Apartments’ profits hit by competition - South Florida Business Journal:
Spiking unemployment, falling demand and growing competition from condo investors-turned-landlords is draining tenants and profits out of South Florida rental apartment complexes.
In September, occupancy levels at apartments in Palm Beach and Broward counties bounced along at lows not seen in a decade. Rents there and in Miami-Dade also continued into another year of decline, according to data from Carrollton, Texas-based apartment research firm MPF Research.
Broward’s occupancy rate of 92.4 is just 0.1 percentage points above a mid-1998 low. Year-over-year rents fell 4.1 percent to an average monthly rate of $1,103.
Palm Beach County’s 91.9 percent occupancy was 0.7 percentage points above a mid-2003 low. Average rents fell 4.6 percent to $1,039.
At 94 percent, Miami-Dade occupancy was the strongest in the region, but average rents fell 2 percent to $1,004 a month. Miami-Dade’s occupancy is 4.7 percentage points above the county’s all-time low of 89.3 percent in early 1998.
“The biggest thing you see this year is rent cuts,” said Greg Willett, VP of MPF Research. “Operators are essentially buying occupancy.”
Free rent now defines dealmaking for many complexes.
In metropolitan Miami, 40 percent of the apartments dangle concessions, MPF data shows. In Broward, the concession rate jumps to 48 percent, and in Palm Beach County, nearly 60 percent of all units are discounted.
At the new Satori in downtown Fort Lauderdale, renters can get up to two months of free rent.
“The concessions drive production,” said Joel Altman, chairman of the Boca Raton-based Altman Cos., developer of the upscale 279-unit Satori. Altman’s strategy: create a niche with green features such as solar roof film to generate power for common areas; super-efficient washers, dryers and HVAC; and luxury finishes inside units.
Rents are among the highest in the area, starting at $1,715 for a one-bedroom unit and going up to $2,700 for a three-bedroom unit.
In downtown Fort Lauderdale, where 781 new units are coming online, competition is particularly intense. Satori competes against two other upscale complexes, 4 Forty Flagler Village and Alexan Solmar, for renters
“The lease velocity is good, the pricing is poor,” said McCallum Parrott, senior managing director for Trammell Crow Residential, developer of the 284-unit Alexan Solmar. In addition to two months’ free rent, base rents were lowered before leasing started to reflect market conditions, he said.
Similar to for-sale housing, apartment leasing and rent growth are tied most closely to employment strength, so rental income isn’t likely to bounce back quickly, experts say.
“The trend is still declining,” said Paula Poskon, a senior research analyst with Robert W. Baird & Co. “I think 2010 will be the trough of the NOI [net operating income] decline.”
Weakening fundamentals and depressed values have trampled South Florida’s once-robust apartment sales market, even though financing is easier to get, due to Fannie Mae and Freddie Mac underwriting.
Apartment sales have plummeted more than 80 percent since 2007 when nearly $2 billion in transactions had occurred by Oct. 31, according to Real Capital Analytics.
“What we are seeing is sellers with a choice choosing not to sell into this market,” said Brad Capas, a senior director at Cushman & Wakefield. “Buyers are looking for deals.”
But, conventional apartments could be setting up for a big rebound in rents by 2012, experts say. That’s because after the current wave of units hit this year and next, few projects are in the pipeline.
Tight vacancy and strong rental growth is in store a few years down the road, said Jay Jacobson, a partner with Wood Partners, which is finishing up a 381-unit complex in Miami.
Wood owns sites in Delray Beach and north Miami-Dade County, but has no immediate plans to develop due to financing challenges.