The Brokers from Florida Investment Real estate participate in numerous conferences and educational sessions in different parts of the State so that we can keep abreast of trends for the benefit our clients
Last week I attended the Annual CCIM West Coast Florida Chapter Outlook Conference. Below is my report based on discussions with and between multiple brokers, developers and market participants regarding the current state of the market for commercial real estate in Tampa Bay
We will start off with the Multi-Family Market
The Multi-Family property market in Tampa Bay is very healthy especially in the urban core where there is great demand. In the core markets apartment vacancies are very low. For instance vacancy is under 5% in the West Shore and Channelside districts of Tampa and St. Petersburg also has a very high occupancy. Like the rest of the country, Tampa Bay is experiencing the trend of a move back to urban living. Nobody is building office buildings in downtown Tampa. The Urban core is growing in with restaurants, museums and multifamily. This trend will likely continue. A Florida State University statistic cited that 25% of 18-24 year olds do not have a driver’s license. The trend is for people to be down town and not drive. In St Pete developers are seeing many tenants not even using the parking spaces.
Brokers report that in the multifamily market there is strong demand across the board and they expect the market for multifamily to continue to perform well.
On multifamily investment properties Sellers are receiving 7 to 10 offers for each property that is offered. There is no question that there is a deep market for Multi-Family Investment. For Class A and high Class B the there is even more depth to the market. Some Sellers are receiving as much as 40-50 offers for each listing.
Because of the low vacancy rates there are now new multi-family projects coming up in Tampa Bay. A lot of the projects leasing out now or that were recently started are projects that were on the drawing board when the recession hit in 2008 2009. These represent the first wave of new product coming onto the market. Now newer deals are in the works and the second phase buildings are already in permitting . The pipeline in planning is huge and the concern should be overbuilding. The question is whether they will be enough people to fill the high-rise developments.
For the new developments in the first phase costs in some projects already reached above $210 per square foot. For the high-rise apartments following behind, the rental market construction prices range from $175 – $215 per square foot. As an example, The Strazz the stress with 350 units will be at $215 a square foot. Whereas high-rise construction costs can easily exceed over $200/sf this can be dramatically increased where the structured parking is required. Structured parking can bump these developments into a much higher level with $10,000 per parking space being at the lower end of the range. To afford the rent required to support this price of development, the tenant has to earn around $72,000 per year. So the concern is whether the job growth is expanding fast enough to support the higher rents that will be required for the new developments.
Second and third tier markets are less costly. Downtown edge developments are at 150/sf ft. For rental projects but in suburban areas prices come down to $110/sf for stick frame garden style construction. Construction costs for three-story walk-up in the suburbs may be at $70/sf. Labor is another factor that will affect multifamily development construction costs. During the recession Florida lost 70% of the labor force. Not only did we lose a lot of labor, contractors went out of business so that now for the current market there is not enough labor. This could be the perfect storm for price increases in new construction.
Permitting fees in different jurisdictions can also be a factor. Impact fees can be the biggest detriment to multifamily development in Florida. In Sarasota, for instance, permitting fees can run at $12,000 per unit which creates barriers to entry. In Tampa and Pinellas the costs are much more reasonable running approximately $1,500 per unit in Tampa and around $2,000 per unit in Pinellas
Cap Rates for investors in the multifamily market are compressed. Part of this is caused by low interest rates where developers can finance at low rates. For Class A we have seen some Cap Rates at 5%. In Class B Cap rates are compressing to 6%. In Class C properties, in general Cap Rate seems to be in the 6 to 8% range. Cap Rates are historically low because there are so many more buyers than Sellers. If you can find Class C properties in A locations that is a home run.
So what will happen to Cap Rates in the future? If interest rates go up then Cap Rates invariably have to move up. As the economy improves job growth should increase, interest rates should increase and so should Cap Rates, but the high demand for product from Multi-family Buyers will maintain downward pressure on the Cap Rates. Participants in the market feel that there is a three to five-year window for multifamily development.
Other nontraditional forms of multifamily development have also been improving for instance tax credit Florida housing which comprises probably no more than 20% of the market. Most of this goes to Miami area. One of the hottest multi-family markets in the State is the South Florida Fort Lauderdale- Miami area. The market there is different in that area because the condo market is very strong. Developers in this market are often already armed with 50% cash deposits from buyers that they use for development. However multifamily rental deals are also coming back across the board. The Orlando Tampa and Pinellas markets are doing well. Everybody seems like the urban downtown core concepts especially in areas like downtown Tampa, West Shore and St. Petersburg.