In the mid-2000s, Tampa Bay’s multifamily market was as overheated as any in the United States. The residential bubble contributed significantly to the burst, combined with white-hot demand, easy financing, and condo converters saturating the market. In fact, it was estimated that as much as 25 percent of the apartment stock was purchased for conversion to condominiums, although only the converters early in the cycle fared well, as the landscape became littered with dozens of partially converted properties. New apartment construction also ground to a halt at this time, with nearly a 36-month gap from when one of the last market-rate development sites sold in late 2007 before another one sold in late 2010. Today, however, with first-quarter 2012 statistics showing unemployment continuing to drop and fundamentals continuing to improve, Tampa Bay is well-positioned to be a preferred market for multifamily investors for the foreseeable future. This has spurred a number of new construction projects that are planned or breaking ground, and, for the time being, everything is moving forward at a brisk pace and demand for product remains high. Indeed, in the past 24 months, investor demand has picked up significantly and, as with many markets, there is markedly more capital chasing deals than there are deals to be had. While there have been fewer institutionally driven Class A deals in the Tampa Bay metro, the Class B and C markets have been heavily favored.

Operating conditions continue to improve in the Tampa Bay market, a trend that shows no signs of abating. Vacancy rates topped out while rents bottomed out in 2010, and both fundamentals showed a measurably positive trend through 2011. The vacancy rate in Tampa Bay has gone from a high of 12.6 percent in 2008 to just 6.8 percent in March 2012. During the same time period, rents dropped to an average of $783 versus today’s average of $848.

Tampa Bay’s various submarkets are experiencing different levels of success. Vacancy rates in the Hyde Park/South Tampa, Downtown Tampa, Westshore, Downtown St. Petersburg, and New Tampa submarkets are averaging 4 percent to 7 percent. These same submarkets are currently achieving the area’s highest rents, with a high in Downtown Tampa of $1.90 per square foot to $1.22 a square foot in the more suburban New Tampa market.

Some market vacancy issues can be attributed to distressed inventory, but as these deals work themselves out, the occupancy numbers should continue to steadily climb.

New Projects Aplenty

Although most Tampa Bay apartment developers were dormant from 2007 until 2011, at least one project has already broken ground in just about every submarket in the area.

While many submarkets will likely only be able to absorb one new project at a time, several key submarkets are poised for multiple projects, as illustrated by current rents and vacancies. Downtown Tampa, South Tampa/Hyde Park, Downtown St. Petersburg, Westchase, and the Westshore Business District are the top candidates for two, or even three, new projects each over the next 24 months. Developers are locating new projects in more infill locations and much closer to employment centers. Many projects are much denser than in years past, and a much smaller percentage of three-story, garden-style walk-ups is spread out over a 30-acre property that defined the suburban landscape in the late 1990s.

Nearly 1,500 units will be delivered in Tampa Bay in 2012, with 2,600 coming in 2013 and up to 3,800 potentially delivered in 2014. Smaller developers are finding it nearly impossible to get projects out of the ground, as equity and debt providers are being highly selective about projects and the strength of the sponsor.

At this time, it doesn’t appear that Tampa Bay is in danger of overbuilding, but it’s important that employment and rent growth continue in the same upward direction.

A South Florida Alternative?

Tampa Bay is viewed as the next-best opportunity to invest in the Florida multifamily market outside of South Florida, where cap rates are much lower and the market is flooded with many more South American and European investors.

That said, cap rates still remain somewhat compressed, frustrating many investors. While there is a plethora of distressed assets trading, the high investor demand is supporting higher price points, limiting the pennies-on-the-dollar pricing that’s so highly sought after but not really materializing. It’s still common for listings (particularly distressed and bank-owned) to get dozens of offers through a shortened marketing period. Even though financing is still readily available, the most successful investors are purchasing properties with all cash, then refinancing post-acquisition to redeploy their capital. Since interest rates are expected to remain relatively flat in this election year, it could be considered both a good time to buy and a good time to sell.

According to market research firm Real Capital Analytics, transaction volume in dollars in the Tampa Bay metro increased 54 percent from 2010 to 2011. The number of properties exchanged increased by 59 percent, with the number of units sold increasing by 62 percent. Additionally, the average price per unit during this period fell 12 percent, to $69,257, and cap rates actually fell as well, from 6.6 percent to 6.5 percent.

Tampa Bay offers a solid option for investors looking for steady returns and good asset appreciation. The region is clearly in the midst of a strong, but cautious, recovery. Barring any unforeseen circumstances, the region is poised for a long and protracted investment outlook across all multifamily asset classes.

T. Sean Lance (far left) is managing ­director, as well as president of troubled asset optimization, and John Burpee is president in NAI’s Tampa Bay office.