SOUTHEAST SNAPSHOT, DECEMBER 2004

South Florida Multifamily Market

South Florida remains a national trendsetter in the multifamily market, and the condo conversion market is having an enormous effect on the area. While a strong conversion market is helping long-term owners cash out at high returns, condominium purchases are removing renters from the tenant pool. In addition, a firm supply of construction is adding to vacancy levels. Continued in-migration and above-average employment growth, however, bode well for apartment owners’ concerns about vacancy. We’re also seeing sales occurring in rapid succession in South Florida despite elevated vacancy rates, a trend we expect to continue over the next year.

Palm Beach County Continues to Grow

Palm Beach County is getting a large share of multifamily construction, in part because the West Palm Beach metropolitan area is quickly becoming a hub for cutting-edge bioscience and medical technology industries. In addition, the availability of land for development sets West Palm Beach apart from its South Florida neighbors. Multifamily inventory grew by 23 percent between 2000 and 2003, and we expect another 4.6 percent expansion this year as developers add 955 units in North Palm Beach and 600 units in Century Village. Sales prices are up by 20 percent in West Palm Beach this year.

Investors Target Hollywood

In Broward County, Hollywood is gaining increased attention from investors due to its affordability and renter demand. The median price in this submarket is 20 percent less than in the rest of the Fort Lauderdale metropolitan statistical area. A typical property here was built in the 1960s and has fewer than 20 units. The city attracts younger professionals as a result of its cultural centers, beaches and popular nightspots. Asking rents average $960 per month, and owners enjoy a 6 percent vacancy rate. Population should increase by 20,000 over the next 5 years.

The Good News for South Florida’s Economy

Employment in South Florida is forecast to grow by 2.5 percent in 2004, an increase of 56,000 jobs. The Fort Lauderdale MSA is expected to add more than 22,000 positions by year’s end, a 3.1 percent gain. In addition, the 14,600 jobs added in Palm Beach County this year are likely to be higher paid due to growth of the medical technology and bioscience industries in the area. We expect this growth to boost renter demand for Class A/B-plus units in the West Palm Beach MSA.

Housing prices in South Florida are relatively high and rising, which bodes well for the multifamily market. The median price for an existing home in the tri-county region is currently 45 percent more than the national average, and values are rising at a faster rate. This continuing escalation of housing prices will boost demand for Class A apartment units as young professionals get priced out of the for-sale market.

Construction Begins its Decline in South Florida

Developers are forecast to deliver 6,700 units to the South Florida market this year, down slightly from 2003. For 2005, we anticipate that construction activity will decelerate further as fewer than 6,000 units are scheduled to come on line. The West Palm Beach MSA will account for 40 percent of the total as builders are expecting increased in-migration into Palm Beach County due to projected economic growth in the near term. Crucial to South Florida’s apartment market is the continued development of condominiums through construction and conversion. The rapid increase in the number of condos is significantly eroding apartment inventory in dense urban areas and along waterfronts.

Owners Anticipate Rising Vacancy Along with Slightly Rising Asking Rents

The bad news is that vacancy is forecast to rise by 20 basis points by year’s end to 7.2 percent. The spike in condo purchases combined with the high level of construction will overshadow the current strong in-migration to the area and the effects that conversions have on the local apartment stock. These trends are most notable in the Miami MSA, where vacancy will increase by 30 basis points this year to 6.8 percent. Vacancy in Dade County’s Kendall East submarket is expected to jump more than 300 basis points this year, largely due to 500 new units coming on line near the end of 2004. Vacancy in Palm Beach County is on track to increase by 20 basis points to 10 percent by year’s end. In Broward County, we expect only a minor 10 basis point increase to 5.4 percent.

Asking rents are forecast to grow in South Florida by 2 percent to $980 per month by the end of 2004. Still, this increase represents the smallest annual rent gain in more than a decade, attributable to the many options available to renters. South Beach has the highest asking rents in the region at $1,437 per month; however, we anticipate a minor downward adjustment by year’s end. The strongest rent growth, at 4.5 percent, is taking place in submarkets located in the southern part of the Miami MSA, due largely to population growth in the area and its affordability.

South Florida Sales Remain Hot

The median sales price has increased 4.9 percent year-to-date, and we anticipate moderate growth throughout the remainder of the year. Strong demand for condominiums is pushing apartment prices higher as investors race to land properties ripe for conversion. Investors are also trying to accumulate assets prior to a spike in interest rates, which has produced aggressive bidding. The Miami Beach area has had more transactions this year than usual, and the median sales price has increased to $75,000 per unit. While there have been several sales this year of properties with more than 500 units, more than 75 percent of transactions involve properties with fewer than 50 units, many of which are destined for conversion.

In summary, an improving economic outlook and strong demand for condo conversions in South Florida are fueling transaction activity as aggressive investors seek opportunities and push apartment sales prices higher. In addition, despite an increase in 2004, apartment vacancy remains near the national average, and accelerated job growth over the next few years will boost tenant demand and occupancy rates.

— Gene A. Berman is a senior vice president and regional manager of Marcus & Millichap’s Fort Lauderdale office.

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