On Tuesday, Atlanta-based Wood Partners made a move that has been all too rare the past few years: It purchased land in Florida.
Wood acquired 9.69 acres on which to build Alta at Lake Eve, a $32.7 million, 264-unit luxury apartment community, approximately 2 miles from Walt Disney World. Construction is expected to begin in December, and the first residents will move in by September 2012. The project will be completed by March 2013.
Wood isn’t alone. Last week, Phoenix-based Alliance Residential announced that it purchased a 17-acre parcel of land in Boca Raton. There, it plans to build a $62 million, 384-unit luxury apartment community called Broadstone at North Boca Village. Alliance anticipates initial lease-up to begin in the third quarter of 2012, with final completion expected in March 2013. The company already has 296 units under construction in Tampa and 396 units that it’s working through the approval process with in Broward County.
Atlanta-based Gables Residential has a deal under construction in Coral Gables and is sitting on a site in Aventura that it would like to put under production. It’s pursuing other opportunities in South Florida, as well, according to company senior vide president of investments Joe Wilber.
Think back a couple of years. Supply soaked Florida dominated the real estate headlines with foreclosures, distress, and investors fleeing from their downpayments. Now, national multifamily firms such as Alliance, Gables, and Wood are making big building bets on the Sunshine State. Jack McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach, says there are 18,000 units are in the works in South Florida overall.
"In South Florida, there are 62 new apartment projects that are under construction, have been permitted, or have been announced," McCabe says. "Apartment construction is coming back and its rip roaring in Florida right now."
The question is can the market absorb these new units. If a gambling bill passes the state's legislature (to allow three new destination resorts in South Florida), there's hope the job situation will improve. "I have strong questions about whether the market can absorb that number of new residences unless we see job growth," he says.
What happened to cause this resurgence of interest in Florida? Well, for one thing, like the rest of the country, the occupancy situation in Florida has stabilized and now tightened. The major markets in the state are 93.3 percent occupied, which is an increase of 0.7 percentage points in the past year, according to Carrollton, Texas-based MPF Research. Michael Ging, Alliance’s managing director of development for Florida, says the company’s portfolio is at about 94 percent occupancy in the state, with Tampa, Orlando, and South Florida occupancies “very healthy.”
“What excess inventory existed has mostly been absorbed, and we’re operating at stabilized occupancies,” Ging says.
Ging says the shadow market isn’t really factor in the fundamentals picture. “There’s some impact from the shadow market, but there’s nothing really significant,” he says. “What has offset that has been the problems in for-sale housing market with foreclosures and the difficulties people have getting qualified. We see a lot of demand [for apartments] coming from that sector."
In fact, Wilber says that the condo boom at the height of the market may have helped apartments. “The majority of the condos have been sold. I think that pipeline is gone, and that has been absorbed,” he says. “There been no new deliveries of apartments for many years. In the condo conversion days, a lot of rental product got converted to for-sale product. There’s really sort of a shortage of rental product.”
Condos Creeping Back
As rental operators start securing land, lining up financing, and firing up cranes, there are murmurs of condo developers getting back into the action as well. “You’re seeing these investment groups pinpointing failed or formerly announced development sites,” says Peter Zalewski, a principal with the Bal Harbour, Fla.-based Condo Vultures. “They’re trying to take that stuff down, especially in downtown Miami.”
Right now, Zalewski says one major condo project, 23 Biscayne Bay in Greater Downtown Miami from the Melo Group, which has roots in Argentina, is in the works. The project started in August and construction is scheduled to be completed by the third quarter of 2012. McCabe says the Miami-based The Related Group has six projects in the pipeline (using buyers to finance much of the development).
Zalewski says that in the last 90 days, two Asian funds announced four condo towers. In fact, international buyers bought more than $3.8 billion in residential real estate in the Miami/Ft. Lauderdale market in 2010, according to a report from the National Association of Realtors. About a quarter of the buyers in the state have been foreign investors, who generally pay with all cash and often don’t need to rent their units out, lessening the impact of the shadow market. The report also says that foreign buyers are much likely to buy in a city, which helped soak up condo supply in South Florida.
All told, most developers are talking of new starts. “Developers develop,” Zalewski says. “They see a little crack. These developers are thinking there will only be so much allowed this go-around. So we want to come out early and announce it early.”
So far, this mostly remains talk, Zalewski says, adding that a lot of developers are also proposing sites as rentals with the intention of eventually converting them to condos. Fueling this talk is the brisk absorption of condos in Florida, particularly in South Florida. As of June 30, buyers had purchased more than 43,000 units of the 49,000-unit inventory, according to a recent CondoVultures.com report. “At the current pace, downtown Miami would be done [sold out] by the third quarter of 2012,” Zalewski says. “All of South Florida east of I-95 should be done by the end of 2012.”
The Rental Impact
Ultimately, what will this mean for rental operators if (and it’s a big if) condos do start to sprout again in Florida? As the past couple of years have shown, the effect on rental fundamentals for traditional apartment operators may not be affected much.
A bigger issue could be underwriting deals. Right now, a lot of Florida developments are penciling out because of almost-distressed prices for land and relatively inexpensive materials and labor costs. “Costs have edged up slightly [from the bottom], but not significantly,” Ging says. “Across the board, costs came down about 30 percent from the peak pricing back in 2005.”
If some condos do start to come out of the ground, that could change. “Materials, labor, land—everything will start to move up,” Wilber says.
And land could be harder to come by. Right now, apartment operators are finding a lot of former condo sites that are available. “There’s a fair amount of deals that never got built,” Wilber says. “The sites that got tied up and got entitled for condos towers but never built are coming back into the market. We're looking at them as rental opportunities. In some cases, the prices make sense, and in some cases they don’t.”
But Zalewski says condo builders such as The Related Group and luxury builder Martin Z. Margulies are eyeing sites. This will push land prices up and possibly out of reach for many rental developers. In the first eight months of 2011, at least 11 land deals have occurred in Greater Downtown Miami, according to a recent CondoVultures.com report.
But Wilber, Ging, McCabe and Zalewski remain skeptical about an influx of condos in Florida anytime soon. "Condos are on the blacklist and considered undesirable undesirable by most lenders," he says.