That screeching noise you're hearing is coming from Florida. It's the sound of a once white-hot apartment sales market grinding to a halt.
"I don't know if anyone is active [in buying Florida apartments]," says David Schwartz, managing member of Waterton Associates, an apartment manager based in Chicago. "If you were to compare it [apartment sales] over the past 12 months versus the prior 12 months, it would be dramatically different volumes. There's just not a lot trading right now. The brokers have plenty of time for family and golf compared to the past three or four years."
Why the dramatic change? Schwartz points to two main reasons: skyrocketing insurance costs and the slowdown in condo buying. "It's hard to blame the insurance market entirely, and it's hard to blame the condo market entirely," Schwartz says. "It's a combination of the two at the same time."
Condo converters certainly have disappeared since the condo market went soft, but many apartment owners argue that staggering insurance costs are the main culprit in Florida markets. (Rising premiums are making it difficult for buyers to underwrite deals.) While some multifamily owners have been trying new insurance strategies, most companies continue to struggle with the issue.
Everyone knows why insurance costs have jumped through the roof: hurricanes, hurricanes, hurricanes. In recent years, insurance companies have taken big hits in Florida and the Gulf Coast, and now they're attempting to recoup those losses with higher premiums for owners of all types of properties in coastal areas.
"It's a very, very serious issue right now," says Jay Massirman, a vice chairman at CBRE Investment Properties, a broker in Miami. "Multifamily is not the only product type affected. It's everything."
For anyone who owns apartment properties in Florida or wants to buy one, the numbers have been startling. "Prior to this crisis, you could get insurance for $300, if you were a self-insured REIT, to $800 a unit," Massirman says. "In the last three months, one-off players have been quoted anywhere from $1,500 a unit to $3,000 a unit."
These higher costs have chased many of the one-off, private buyers from the scene. As things play out, Mark Sanders, CEO of The Fifteen Group, an apartment owner and operator based in Miami Beach, Fla., expects the bigger multifamily players to step in.
"It should be a feeding frenzy for advisors and larger REITs," Sanders says. "The deals we see getting done are getting done by [pension fund] advisors. It's hard for private guys like us to compete."
Pension funds and the big apartment REITs do have a significant advantage as far as insurance: They can spread their insurance risks across their entire portfolios, including those that aren't in coastal areas. "If you are a big enough player, you get a lot of pricing power" by having a large portfolio, says John Williams, managing partner of capital markets for Carmel Partners, an apartment owner and operator based in San Francisco. "The insurance companies look at it as pooled risk."