Sun Sets On South Florida's Apartment Boom
South Florida's multifamily market is cooling, with occupancy rates declining to 95% in Q2, a 2% YoY drop, according to Berkadia.
South Florida's Apartment Boom Hits a Pause: Occupancy and Concessions Tell the Tale
The Dorsey apartments in Wynwood at 286 Northwest 29th Street (Dorsey Wynwood; Getty)
South Florida's multifamily fiesta seems to be cooling down. After a gentle lull in the second quarter, the market, according to recent reports, appears to be preparing for a more subdued finale by year's end.
By the numbers: South Florida's multifamily scene isn't as vibrant as before. Occupancy dropped to an average of 95%, down 2% YoY, according to Berkadia. Landlords tried to entice with perks like free rent for a month. Yet, with interest rates rising, investment sales plunged 72% YoY in the first half—quite the tempo change.
The good old days: The drop follows a hot market driven by population growth starting in late 2020, causing high rent, development, and sales. This tri-county market outperformed the rest of the booming Sun Belt, with the highest rent increase nationwide. Some properties reached $4 or even $5 per SF in rent.
Not helping the situation: Meanwhile, landlords raised rents in Q2, averaging $2,500 a month in South Florida, up 6.3% YoY. Effective monthly rent shot up 7% YoY to $3,280. North-central Miami saw the biggest gains at 19.4%, with $1,825 in effective rent. Palm Beach County was the only area with a slight drop of 0.2% to $2,520. North Lauderdale rents stayed flat at $2,235.
Keep calm and develop on: Even with occupancy plateauing, the mood in South Florida remains upbeat among brokers and builders. This year alone, developers are set to roll out a whopping 19K units, eclipsing the projected absorption of 12K. And Berkadia? They've reported a brisk 2,400 leases inked in 1H23. While an influx of units might briefly spike vacancy rates, it's likely just a temporary blip on the horizon.
Declining sales: South Florida's multifamily investment dropped to $1.1 billion in the first half of this year, a stark contrast to the $3.9 billion of the previous year, as per Berkadia's report. Despite this slowdown, June saw a resurgence, with significant purchases by Harbor Group International and Praedium Group. Past rent growths in 2021 and 2022 provide a buffer for investors amidst new market challenges.
➥ THE TAKEAWAY
The sun is setting: South Florida's multifamily market is cooling, with occupancy rates declining to 95% in Q2, a 2% YoY drop, according to Berkadia. As interest rates rise, investment sales have plummeted by 72% in the first half of the year. This downturn contrasts starkly with the previous boom driven by population growth and surging rents since late 2020. While developers remain optimistic, introducing 19K units this year, the current trends indicate a market recalibration.
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Biden ‘Aggressively’ Pushes for Return of Federal Workers to the Office this Fall
In a recent memo from the White House, President Joe Biden strongly urged federal agency leaders to boost in-person office attendance this fall, with local officials and market experts watching with hopeful caution.
The President has spoken: In a recent memo to Cabinet members, President Biden’s chief of staff called for federal agencies to increase in-person work this fall. This move marks Biden's boldest initiative to bring federal workers back to the office, reflecting the challenges businesses face as the remote work trend persists, even with the pandemic's decline.
Between the lines: Jeff Zients, White House Chief of Staff, wrote: “We are returning to in-person work because it is critical to the well-being of our teams and will enable us to deliver better results for the American people." Zients said that the changes will not rule out working remotely but rather combine that flexibility "while ensuring we have the in-person time we need to build a strong culture, trust, and interpersonal connections."
Long-standing call for action: Local leaders and businesses have long called for the federal government to ramp up its return-to-office efforts. The presence of federal employees significantly impacts downtown areas, and low foot traffic has resulted in billions in lost revenue. Republicans have even attempted legislative changes to direct agencies back to pre-pandemic teleworking policies.
➥ THE TAKEAWAY
Where’s the big stick? Since spring 2022, Biden has aimed to bring federal workers back to their desks, though with limited success. Amid gradual White House re-openings and policy changes, Zients' recent letter seeks to expedite this shift. However, the tug-of-war between return-to-office pushes and the flexible nature of hybrid work remains a hurdle for both parties.
Blackstone, KKR, and Starwood REITs Halt New Loan Originations
Major mortgage REITs, such as Blackstone Mortgage Trust and KKR Real Estate Finance Trust, have significantly scaled back or halted new loan originations amidst mounting challenges in the market.
The big-picture problem: These major lenders have stopped providing loans to new borrowers. While existing loans are still being serviced, new originations have dramatically declined. Typically, mortgage REITs have been responsible for originating around $10 billion in loans every quarter. However, recent trends indicate a significant reduction in this figure. Starwood Property Trust is another name that has shown a diminishing appetite for new loans.
