COVER STORY, APRIL 2006

LONGING FOR LAND
Multifamily developers seek untraditional avenues to build their product as the search for land continues.
Daniel Beaird

The ever-growing population of urban centers in the Southeast has led multifamily developers on a search for available land close to the action. Developers have turned to mixed-use as multifamily dwellings rest on top of ground-floor retail space. Meanwhile, the question to convert or not to convert is on the minds of investors, who are wondering if the condominium market can remain white hot. From the Florida markets to Atlanta to the Southeast’s secondary markets, the availability of land is driving the future of the Southeastern multifamily market.    

The recent condominium conversion craze set records last year. Florida markets, already suffering a land scarcity, saw prices soar as condominium developers devoured Class A rental complexes, converting them into for-sale units. “Condominium converters can spend a little more because rents seem to be so constrained and they have converted the best rental properties,” says Joel Brockmann, vice president of development for Lane Company. With the loss of Class A rental properties, renters are beginning to feel a significant void. “But, the condominium developers have made it very difficult for other developers to rationalize the economics of buying what land is still available to develop a rental property,” Brockmann says.

However, after last year’s success, the condominium conversion craze could be in for a downturn. “The bloom is falling off that flower,” says Jeff Tabor, managing partner for Titan Real Estate Investment Group. “Deals are not selling at the pace they once were and buyers will be back in the driver’s seat before long.” According to Tony Martin, executive vice president of the Florida division for Tarragon Corporation, that is because the condominium conversion market witnessed so many one- or two-time buyers that changed the market. “The market will slow in terms of acquisitions,” Martin says. One- or two-time buyers will vacate the marketplace as soon as the quick condominium flip is not profitable anymore. “Anytime a Web site called condoflip.com comes up, it is a testament to how many investors are trying to flip condominiums as quickly as possible,” Tabor says. “Those kinds of deals have huge negative cash flows.”

“Many people were spoiled because single-family homes and condominiums were selling at prices that none of us ever expected,” Martin says. “The condominium market is coming back to reality, but it is still a good business to be in.” It is still a good business to be in because, according to Martin, single-family housing is beginning to be priced beyond what some can afford. In turn, this creates more renters for condominium and apartment owners.

The high number of conversions in the last year has not left much to convert, which, according to Brockmann, could also help strengthen the apartment market.

Not only are developers fighting the price of land, but they can face resistance from the local government as well. “Because the multifamily sector is growing so fast, especially in Florida, government agencies tend to want to slow us down,” Martin says. “But these are the same agencies which are promoting the state of Florida as a nice place to live. When the population grows, it needs to have a place to stay.”

The multifamily markets in Florida remain the most stable in the Southeast. As the dust begins to settle from the conversion craze, a substantial reduction in inventory has led to a tight marketplace for Florida apartments. According to Marcus & Millichap’s 2006 National Apartment Index (NAI), Fort Lauderdale is predicted to maintain its position as the tightest apartment market in the state, and second in the nation behind Orange County, California. In Fort Lauderdale, like so many other Florida markets, multifamily development is being hindered by high costs, so investors have been bidding higher prices for existing units. The median price per unit in Fort Lauderdale last year was $102,000, up 27 percent from 2004.

“Florida is unique in that it offers a retirement place, a vacation spot and the job growth is solid,” Martin says. Not many other markets offer that combination, which has led to tremendous population growth in Florida. Miami (25) rose six spots in Marcus & Millichap’s 2006 NAI due to the large number of multifamily units expected to come online, while Tampa (12) and Orlando (17) jumped seven and four spots respectively because of above-average job growth and vacancy improvement. “There have been a number of condominium sales in South Florida,” Brockmann says. “I don’t know if the market will be as strong as it was the past 2 years, but it will definitely continue to grow.”

Now, developers are turning to tear-down sites to find the operating room necessary to build. “It is very difficult to find available land, so we have to look at tear-down sites,” Brockmann says. Markets outside of Florida, like Atlanta, are making the same tear-down possibilities available to developers. Lane Company is tearing down two office buildings in Atlanta to build multifamily developments. “Who would have thought the office markets would be soft enough that it is affordable to tear down an office building and replace it with multifamily housing,” Brockmann says.

In Atlanta, Brockmann predicts that the apartment market will strengthen and the condominium market will  grow at a reasonable pace. “Atlanta has changed its mindset,” Brockmann says. “Ten years ago, Atlanta was not a big condominium market, but that has changed and people continue to buy and sell condominiums.”

Overall, apartment development is slowing in Atlanta as it is witnesses a strong for-sale market. The Buckhead submarket is experiencing the highest number of condominium conversions in the market. But, apartment development remains strong in the Buckhead and Midtown submarkets of the city as Atlanta’s population begins to move back into the city to avoid some of the worst traffic in the nation.

Lane Company’s $71 million, 303-unit ATL Lofts sit atop the retail and entertainment district of the Atlantic Station community in Atlanta.

As developers search for available land for multifamily sites, apartment markets in the large Southeastern MSAs are expected to rebound from the onslaught of condominium conversions seen last year. Higher mortgage rates will reduce the flow of renters to the for-sale market, and will bring some homeowners back to the rental market.

Opportunities for multifamily development, while slim, have presented themselves in the forms of mixed-use developments, tear-downs and condominium conversions. With job growth on the rise in the Southeast, the demand for multifamily housing is also rising. Developers have recognized the trend of moving back into the urban core. Now, it is a matter of working with local government authorities and finding the space necessary to meet the demand of the multifamily markets.

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