As long as children around the world love Mickey Mouse, Disney World isn't going anywhere—and neither is the demand for multifamily housing in Orlando, Fla.
Investors seeking steady returns and long-term opportunities should look to the Orlando apartment market for discounted assets and positive long-term demographics, including an upward forecast for population growth. Although the current economic slowdown has softened multifamily market conditions, long-term fundamentals are expected to remain strong, benefiting investors with the patience to wait out the current down cycle.
From 2004 through early last year, apartment vacancy rates in Orlando were less than the market's long-term average. Still, those rates are expected to climb in the months ahead as a supply-and-demand imbalance gradually corrects. Additions to inventory consisting of new apartments, reverted condos, and for-sale residences being employed as rentals are forcing owners to adapt. For example, in the Southwest submarket—located south of Colonial Drive and including the MetroWest area—the vacancy rate has increased 80 basis points in the past 12 months, due in part to the return of 300 condos to rental status. Rent growth has slowed to a trickle, and concessions have risen to 6.8 percent of asking rents as owners attempt to attract and retain residents.
Even in the Maitland/Winter Park submarket, where office employment has been reasonably strong, apartment demand has fallen 3 percent in the last year as a result of competition for renters from reversions and other sources. Apartment owners in the submarket have responded to supply-side pressures by holding the line on rents but raising concessions to 8.1 percent of asking rents, up from 7 percent one year ago.
Despite this, Orlando has a positive future. Eventually, population growth will absorb the excess housing currently in the market. That will allow vacancy rates to settle at a level near historic norms and concessions to burn off, improving profitability. Forward-looking investors continue to show optimism for the market's long-term prospects, although tighter underwriting and greater cash requirements will constrict deal flow in the months ahead.
Keep in mind that asset pricing presently reflects vacancies and rents, not conversion value, and cap rates continue to moderate. For top Class A properties, investors can expect to find initial yields ranging from 6.5 percent to 7 percent, while Class B assets trade in the low 7 percentile range. Private investors continue to remain interested in Orlando's apartment properties and will become more active as credit market conditions improve.
UPS AND DOWNS Metrics in the Orlando market have seen their fair share of fluctuations in the past two years. Take employment. In the first quarter, 2,100 jobs were added in the metro area—in the past 12 months, local employers have created 5,000 new positions. That is substantially off the pace of growth shown during the 12-month span ending in the first quarter of 2007, when 34,100 new hires were made. In the first quarter, expansion of staffing levels in the professional and business services, leisure and hospitality, and educational and health services sectors helped to offset a loss of 200 positions in financial fields. Year over year in the first quarter, nearly 1,100 jobs were trimmed in the financial activities sector, reflecting the downturn in housing-related businesses.
Declining tax revenues also continue to force many local governments to trim budgets and consider layoffs. Additionally, future decreases in taxes arising from the passage of Amendment 1 earlier this year will further crimp government budgets and limit the hiring of new employees. By year's end, employers are on course to add 2,500 positions, a 0.2 percent gain and the lowest number of workers hired in any year this decade. In comparison, a total of 11,200 jobs were created in 2007.
Turning to construction trends in the Orlando market, in the 12-month period ending in the first quarter, rental inventory rose 1.6 percent, or by 1,786 apartments. Broken down, this total represents 912 units of new construction and 874 condos that reverted to rentals. The pipeline of planned projects contains 4,900 units. All but 500 units are located in Orange County, Fla., including 1,600 apartments in the South Central submarket.
In addition to rental units that are either planned or under construction, nearly 2,000 condos have delivery dates scheduled for this year. Most of the condo units are in the downtown area. About 2,300 apartment units are scheduled for delivery this year, although some projects may be delayed. In 2007, 975 units came online.