Apartment industry observers have watched over the last six years as South Florida’s condo market, considered a chief competitor to apartments in the region, has seen a meaningful development run, reshaping the Miami skyline. More than 400 towers have been under construction, with a robust pool of willing buyers. While the cranes are still present, and floors are still in the construction process, the market for condos in South Florida has begun to moderate. Sales data from real estate brokerage firm Douglas Elliman indicate the condo market has already begun to slow. In 1st quarter 2016, the number of days on the market has increased to 94, compared to 51 in 1st quarter 2015. Further, the number of closed sales declined to 728 from 909 reported during the same time last year. Finally, pricing has demonstrated some vulnerability, slipping 1.3% annually.
As the condo market has slowed, questions have surfaced regarding the potential impact to apartment performance. Further, are condo units entering the market (or existing condo product) likely to be repositioned as rental units? While unclear at this time, we can isolate apartment submarkets that have the largest shares of condos from the latest development cycle.
Potential Impact to the Apartment Market
Just over 50% of all condos in development are located in MPF Research’s Downtown Miami/South Beach apartment submarket, which includes Miami Beach, Key Biscayne, Fisher Island and the Design District. These data have changed little over the last year. This concentration of condos present in the most urban submarket can potentially limit multifamily performance as well as influence performance from immediate submarkets. Meanwhile, inland and suburban submarkets are likely to feel limited impact from a slowing condo market.
While half of new condos are coming in Downtown Miami/South Beach, this submarket has already been challenged by inconsistent apartment rent growth and is experiencing an apartment supply wave which started in earnest at the beginning of 2013. As of 1st quarter 2016, rent growth landed at 2.6%, down from the five-year average of 4.1%.
Aside from the Downtown Miami/South Beach submarket, the following submarkets have the greatest concentration of condos: Northeast Miami (immediately north of Downtown Miami/South Beach), Hollywood (within metro Fort Lauderdale), Fort Lauderdale (the Fort Lauderdale central business district), and West Palm Beach (the West Palm Beach central business district) – all with a condo share of at least 5%. These central business districts as well as adjacent submarkets are likely to experience the greatest impact from condos repositioned as rentals due to a weaker market.
Still, investing in apartments remains attractive in South Florida, as fundamentals are solid and the region continues to post strong revenue growth. According to latest data from Real Capital Analytics, dollar volumes for apartment transactions topped $3.3 billion in Fort Lauderdale (up 244% annually), $1.6 billion in Miami (up 142% annually), and $1.5 billion in West Palm Beach (up 78% annually).
Foreign Capital Faces Limitations
Real estate development bubbles are a well-documented phenomenon in Miami. The most recent (and most notable) is the housing crisis and Great Recession. In 2007, the condo market specifically was oversupplied, which helped push prices down as much as 30 percent. As a result, capital dried up, available buyers left, development ceased and construction already underway was abandoned.
Following the recession, foreign capital flowed into real estate markets in South Florida and other coastal areas such as New York and Southern California. Foreign investors in Brazil, China and even Russia have viewed these U.S. gateway markets as stable conduits in which to park capital, as their own economies continue to experience economic distress through overleveraged national, firm and individual accounts, volatility in global markets and uncertainty in political regimes. More recently, however, investors’ purchasing power have been limited due to volatile oil prices, a strong U.S. dollar in combination with weakening local currencies, as well as continued global economic turbulence. As such, the South Florida condo market has begun to feel weakness as deploying foreign investment has been more challenging.
For the foreseeable future, development activity in the condo market certainly continues to influence apartment market performance (both indirectly and directly), specifically rents and occupancy. Further, condo development strategies have targeted central business districts and surrounding submarkets, which impact those apartment submarkets but not the larger metro areas. However, if those development strategies shift, a shadow market of condo rental units could adversely impact the South Florida apartment market as a whole. Investors and brokers are likely to be somewhat more insulated as this cycle slows due to the 50% down payment requirement for buyers. However, it is too early to determine to what degree a shadow market has already materialized in South Florida.