No replies to this topic

[sunshine]

The year 2003 saw an ever-increasing supply of capital, fueling both acquisitions and debt financing. With all forms of capital continuing to be in surplus — and only a modest increase in the cost of the capital for debt financing — 2004 should see more of the same. However, 2003 was a challenging year for apartment operators. If you were a seller, it was probably a very prosperous year. Why is this happening? Should it happen? Will it continue?

In many Florida markets, apartments have performed poorly from both an occupancy and rent perspective, with possible exceptions for Southeast Florida and Jacksonville. With interest rates at historic lows and with a new apartment supply coming online, today’s renters have more choices than ever before.

Owning a home is cheaper because of low rates. Developers are anxious to lease up their recently completed communities, so concessions are larger or street rents are being lowered. These factors are visible in Orlando, Tampa and West Palm Beach. The good news is that during the last quarter of 2003 most markets showed improvement in job growth, with West Palm Beach leading the way and Miami’s job growth expansion losing some steam. Construction starts are down in most markets, except for Miami and West Palm Beach, which should allow 2004 to be a year of continued occupancy improvement and reduced concessions.

For example, with the positive supply/demand relationship in Orlando, third-quarter occupancy increased almost 2% from the June level. Orlando’s employment base is expected to increase by 3% in 2004, coupled with a decrease in construction starts, allowing vacancy to continue to decline and making the future of Orlando’s apartment market brighter than it has been in several years.

Jacksonville turned in one of the better apartment performances in the nation during the latter part of 2003 and should be a good performer for 2004. Improved rents and occupancy will continue, partly fueled by positive job growth and reduced construction starts, but also by the recent rise in condo conversions talking a bite out of the apartment supply, especially in the beach areas. This phenomenon is also having a positive impact on the rental markets in Tampa and Fort Lauderdale.

On the negative side, absorption of apartment units in some markets will be muted even with the improved positive job growth and reduced multifamily completions. In markets such as Fort Lauderdale (Broward County), single-family homes are more affordable than in neighboring Miami-Dade and will have a moderating effect on vacancy rates and asking rents. However, as interest rates rise, pricing some renters out of home ownership, and fundamentals continue to improve in 2004, multifamily performance will continue to steadily recover in most markets.

More good news: Sellers made out handsomely this past year. CAP rates have continued to decline. In others words, a property’s income probably declined this past year, but its value increased. This should not happen. Many, including myself, argued that it was the declining interest rate environment that brought CAP rates down. I now believe it was the abundance of capital chasing multifamily assets that has brought CAP rates down. The multifamily sector is perceived as the safe haven of commercial real estate.

When compared to the alternatives, such as office, hotel and, to a lesser extent, retail, it is easy to see why. Time will tell if apartments will continue to be the darling of the commercial real estate alternatives. 2004 predictions Assuming no adverse global event, interest rates should gradually rise. Look for a 10-year Treasury around 4.70 by year-end, and expect apartments to improve as an investment type and continue to outperform other property types. Ten-year fixed interest rates will range in the low 5%, increasing to 6%, with floating rates available in the 2.5% - 3.5% range.

As interest rates increase, fewer will be able to afford homes, and the number of renters will increase. This should allow rents and occupancy to increase. Even with rising interest rates, I suspect CAP rates will rise only marginally, if at all, due to the infighting of too much capital vying for too little product. Sellers should experience another good year. Apartment markets in Florida should all improve to some extent, but lest we forget, improvement is not full recovery. However — considering renter demand increasing from the Echo Boom, positive job growth, growth in the 55-64 age group opting to simplify their lives, immigration and the leveling off or decline in homeownership already taking place — sales prices will continue at their current pricing fundamentals.

As one can tell, 2004 will have its own set of challenges. But demand is on the mend in the major Florida apartment markets, which will see rising rents, reduced concessions and higher occupancy. Orlando and Jacksonville should lead the way, with Tampa and Fort Lauderdale close behind.

Let’s keep our fingers, toes and any other body parts crossed that cheap capital and developers’ desire to build will remain prudent so that the apartment markets will be in equilibrium in 2005 and supply will not mute the recovery which is finally under way.

If we carefully obey the apartment fundamentals during 2004, we will get what we want next holiday season.