Tampa, Fla.—This city’s multifamily market is on a roller coaster that’s hit a low point for landlords. During the past several quarters, condo converters have taken 24,000 units from the rental market. Many of these units now are being dumped back into the inventory, as converters fail to sell units at desired prices. In the market’s current transitional stage, apartment owners are starting to lower rents.

Still, rent growth is expected to be strong enough to enable owners to hold onto recent reductions in concessions, particularly in areas such as Pinellas County, where adding new supply is difficult. As the market heads toward equilibrium, there likely will be some growing pains through the rest of 2007.

A renter’s market

“We’re seeing up to two months free rent and a dip in occupancy as converters revert units back to apartments,” said Darron Kattan, senior investment associate in Marcus & Millichap’s Tampa office. “Owners are starting to lower rents because they were raising them so much before because everything was going condo.”

The number of purchases for conversion fell 20 percent during the past 12 months, according to a recent report from Marcus & Millichap. As a result of the glut of rental units, developers are projected to deliver 1,277 units this year, down from 2,383 units in 2006, according to a recent report from Reis, Inc., a New York City-based research firm.

All of the rentals scheduled for completion this year are located in Pasco County. Also, more than 2,000 units currently are planned in Tampa’s metro, mostly in Pasco and Pinellas counties.

“Every day I seem to talk to a developer who has a site he’s working on,” said Kattan. “That makes me a little worried. With all the talk, in two or three years we could see anywhere from 7,000 to 8,000 units getting dumped on the market. That could be a lot to absorb at once.”

Don’t rain on Tampa’s parade

However, Kattan said he is optimistic about Tampa’s apartment market. By the end of this year, “the market should be very healthy. Barring some sort of hurricane activity, we’re looking at a phenomenal market,” he said.

Right now though, it’s slow going. Transaction velocity fell 14 percent during the most recent 12-month period in the Tampa metro. Pinellas County recorded a 28 percent decline. Cap rates have crept higher as deals have slowed. Cap rates ranged from 5.9 percent to 6.7 percent at the end of the first quarter of 2007, up approximately 20 basis points from six months earlier.

Value-added plays are hot

Meantime, rents are gradually rising. Asking rents for Class A units rose 4.9 percent in the first quarter from the year-earlier period. Class B and C rents rose much more, by 7 percent in the 12 months ending in March 2007. Rent growth is expected to level off by the end of 2007, said Kattan.

“I’m seeing a push to get higher-end amenities, like valet service,” said Kattan. Owners are trying to justify a higher rent schedule than today’s best properties. But it’s still a renter’s market, and owners are hesitant to raise the rents too much.”

After several quarters of year-over-year declines, vacancy rates for Class A properties have begun to tick up. A 5.3 percent vacancy rate at the end of the first quarter is 30 basis points more than one year ago, according to research from Marcus & Millichap. More Class A renters are moving into more affordably priced single-family homes. Class B properties may be attracting some of these Class A renters, since owners are trying to offer tenants more high-end amenities. The overall vacancy rate is forecast to reach 5.7 percent by the end of 2007, up from 5.4 percent in 2006, according to research from Reis, Inc.

Downtown will be sizzling

Employers added 26,000 jobs in the Tampa metro during the past 12 months. Job growth is expected to slow to 19,600 new positions in 2007. Even so, Kattan said he is excited to see the multifamily market grow in Tampa’s downtown and the city’s Channel District, just east of downtown. The Channel District is bordered by Ybor Channel on the east and Garrison Channel on the south.

“Those areas are going to be phenomenal in five years,” Kattan said. He added that the downtown area should experience some growing pains before things look up, as a lot of units are being introduced there at the same time.

The water’s fine

Even though transactions have slowed considerably, investors are circling Tampa’s waters for the best deals. The 312-unit Campus Lodge, a Class A student housing complex located near the University of South Florida, is up for grabs for $48.25 million. The development is part of a 1,524-unit, 4,477-bed student housing portfolio being marketed for $201 million.

It may be a good time to buy in Tampa as population, jobs, and rents are all forecast to grow steadily for the next few years. Investors may want to look to Class B and C opportunities, as rent increases at these properties are expected to outpace rent growth for Class A properties.