Sunny, vibrant, and colorful—that’s what most tourists come to expect from South Florida. But in recent years, the region has suffered some hits to its crisp, sparkling image. Known as the epicenter of the condo and for-sale housing boom and subsequent housing meltdown, South Florida has witnessed rising foreclosures, a gargantuan shadow market, anemic population and job growth, and housing price depreciation. Despite the headlines, however, South Florida has taken its licks in stride. Comprising the contiguous tri-county area known as Palm Beach, Broward, and Miami-Dade Counties, South Florida is the seventh-most populated metro area in the nation with more than 5.5 million people. The region’s multifamily market was drastically impacted by the condo conversion boom, which brought the multifamily rental inventory down to 415,629 units today from a peak of 479,000 units in 2003. As a result, South Florida multifamily occupancy peaked at more than 98 percent, and rents experienced consecutive double-digit year-over-year growth at the end of 2005 and beginning of 2006. Property performance began to wane in the first part of 2007 as occupancies declined and rent growth started to slow. Today, occupancy is at 93.5 percent, while year-over-year rent growth is an abysmal -2.4 percent.
The good news is the lack of supply of rentals coming to the market. Most of the land purchases over the last few years were made by condo and for-sale home developers. From 2000 to 2008 apartment deliveries averaged nearly 6,135 per year. Deliveries in 2009 are anticipated to be 56 percent below the previous nine-year average with only 2,678 units projected for completion and the majority of those being tax credit deliveries. Apartment deliveries in 2010 and 2011 are virtually nonexistent due to the lack of construction financing in the market. To best understand South Florida, let’s take a step back and look at the tri-county area as a series of independent, yet related submarkets. Sleepy but Steady
Palm Beach County has historically been labeled the sleepiest market in the tri-county area, but it gained ground when it landed the Scripps Research Institute. Scripps Florida currently employs 282 individuals; however, once it moves to its permanent campus in Jupiter in early 2009, it is expected to create 6,500 high-paying jobs over the next 15 years.
In recent years, multifamily property performance has suffered due to the oversupply of single-family developments in northern Palm Beach County. Downtown West Palm Beach experienced a condo renaissance with the conversion and delivery of new projects in the urban core. The Downtown West Palm Beach condo market should receive a boost with the purchase of the remaining inventory of 141 units in the nine-story Whitney condo tower in February 2009. The buyer paid $144 per square foot, or $170,213 per unit. Irving, Texas-based Archon Group picked up Water’s Edge and The Fountains of Delray Beach, two stabilized projects in January 2008 for $36.7 million, or about $123,737 per unit.
On the rental development side, look for Winter Park, Fla.-based Epoch’s delivery of Las Ventanas, a 494-unit mid-rise project in Boynton Beach in 2009. The project will feature one-, two-, and three-bedroom units at market-rate rents. Amenities will include concierge services, an indoor sports court, three pools, and retail space. By 2010, Southcoast Partners of Delray Beach, Fla., will deliver Worthing Place, consisting of 217 units in Downtown Delray Beach, along with 12,000 square feet of retail space and a 430-car structured parking garage. Combined with minimal new apartment deliveries and tighter “for-sale” lending practices, demand for rental product should be stronger over a long-term horizon in Palm Beach County.
A Top Draw
Broward County, meanwhile, remains one of the top target markets for investment due to its location, transportation networks, diverse employment base, and lack of land. Broward County’s population of 1.79 million represents 32 percent of the total population in South Florida, and the county’s average rents of $1,115 per month are the highest in the region. Broward County leads South Florida in terms of sales activity, and private buyers there have been the most aggressive. Broward County experienced $190 million in multifamily investment sales activity in seven transactions in 2008. Recently, ARA brokered the sale of a distressed asset there to Priderock Capital Partners. The West Palm Beach, Fla.-based firm plans to rehabilitate and stabilize the vacant, 405-unit multifamily development called Villas of Lauderhill. Additionally, in December 2008, Scully Co. entered the market with the purchase of Pembroke Cove, a 302-unit multifamily community in Pembroke Pines.
From a rental delivery perspective, expect some serious competition in Downtown Fort Lauderdale as developers Altman, Gables Residential, Trammell Crow Residential, and ZOM look to deliver four new market-rate projects within months of one another. The good news is that the shadow market remains in check due to limited deliveries in Broward County. Rents will be anemic throughout the year, but despite this, Broward County still stands out as a top target market in South Florida.
The Queen Bee
Over the past decade, Miami-Dade County has emerged as one of the great international destinations of the world. And, like any great international destination, it could use a good dose of condo speculation. The good news is that the majority of the cranes have come down in Miami-Dade County as construction commences on the numerous condo projects.
At the peak of the housing market in 2005, 24,501 new condo units closed in Miami-Dade County. To put this into historical perspective, the pace represents five times the average annual closings during the six-year period from 1999 to 2004. Needless to say, the market was hot in 2005. New condo closings in 2008 are coming in around 11,100 units per year. As a result, there will likely be a permanent shadow market in Downtown Miami and the Brickell area for many years to come (from 2003 to 2010, approximately 23,000 units were delivered in this area).
What’s more, fractured condo projects will likely become the norm, offering both rentals and condos under one roof. Look for brokerage and condo sales firms to capitalize on this emerging market. Given looming condo supply in Miami-Dade, the market continues to perform well with occupancy at 94.3 percent and rents declining a modest 2.6 percent year-over-year.
Due to unprecedented investment activity that took place in Miami-Dade County over the past few years, multifamily investment sales came to a screeching halt in Miami-Dade County in 2008, with no notable institutional transactions taking place during the year. In 2007, Miami-Dade did only $347 million in sales, well below the $2.6 billion that traded near the peak of the market in 2004.
The tightening credit standards for home mortgages and weak consumer confidence should bode well for the rental market in South Florida over the next three to five years, as many would-be home purchasers gravitate toward rentals. The decline in housing prices is having a positive impact on housing affordability, as is the absence of a state income tax. And that makes for favorable conditions for any investors in South Florida—well, that along with an average annual temperature of 75 degrees.
Fast Facts: South Florida
Population: 5.5 million
Median Age: 39.3
Median Household Income: $69,600
Average Rent: $1,068
Unemployment Rate: 7.1% (as of December 2008)
Notable: The best-known city in all of South Florida is tourism hub Miami, dubbed America’s Cleanest City in 2008 by Forbes magazine for its year-round good air quality, clean drinking water, and citywide recycling program.