WeaveReport South Florida Multifamily

MULTIFAMILY MARKET UPDATE SOUTH FLORIDA

In 2022, there were 631 multifamily sales totaling 26,390 units and just under $9 billion in volume. This is the second highest year on record. Pricing remains strong with all three South Florida counties (Miami-Dade, Broward, and Palm Beach) experiencing record average per unit sales of $350,874; $312,369, and $385,215, respectively in 2022. South Florida multifamily fundamentals remain enviable versus virtually anywhere else in the U.S. Following record rent increases in 2021, effective rents continued to increase in 2022 by 6.6% in Miami-Dade, 4.8% in Broward, and 1.4% in Palm Beach County. Vacancies marginally increased in all three counties as deliveries outpaced absorption, but the market still favors the landlord on leases. Within the last year the 10-Year Treasury increased from around 1.75% to 3.5% (and topped out at 4.25% in October 2022). In effect, the 10 Year Treasury has doubled in the last year, and sales volume remains strong. How can this be? There are several factors as outlined below: Let’s start with timing. In the first half of 2022, there was $5.1 billion in sales (57% of total sales), versus $3.9 billion (43% of total sales) in the second half of 2022. So, yes sales volume dropped in the second half of 2022. However, if you annualized the second half of 2022 it would still represent the third highest sale activity in South Florida ever. While sale activity is down from record levels it has remained elevated despite a challenging debt environment. Overall sales will likely be down in 2023 but still above pre pandemic levels. Next is pricing. Cap rates have increased due to the higher cost of debt. Cap rates today are ranging between 4.25%-4.5% for Class A properties. Class B and C cap rates are ranging between 4.75% to 5.5%. Many sellers have acknowledged the higher cap rates and deals continue to happen. Interestingly, this has not translated into any noticeable price changes. For example, in the second half of 2022, South Florida witnessed a record average per unit sale price of $353,382 versus $331,802 per unit in the first half of 2022. With the uncertain macro backdrop, sellers’ priorities have shifted, with surety of closing deals now at the top of their list. Depending on terms, debt today ranges between 5% and 6%. In most cases the in place cap rate is below the interest rate. There are three prevailing reasons for this: 1) Many private capital investors have capital lined up or are nimble enough to swap to an all-cash offer as the debt markets shift. In many instances, private capital investors are looking towards acquiring smaller properties on an all cash basis and anticipating putting on new debt one to two years after acquisition at more favorable interest rates. Where once an investor would seek a larger acquisition with leverage, they are now focused on similar equity outlays, often with proximity to properties they own, but on an all-cash basis. Consequently, 2023 is expected to be a very active environment for deals that are $20 million or less. $9BILLION :: SECONDHIGHESTYEARFOR MULTIFAMILY SALES IN SOUTH FLORIDA.

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2) Rent growth remains elevated, despite being below the records seen in 2021, and investors recognize that there remains significant upside on deals that have notable loss-to-lease or value-add potential. 3) South Florida multifamily fundamentals remain excellent and arguably the best in the U.S. There continues to be an influx of domestic capital, mostly made up of high-net-worth investors, that are looking to invest in South Florida as they seek to move capital and sell assets in states where rent restrictions are becoming burdensome. Despite the bullish sale activity and multifamily fundamentals there remain headwinds. The Fed is committed to reducing inflation, which is creating volatility in the interest rate and financial market environment. Financial markets will stabilize as the path of the Fed becomes clearer and the proverbial basic rules of the game are better grasped. Typically, interest rates and the financial markets respond swiftly as the Fed cuts rates. Even before rate cuts, as the markets gain clarity on terminal (peak fed funds rate), other rates including treasuries, corporate bond yields, and comparative CRE lending spreads. The 10-Year Treasury decreasing 75 basis points in the last three months suggests this downward movement has already begun. The increase in population will continue to have implications for South Florida’s multifamily market. Last year, the world’s population reached 8 billion. In 1974 the worlds population was 4 billion, so it has doubled in less than 50 years. South Florida’s growth is even more pronounced. The region today is home to over 6.3 million people. In 1979, South Florida’s population was 3.15 million, so it has also doubled in just 43 years. The growth of the region shows no signs of slowing and with an array of corporate relocations and people moving to the area, the population growth will keep increasing in the coming years. In fact, by 2030, the South Florida population is forecasted to grow by 7.5% to over 6.8 million. There will always be bumps in the road, but South Florida’s multifamily resiliency is unquestionable. News headlines, inflation, and fears of a recession can skew judgement. Fellow Englishman Winston Churchill once said. “ The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty.” South Florida multifamily will continue to be a bright spot and the optimists in the market recognize this. In the following section are compiled key data points along with thoughts and commentary on the South Florida multifamily market: