St. Petersburg, Fla. — Job losses, weak household formation levels, and competition from the shadow market are taking their toll on the apartment market here.
In the Tampa metro area, rents actually rose a bit in the first quarter after declining in the last three months of 2007, but the picture in St. Petersburg, one of Tampa’s biggest submarkets, was less pretty. Rents fell 0.8 percent, and the vacancy rate climbed to 8.1 percent from 6 percent just one quarter earlier.
“Not only is there a housing and condo market slowdown in Florida, but the general economy is slowing down,” said Sam Chandan, chief economist of Reis, Inc., a New York City-based market research firm. Florida began losing jobs in February, a month after the national economy started registering declines in payrolls, and the forecast for the next quarter or two suggests more of the same is in store. A survey released in June by Manpower, Inc., the nation’s largest temporary-staffing provider, showed that just 8 percent of employers in the Tampa Bay region planned to hire in the third quarter, and 46 percent expected to lay workers off.
“We’ve gone job-negative,” said Bill Eshenbaugh, head of Eshenbaugh Land Co., a Florida multifamily land broker. “The state didn’t admit it until February or March, but actually we’ve been jobnegative since October.”
The Tampa Bay region lost almost 8,000 net jobs in the year ended in March, according to M/PF YieldStar, a Carrollton, Texas-based apartment market research firm. Partly as a result, net move-outs soared in the first quarter, as the number of occupied apartments fell by 1,820 units.
“While Tampa posted a lackluster demand performance during the first quarter, the metro also had to contend with a flurry of new deliveries,” said an M/PF report. “Apartment completions during 2008’s January-March time frame totaled 1,008 units, the largest block of new supply to come online on a quarterly basis since second- quarter 2006.”
On top of that, the Tampa-St. Petersburg multifamily market was due for a rebalancing after the condo craze that swept Florida in the mid- 2000s, observers said. The condo boom artificially inflated rents for a few years as condo conversions shrunk the supply of available apartments. Now that inventory levels have begun to adjust—they rose 2.4 percent last year after falling 3.7 percent in 2006 and 0.4 percent in 2005—owners and managers are seeing the fallout.
The metro area’s occupancy rate fell a full three percentage points in the first quarter of this year as compared to a year earlier, bringing it down to 92.4 percent, according to M/PF. That’s the lowest rate since 2003.
Anyone who’s taken an economics course knows the product of that equation. Rising supply plus falling demand equals declining prices, so it’s not surprising that landlords would cut rents to compensate. M/PF’s research shows that effective rents fell 1.2 percent in March from a year earlier, to $810 a month.
Reis’ research puts effective rents even lower, at an average of $784 in the first quarter. The St. Petersburg submarket registered a 1.1 percent decline in the first three months of the year, pushing rents down to $711, the firm found. On average for the year, though, St. Pete rents will climb slightly, to $726 per unit from $719 in 2007, the firm found.
“It’s difficult to grow rent levels when people’s household income is constrained,” Chandan said. At the same time, population growth slowed to 0.6 percent last year from 1.5 percent in 2006 and 2.2 percent the year before that, further damping demand.
An apartment market recovery will begin taking hold in 2009, as St. Petersburg rents rise another 2.3 percent to $743, according to Reis. That’s the same recovery rate as the metro area as a whole, where rents are expected to average $813 next year. Still, vacancy rates will keep climbing for at least the next two years before finally peaking at 8 percent in 2010 and falling in 2011, Reis projected.
“We think you sort of are at the bottom” in the Tampa-St. Pete market, said Greg Willett, vice president of research and analysis at M/PF YieldStar, “but we think you stay there for a while.” It will take some time—maybe a year or more—to burn through the inventory that’s been added to the St. Petersburg apartment stock through the shadow market of single-family homes and condos, he said.
One reason the recovery will be so slow, he said, is that M/PF expects another 1,200 units to come online in the coming year. “We’ll be getting a little bit more new supply, and they’re going to be out there aggressively marketing that product,” Willett said.
Meantime, multifamily sales volume has plunged to just $820 million in the first quarter from $1.47 billion a year earlier, data from Real Capital Analytics (RCA), a New York City-based research firm, shows. That’s less than a quarter of the $3.62 billion in transactions multifamily buyers and sellers closed in the first three months of 2006.
Two of the biggest transactions were the sale of the 336-unit Bay Cove property in Clearwater for $34.1 million, or roughly $101,000 per unit, and the sale of Legend Oaks, a 416-unit property built in 1983, for $23 million, or about $55,000 per unit. Both were closed in March.
Capitalization rates, which represent the net income thrown off by a property as a percentage of the sales price, fell back to 2006 levels after spiking in 2007, according to RCA research. Cap rates averaged 6.11 percent in the first quarter, close to the 6.15 percent levels seen two years earlier.
But bargain hunters are circling, according to Chandan. “There’s some sense that Florida prices have the potential to fall a little further,” he said. Once that happens, investors may swoop in and snatch up whatever inventory is available in St. Petersburg as they position themselves for what at this point sounds like pie in the sky but in terms of the business cycle is inevitable—the next boom.