If you're looking for a vital, growing community, Jacksonville is a great bet. If you're looking for an active economy, it's Jacksonville again. If you're looking for a relatively low cost of living and quality of life among beaches and oceans, rivers, and estuaries, Jacksonville has these as well.
But if you're a multifamily owner looking to buy an apartment property based on rental economics, you may be out of luck: In Jacksonville, there's virtually no such thing. Here—at least for now—condominiums rule the day, and that makes it the place to be for a few select groups: those interested in building condos, buying apartments for conversion to condos, or owning Jacksonville apartments that are ready to sell to anxious, capital-rich investors.
ON THE WATERFRONT: With the St. John's River as its centerpiece and a moderate cost of living, Jacksonville has broad appeal for the condo-conscious.
Young and Growing
Unlike Florida's many retirement-dominated markets, Jacksonville and the rest of Duval County have a relatively young population of just more than 1 million residents. According to the 2000 U.S. Census, only about 10 percent of Duval County is over the age of 65—and the greatest percentage (26.3 percent) is under 18.
In terms of growth, consider Florida a boot that is slowly filling, with Jacksonville at the top in the northeastern corner of the state. Its slow, steady growth has been helped in part by the conservative 1986 Growth Management Act, a plan designed to guide development within the state, discourage urban sprawl, and assure that infrastructure was adequate to serve new developments. In this enviable watch-and-learn position, Jacksonville can benefit from Florida development history and manage the growth coming its way in a much more proficient manner than its neighbors to the south.
As a result of this statewide focus on better land planning, Duval County today has large areas of land that remain available for strategic commercial development. Thanks to joint management agreements with national and state park services, this Florida county also has the largest urban park system in the United States.
On an economic front, Jacksonville is the insurance and financial center of the state, with an emerging focus on health care. Major and regional headquarters in Jacksonville include Blue Cross/Blue Shield of Florida, Baptist Health System, Bank of America, St. Vincent's Health System, and CitiBank. A Mayo Clinic is also located in the market. Fidelity National Financial recently relocated to Jacksonville, citing its cost of living as a major reason. In addition, Jacksonville is home to two U.S. Naval stations (Naval Air Station Jacksonville and Naval Station Mayport) that together employ nearly 35,000 people and are slated to increase as a result of other base closings announced by the Bush administration in June.
The largest city in the contiguous United States in terms of land area, Jacksonville is at the hub of two major interstates—I-95 and I-10—and four major U.S. highways. The Jacksonville International Airport is home to 15 major and regional airlines that offer 250 daily flights. The city is also a full-service international seaport that in 2002 handled 7.1 million tons of cargo. The combination of these facilities makes this a multimodal distribution center.
And then there's the quality of life: Four temperate seasons. Sixty-eight miles of Atlantic Ocean coastline. Three hundred miles of river. Significant forest and park land. All within the most affordable city in Florida, according to the Jacksonville Chamber of Commerce. These features bode well for Jacksonville's present and future.
Domino Effect
The combination of these economic and quality-of-life factors have made Jacksonville a hot spot for multifamily investment and development. Most would agree that the market's multifamily units are under more value pressure today than at any other point in recent history, in part because of the rising popularity of the community but also, more significantly, because of rock-bottom interest rates.
The cycle is a common one across the nation right now: Interest rates fall, making it easier for individuals to buy a home. This, in turn, increases demand for single-family and townhome/condominium properties, and permits and building activity push skyward. Developers rush to break ground on new communities while investors with an eye toward conversion rush to buy complexes suitable for repositioning as for-sale units that can fill buyer demand. At the same time, land values increase, also requiring multifamily developers to lean toward condominium and townhome projects that offer a higher return on investment and will return acceptable profits.
In Jacksonville, this domino effect has transformed the traditional apartment deal. Properties with units typically valued in the low $80,000s are being bid up to $90,000 and higher among converters that don't have to work on apartment or rental fundamentals because they know that, once it's converted, they can sell the same units for as much as $140,000 each.
Montecito Property Co. renovated two such projects in the greater Jacksonville market last year. The first is a 328-unit property located south of downtown Jacksonville at St. Augustine's Anastasia Island. The company purchased the project in 2004 for almost $28 million, or $85,000 per unit, then converted and sold out in just a few weekends at more than $100,000 per unit. The second, also a 328-unit project and also in St. Augustine, was purchased in 2004 for $35.5 million, or $108,000 per unit, and sold in the mid-$150,000s per unit.
Sperry Van Ness recently pursued a B+ class, 2004-built property in the St. Augustine submarket that was listed at $16.5 million—or $88,000 per unit. The project instead sold for around $19 million to an investor that also immediately converted. According to a late 2004 report by Real Capital Analytics, 96 percent of buyers in Jacksonville, and the ones pursuing these conversion opportunities, are private individuals.
