‘We Can't Raise Rents Fast Enough’: South Florida Multifamily Market Soars (But So Do Costs)
In South Florida, where the population is booming and homeownership is out of reach for many, multifamily developers have been able to command high rents in their fully leased apartment complexes. But building new projects is challenging because land is only available between the ocean and the Everglades, and savvy sellers are not letting go of their property easily.
“I can't buy stuff in this market. It's completely out of sorts, in my judgment,” Coral Rock Development Group principal Michael Wohl said during a Bisnow webinar regarding South Florida multifamily May 21.
Construction costs have jumped, and there’s no shortage of competitors in the industry. Amid these market conditions, several multifamily developers said they have been getting creative in all aspects of the business, from site selection to uses to joint ventures.
“We have, in one respect, a big tailwind, and [in] another respect, a big headwind," The Altman Cos. co-CEO Seth Wise said. "The tailwind obviously is the demand, at least in the multifamily and rental space. Tenant demand is off the charts, and we're setting records of leasing activity on a weekly basis."
He said the company is raising rents to levels materially higher than what it projected 18 months ago.
Such improvements in net operating income could help combat increasing costs. But, Wise said, “if the inflation and construction cost continues at the level that it's been at, it's going to dramatically slow new starts because rents just can't keep going the way they've been going.”
“In the affordable space, cap rates have fallen dramatically. We used to sell affordable housing developments 10 years ago at a seven cap," Wohl said. "Now, in good locations, because of the demand and because of the funds that are out there chasing affordable deals, everything is selling sub-five.”
In order to combat costs, Coral Rock is doing a lot of value engineering.
“Frankly, we don't look at anything that includes structured parking anymore,” Wohl said, adding that he is focusing on mid-rise projects.
“What I mean by that is we're mixing in hybrid models of fully furnished micro-unit rentals along with a co-living platform and extended stay with a 15-day minimum, and that's helping us get the type of yields that we are targeting and our investors are looking for,” Kapoor said.
Wohl said he has been convincing potential sellers to come down on their sales price and take a stake in a joint venture with him in lieu of the extra cash. A portion of their asking price would be better reinvested in the development, he said. With this structure, at least the deal becomes feasible, even though he has to give up some of the back end to the seller.
Kapoor said he is exploring similar partnerships.
“It’s possible to say, ‘If you think the land is worth X, then take the ride with me.’”
Eden Multifamily President and Chief Operating Officer Jay Jacobson said it feels like he is competing with every other multifamily builder in the world in South Florida, and supply chain issues are driving up prices while driving down availability on everything. Lumber costs on one project alone almost tripled from pre-pandemic prices, he said, and today would cost about six times what he had originally budgeted for.
His firm tore down a shopping center in Tamarac, but even those sorts of redevelopment sites are few and far between, he said. Jacobson landed on a successful formula building one-story apartment communities interspersed with some two-story condo homes. They have a density of 12 to 14 units per acre, but they have backyards that appeal to residents.
"Costs are a little bit cheaper than doing three- and four-story," Jacobson said. "We've got 1,200 units going under construction around the state in that configuration this year, and we're building the platform up to handle about 2,500 units a year throughout the southeast U.S."
Shoma Group President and Chairman Masoud Shojaee said demographers predict 4 million people moving to South Florida by 2030. He is going for height and density in areas previously neglected by multifamily developers, like Hialeah, where he has 1,000 people on a waiting list for a project, he said.
"We can't build them fast enough," said Kevin Neal, head of real estate development in Florida and managing director of Trinsic Residential Group. "We have a lease-up in Boca right now — 320 units, we got to 50% leased in three months."
His firm raised rents 14% in four months, he said.
"Delray rents are up about 5% last month and in North Miami Beach, they're up about almost 4% in the last month, and occupancies in all three of those markets are 97%, 98%," Neal said. "We can't raise rents fast enough."