Numbers say rents will rise, but not as fast as recent years
By Dan Tracy
The economy has worked in favor of Florida’s multifamily housing industry pretty much since the Great Recession of 2007-08 by generating more jobs but not a lot of additional wages.
That combination helped create an environment where demand for rental housing either met or exceeded the supply, three apartment industry experts said during an educational session at October’s 2017 FAA Annual Conference & Trade Show at Disney’s Contemporary Resort.
The result was Florida’s multifamily rental market outpaced most of the nation in occupancy, rent increases, and new construction.
But that near-perfect scenario is changing, meaning some less stellar times might well be in the future: “It’s not going to be the fairy tale of ‘build it and they will come,’” Theron Patrick, data analyst at ALN Apartment Data, said. Patrick was one of the panelists for the session titled, “Numbers Talk but What Are They Saying?”
Wages, statistics show, are starting to increase, in part because the state’s unemployment rate has fallen below 4 percent, forcing employers to pay their workers more. When paychecks rise, Patrick said, people tend to move out of apartments to purchase houses.
“It’s a zero sum game,” he said. “They’re buying, not renting.”
Another factor to consider, the analysts said, is that new home sales remain below historic norms — a drop of as much as 15 to 35 percent in some markets. New subdivisions, including some that had gone fallow during the recession, are popping up across the state.
Patrick thinks the switch to ownership will start to take hold in 2018. Remember, he added, home loan interest rates remain low, which could push the reluctant millennial generation — those born from the early 1980s to the late 1990s — to buy as well.
“They’re nipping at the edges,” Patrick said.
Yet, the outlook is not all that bad, Patrick said. Along with the two other panelists, he said rents will continue rising in Florida, just not as fast as in recent years.
“These are still First World problems,” he said.
Rather than seeing annual rent bumps of up to 8 percent — which Florida experienced as recently as 2015 — increases of 2 to 4 percent seem more likely, Patrick predicted. This year, the average increase was about 5 percent.
Josh Gold, executive vice president of the FAA, said the industry has been in a remarkably strong growth mode for several years, but agreed a slowdown is likely, similar to the changes the stock market or any other business periodically faces.
“Obviously, you can’t keep the momentum forever,” he said.
Construction Continues, But Absorption Rate Not Keeping Pace
One of the main issues facing the industry is that new apartment construction is continuing largely unabated at a time when the absorption rate — or people renting new places — is starting to slow. Across Florida, some 100,000 new units are under construction or in advanced planning and permitting stages.
Statewide, there now are nearly 1.4 million multifamily units. For their analysis, the panelists focused on the 750,000 units owned or managed by large companies, excluding student, assisted living and subsidized housing. FAA represents more than 630,000 units in the state.
About 92 percent of the monitored units are rented. That’s a bit below the occupancy rate of 95 percent in recent years. The average rent for a two-bedroom, two-bath apartment in Florida is more than $1,200.
Other panelists were Brian Alford, market economist at CoStar Group, and Cameron McIntosh, real estate research analyst of Real Page.
With new apartments opening throughout the state and in all of its major metropolitan areas,
Patrick predicted coming months could see an incrementally slow rise in rents, along with an increase in concessions, such as a week’s free rent or gratis upgrades in the apartment amenities.
“You’re going to have to do more to capture [renters] and do more for retention,” Patrick said.
But McIntosh was more upbeat, arguing a slowdown might not occur until 2019 because some of the new construction will not be ready until then. Orlando, in particular, he said, should not experience much of a slowdown in rent appreciation.
“Demand is robust enough in most of these markets,” said McIntosh, referring to Orlando, Tampa, Miami, West Palm Beach, and Fort Lauderdale.
Orlando, for example, has added about 25,000 new units during the past five years, while Tampa and Miami each have brought on roughly 20,000. Orlando and Tampa have filled almost all of those places, while Miami has fallen about 5,000 units short.
The Orlando area may outperform the rest of the state because many of its new jobs are service oriented and transient in nature, Patrick said. That means people holding those jobs are less likely to buy a home because they may not be staying in the market for an extended period and are likely to move on when a better economic opportunity arises.
Market Will Follow Class A Properties
Much of the new construction, the analysts said, is in the Class A, or luxury level, of apartments. Those are typically the newest or more recent entries into a market and most often are found in the urban core or the trendiest areas in which to live. About 12 percent of Florida’s apartments are considered Class A. The next category, Class B properties, are usually about five to six years old and comprise 20 percent of the market. It is followed by Class C, at 38 percent, and Class D, or the oldest units, at 30 percent.
Alford said that the A sector, which charges the highest rents, may have the softest demand going forward, particularly during the latter parts of 2018, when some high-end communities open their doors to renters in various parts of the state.
Already, statistics show, the occupancy rate in Class A space has dipped below 90 percent, down from 94 percent in 2013.
Right now, leasing agents need up to 30 days to rent a unit, regardless of classification, statistics show.
Class A properties, the experts said, are the standard bearers for the state, meaning their performance affects the rest of the market. In other words, if Class A does well — or poorly — so do classes B, C, and D.
“It’s sort of a whiplash effect,” Patrick said of the relationship of Class A to other properties.
One way to increase occupancies would be to promote properties within a wider area. Cameron said apartments historically draw residents from about a five-mile radius. But his research shows people are willing to drive up to 50 miles from an apartment to work for the right amenities or school districts.