Advantage: Converters
Keep in mind, this high-value trend is occurring in an apartment market that has remained relatively flat over the last several years. In fourth quarter 2004, for example, a survey by CALEX Realty Group (one of northeast Florida's largest managers of multifamily properties) noted that the average multifamily occupancy in Jacksonville was 93 percent. That compares closely to the occupancies reported in the third and fourth quarters of 2004 (93.4 percent and 92.6 percent, respectively). The survey showed average rents equally flat, at $731 (or 78 cents per square foot) per month in third quarter 2004 versus $733 (or 79 cents per square foot) per month in fourth quarter 2004.
Such high buyer interest and values in such a flat market have caused cap rates in Jacksonville to fall in the past two years from a fairly soft 9 percent down to mid-6 percents today.
THE HIGH LIFE: The Plaza Condominium at Berkman Plaza towers over a bustling neighborhood and the St. John's River.
These trends are not only distorting the true value of Jacksonville multifamily properties but are also making it virtually impossible for the authentic apartment buyer to make the numbers work for an own/rent model. Converters get to the deal first and offer more than the authentic apartment buyer ever could.
Clearly, if you're a Jacksonville apartment owner ready to sell, this means there's no better time than the present. Buyers are coming to the market from across the nation, and the sellers can push their sale price to the maximum.
On the buy side, those interested in conversion may still have some time left in Jacksonville, although many Florida economists are concerned about the level of the market's condominium conversion and construction activity. They have seen the results of condo overbuilding in the market in the late 1970s and again in the late 1980s and are paying attention. "Florida condominiums are overbuilt about every 10 years. You can almost set your watch by it, but you can't necessarily relate this environment to overbuilding eras of the past," says Joel Coykendall, senior vice president for NorthMarq Capital in Jacksonville, a national real estate investment firm producing more than $9 billion in originations annually. "This time around, rates are a lot lower, condominium buyers have inexpensive investment capital at their fingertips, and a great many are baby boomers who have accumulated and inherited wealth are looking for second homes." Coykendall says there are "a lot of demographic changes occurring that add stability to this condo boom" but warns that there are concerns with regard to the number of buyers who are speculators or investors as opposed to actual buyers.
Submarket Spotlight
As that demand continues to rear its head, condo conversions and new developments move full speed ahead, especially in areas that offer desirable amenities such as water exposure, downtown locations, or suburban environments.
The coastal market, in particular, has seen major condominium activity for years. In St. Augustine, Montecito Property Co. recently bought and converted the luxury Las Palmas community on the Intercoastal market. The same company is responsible for The Venetian on the Ortega River, a nine-building project originally constructed in 1969 as offices for the U.S. Navy. Now it has been converted to condos, which are selling from the high $100,000s to the $400,000s.
AT THE TOP: Located on the Intra-coastal Waterway, which runs from Jacksonville to Miami, Las Palmas features a variety of outdoor amenities.
The Oceans Edge apartment community just one block off of Jacksonville Beach also was recently sold for $126,000 per unit. The 182-unit complex built in 1973 is now among the highest-priced sales in the market. It is currently being converted to condominiums.
Though not as dynamic as the coastal market, Southside near the University of North Florida and along the J. Turner Butler corridor is alive with emerging employment centers. Local businesses include Merrill Lynch, Blue Cross/Blue Shield, and a quadrant of hotels and office parks. The completion of the new Interstate 295 has further infused the market, creating an eastern link around the city and opening new areas for office, retail, and multifamily development.
One significant multifamily project in this market is Marina San Pablo, a 14-acre, $100 million condominium development in which the average price per unit will range from $500,000 to $700,000. On the conversion front, Tarragon South Development Corp. is repositioning The Madison at Deerwood. The company purchased the year-old complex for $121,300 per unit. The 444-unit project is located in one of Southside's fastest growing neighborhoods.
Topping the list is downtown. According to CALEX, this submarket has seen an 11 percent increase in occupancy since fourth quarter 2003. This is in part due to the $2.25 billion Better Jacksonville Plan, a growth-management initiative funded by a half-cent sales tax and approved by voters in September 2000. The plan is responsible for a new Jacksonville Veterans Memorial Arena, the Baseball Grounds of Jacksonville, new libraries, and a new one-million-square-foot courthouse encompassing eight city blocks. The improvements are encouraging residents to re-enter the downtown living environment.
In the last 18 months, approximately 2,000 new units have been approved, constructed, and partially absorbed in downtown, and more than 800 have been approved or are on the drawing board.
