida so far in 2010—and that deal used conventional construction loans so the value will only increase modestly in 2011.

Overall transaction volume in the MSA followed the same path as the remainder of Florida, with sales grinding to a halt in 2007. Rental rates have decreased an average of 25 percent to 30 percent over the past three years, and concessions are as high as three months in some Class C product.

Foreclosures hit the Core and East of I-75 markets the hardest. Currently, New York-based Trepp and Real Capital Analytics (RCA) are tracking 24 large CMBS-backed assets that are in special servicing in the MSA, with an additional 47 assets with more than 10 units being tracked with local lenders.

That being said, there have been some recent sales of Class A product which have traded at compressed cap rates similar to what has been seen in other large MSAs in the Southeast, according to RCA. Yacht Club at Heritage Harbour is a 392-unit, Class A community completed in 2007 and purchased by TGM Associates in June 2010 for $43.5 million ($110,969 per unit, at an estimated cap rate of 6.3 percent). Similarly, 210 Watermark was built in 2003 and sold to Transwestern Investment Co. in June 2010. The sales price for this 216-unit property located in downtown Bradenton was $18.5 million ($85,648 per unit, at an estimated 6 percent cap rate).

In recent months, rental rates appear to have stabilized and are no longer in free fall. Rental growth is estimated to be at least three to five years in the future, as current unemployment stands at 11.8 percent, down from its high of 13.2 percent in late 2009.

As a result, the Sarasota-Bradenton market is not for the quick flip investor, but rather for the long-term, steady growth owner who comes prepared with a five- to 10-year outlook. Significant gains will occur as employment opportunities increase, concessions diminish, and rent growth returns. And while some larger MSAs, such as Tampa and Orlando, will likely recover at a faster pace, Sarasota and Bradenton will not be far behind.