Why the cutback? The commercial real-estate market is undergoing one of its toughest periods in decades. Mortgage REITs are retracting to safeguard their balance sheets. Higher interest rates have made refinancing more challenging for borrowers, leading to increasing defaults. With office buildings experiencing higher vacancy rates and an overall tightening of credit, total commercial and multifamily mortgage lending is anticipated to drop by 38% from the previous year.
Consequences for property owners: The lending reduction has repercussions on commercial property owners, who are struggling to refinance maturing debts, raising the potential for more defaults and property losses. This financing scarcity has compelled some to garner more equity to renew impending loans. For instance, a New York-based property venture found that half of its potential lenders backed out due to the deteriorating commercial property market.
Market view: Mortgage REITs, while not in immediate financial jeopardy, face challenges. Despite recent rebounds in share prices, many cannot issue new stock due to the plummet in share prices since the interest rates surge. The potential for economic downturns makes them susceptible, with some opting to conserve capital. Their portfolios are also under pressure due to borrowers struggling to refinance or dealing with dwindling cash flows.
➥ THE TAKEAWAY
Getting ready: While commercial real-estate lending volume has seen a dip due to reduced property purchases and borrowing, and refinancing activities have declined owing to the high-interest rates, there is still a ray of hope. Some lenders, such as insurance companies and specific nonbank lenders, are still active, providing them with a unique advantage. Furthermore, some mortgage REITs are prepping to capitalize on potential future opportunities once the market stabilizes.
📖 Read: Apollo Global Management’s merger with Athene Holding was expected to be an M&A blunder. Yet two years on, the firm is doing better than ever thanks to some clever financial engineering in Bermuda.
▶️ Watch: Wilkshire Lane’s Adam Demuyakor thinks that the CRE market may soon see a pickup in repurposed commercial properties. Find out why on this segment from CNBC’s Fast Money.
🎧 Listen: Isaac Collazo and Jan Freitag unpack the latest hotel performance and demand trends, discuss the news affecting the numbers, and provide their off-the-cuff take on hospitality in this episode of the Hotel News Now Podcast Network.
Hidden gems: Huntsville, AL tops CBRE's list of smaller tech markets in North America with strong growth potential, offering specialized skills and 14% more tech jobs over the past 5 years.
Skyscraper dreams: NY-based RFR Realty plans to build a 104-story, 1,049-foot supertall in downtown Miami with hotel and residential units.
Tracking debts: The CRE Finance Council (CREFC) and the National Council of Real Estate Investment Fiduciaries (NCREIF) are developing a measure to track the performance of open-end debt funds in commercial and multifamily.
Student housing steals the show: The 2023 U.S. Student Housing Preleasing Report shows that student housing is 89% preleased in the Rocky Mountain states, achieving record rent growth and offering investors high risk-adjusted returns.
Fraudulent financier: Robert Matthews was sentenced to over 5 years in prison for multimillion-dollar frauds across three states, causing over $30M in losses to banks and investors.
Following the compass: Compass (COMP) has finally achieved positive cash flow despite lower revenues in Q2, which are down 26% YoY.
Striking gold: Colony Hills Capital buys a 440-unit apartment complex in Princeton from Kushner Real Estate Group and Goldman Sachs (GS) for $115M.
Cooling markets: Detroit's CRE sales in mid-2023 are significantly lower compared to prior years, with only 936 sales worth $991M, as high rates and changing market conditions dampen activity.
Tiptoeing around: Foot traffic growth in US malls slowed in July compared to June, but visits to lifestyle centers were higher than in 2022.
The game-changer: Real estate industry investors, including Zillow (ZW) founder Spencer Rascoff have invested in mobile game startup Closing Theory, which is creating a real estate game using real-world houses and data.
Double trouble: Landlord groups CHIP and RSA, representing rent-stabilized landlords in New York, may merge, combining lobbying efforts and membership.
Fiscal strain: Rising financing costs and operating expenses are pressuring net operating income, impacting debt service coverage ratios and refi attempts for multifamily operators.
Economic empire: Empire State Development leases 117,181 SF at 655 3rd Ave. in Midtown Manhattan, becoming one of the largest new leases in the area this year.
Hidden proptech gem: Washington, DC is an underrated proptech hub with well-established companies like Hilton and Marriott and a growing VC community.
Building the future: Nationwide construction efforts are facing current worker shortages and future work shortages due to rising inflation and rates.
Crunching numbers: Trepp's July 2023 report shows a 6.62% CMBS special servicing rate, an increase of 20 bps.
US office leasing saw its largest quarterly increase in two years as tenants seek smaller spaces. In Q2, signed square footage is expected to reach 98.5M, according to Phil Mobley, CoStar Group's national director of US office analytics. However, this is still 13% below the average quarterly total between 2015–2019.
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