The Plaza Condominium at Berkman Plaza on downtown's Northbank was among the earlier in this round of conversions. The 22-story building was purchased for $46 million by McRae & Stolz Jacksonville and post-conversion is about 75 percent sold, with unit prices ranging from the $200,000s to more than $700,000.
Competition, however, is heating up across the river with numerous projects on Southbank. These include The Strand, a 28-story apartment tower with 295 units that broke ground in mid-2004; The Peninsula, a 36-story condo tower now in the sales process; and the nearby San Marco townhomes overlooking Lake Marco, which also broke ground mid-2004 and will sell for no less than $1 million each.
And the movement continues. In March, Hines and South Shore Group Partners announced plans to develop Riverpointe, a $100 million high-rise new-build project on downtown's Southbank. At completion, Riverpointe will total up to 300 condominiums and townhomes. Construction is set to begin late this year or early next.
Financing Watch
While the market is booming, there's no doubt that demand for condominiums will decrease when rates inflate, and already, some lenders are stepping back from the condominium sector. "Right now there's a lot of major lenders out there with concerns that the condo market is so hot. Some are starting to underwrite their loans a little more conservatively and, in some cases, even exiting the market," says Coykendall.
He cites Bank of Atlantic, which is one of the largest banks in Florida, as an example. "They've been active in the condo market for years and likely realized they had just too much exposure, and they exited the market six to nine months ago," he says.
Those banks that have not exited condo conversion financing are getting more particular. "They see the big gap between high values and lowering cap rates," Coykendall adds, "and are requiring buyers to offer substantial equity in order to fulfill financing."
Jim Morgan is a senior advisor for Sperry Van Ness-Investec Services in Jacksonville, Fla.
Still, Coykendall says he has yet to see a condo conversion in northeast Florida fail to do well. "Some are weekend sell-outs and some fill slowly, but they do eventually succeed, 99 percent of the time thanks to low rates," he says. "It will be interesting to see what happens when mortgage rates start moving up, which is inevitable."
Until this changes, luck is on the side of those that can fulfill the American Dream: homeownership.
On the Go
Survey Says: Renters Move Fast.
Want to reach the new generation of renters? Skip the grocery store and go straight to Starbucks. According to a new survey from Apartment Finder in Lawrenceville, Ga., today's on-the-go consumers usually shop at specialty or convenience stores, making them the best spots to find prospective renters.
"People are shopping in different places," says Denise Smith, director of marketing for Apartment Finder. "Before, it was understood that the logical place people would go to shop were the grocery store and the drugstore. Now they go to drugstores and convenience stores."
Bob Murray, president of KSI Management, an apartment owner and manager based in Centreville, Va., hadn't read the Apartment Finder survey (which studied 5,000 people in St. Louis, Orlando, Atlanta, and Dallas)—but he thinks the results make sense. "It's probably more important to be at Starbucks [than the grocery store] today," he says. "The trendier, more urban the market, the less likely people are to go to a grocery store."
The survey results also created a profile of today's average renter (a single, 34-year-old, college-educated female making $36,000 annually) and how long she takes to find an apartment. Though many people believe it takes prospective renters 30 to 60 days to find a new place, the survey found that would-be residents looked for an apartment for 24 days, using technology to narrow their hunt to an average of nine properties, which they visited in person.
"The more people use the Internet, the less time it takes [to find a place to live]," Murray says.
—Les Shaver
Solid Ground
April employment numbers offer hope to economy and multifamily.
Employment numbers are like watching baseball players. When it comes to gauging performance, you have to look at the averages. The reason? Month to month, there are ups and downs. Just look at the chart above.
For 2005, the average number of jobs created per month is good—211,000—good enough to keep up with the influx of new entries into the labor force.
When you figure that every five jobs creates demand for one additional apartment unit, as Trammell Crow Residential does, that's good news. "Our outlook is good," says Kevin Andrade, senior managing director of Trammell Crow Residential, Southern California, based in Costa Mesa, Calif.
Better yet, the nation should continue to add new jobs at a healthy, if not spectacular, clip throughout the year, says Lynn Reaser, chief economist at Banc of America, capital management. "Job growth is unlikely to be consistently as strong as the 274,000 jump we saw in April, but it should be solid, close to the four-month average, and that should be supportive of the multifamily industry."
The long-anticipated climb in interest rates could add another boost, Andrade says. "To the extent that interest rates go up, it's positive for apartments because people switch." Of course, Trammell Crow has covered its bases either way: Over the last three years, the company has shifted from 100 percent apartment development to 50 percent condominium construction.
—Nichola Zaklan