South Florida Multifamily 2020 Forecast

ASKING RENT VS VACANCY RATE

GRAPH 3 :: SOUTH FLORIDA ASKING RENT VS VACANCY RATE

$1,800

10.00%

Miami-Dade

Broward

Palm Beach

$1,600

$1,400

7.50%

$1,200

$1,000

5.00%

$800

$600

2.50%

MU LT I FAM I LY I NVE S TMENT | SOUTH F LOR I DA T E AM 4 $0 $200 $400 2010 2011

0.00%

2012

2013

2014

2015

2016

2017

2018

2019

Asking Rent

Vacancy Rate

RENTS CONTINUE TO INCREASE Rents were at record levels for the tenth year in a row in all three counties. In the past decade, asking rents increased by 49%, 43%, and 53% in Miami-Dade, Broward, and Palm Beach counties respectively. 2015 was the high point for rent growth in South Florida – at 8.5%. In 2019, overall rent growth for South Florida was at 2.7%, which was lower than the 3.1% growth in 2018. We anticipate rent growth between 2%-4% in 2020. New product coming to market is being absorbed in short duration which is fueling rental growth. Fears of a rent compression remain unfounded. Class B and C rents continued to have the biggest percentage

CAP RATES/INTEREST RATES TRENDING DOWN In late 2018 and early 2019, many investors were fearful of higher interest rates and the knock-on effect on cap rates. Three interest rate cuts in 2019 eliminated the single biggest concern in the marketplace. At the time of writing, the 10-year treasury was around 1.8% down 100 basis points from a year ago. Cap rates decreased in 2019 by +/- 40 basis points Cap rates today range between 4.1%-4.5% for Class A properties. Class B and C cap rates are ranging between 4.5% to 5.50%. Some value-add properties that have a clear path to higher returns, are trading with in-place cap rates of sub-4% provided the value-add strategy can provide a future return of 5.5%. This has caused some value add buyers to switch to newer product which has comparable in-place cap rates.

increases in 2019, due to strong demand and limited availability. Class A rents faced more competition from new supply. The headroom between B/C properties versus Class A remains significant and could be over $800 per month in certain submarkets. Value-add buyers were improving many B/C properties and increasing rents to fill the gap in pricing within certain submarkets.

CAP RATES Class A: 4.10% - 4.50% Class B: 4.50% - 5.25% Class C: 5.25% - 5.50%

On agency small balance loans with a 70% LTV, overall interest rates ranged between 3.6% and 4.1%. In previous years, interest rate hikes were offset by spread compressions. Conversely, with interest rates decreasing in 2019

VACANCY RATES STILL LOW BUT EDGED UP The South Florida vacancy rate increased year-over-year from 4.9% to 5.2% at the end of 2019. The higher vacancy was attributable to 7,359 new units delivered to market. For the most part net absorption levels offset new supply, however, certain submarkets will witness increased short-term vacancies as several new buildings come online in a short duration. Class B and C properties hovered at less than 4.0%, which was the lowest vacancy ever recorded in South Florida for that property class. With virtually all the new supply slated for completion being Class A there is a lack of market rate workforce housing in the market. EMPLOYMENT & INCOME IS VERY STRONG The strong employment market supportedmultifamily rent growth in 2019. 271,000 jobs were added to South Florida in the past five years, reducing the unemployment rate to 3.3%, the lowest level in over 13 years. In the past year, the median salary increased by 5.8% in Miami-Dade, 5.5% in Broward and 6.2% in Palm Beach County. For only the third time in 10 years, income levels grew at a higher percentage rate than rental rates. Stronger employment and income levels will help with affordability and bodes well for multifamily fundamentals.

spreads widened which resulted in lower cap rates but not proportionally to the lower interest rates. Currently, spreads on 10-year, were 170 bps to 205 bps. By comparison, during the previous real estate cycle, credit spreads on 10-year CMBS loans were as low as 90bps to 100bps. The strength of the multifamily market in the past decade was fueled by cheap debt. Investors have questioned how long the low interest rate environment will continue. With negative interest rates in many parts of the world and limited concerns about inflation, it is more likely we see interest rates go lower than higher in 2020. Low interests rates are the new norm. THE SIXTH BOROUGH At the beginning of the last decade the most active private capital multifamily investors in South Florida derived from Latin America. Now it’s New Yorkers. New York investors were always prominent in South Florida, but we are seeing an unprecedented amount of private capital looking to invest in multifamily. Recent rent control regulations coupled with the elimination of State and Local Tax (SALT) deductions in New York contributed to investors increasingly looking at South Florida for new investment opportunities. We expect this trend to continue throughout 2020.