Perhaps no sector of the commercial real estate market has seen more volatility over the past three years than multihousing. From a market position grounded in strong fundamentals to a euphoric run to conversions, the apartment market is again beginning to stabilize for owners, potential investors and tenants.
“The good news is that the effects of ‘conversions’ to ‘reversions’ over the last two quarters of 2007 are being addressed and we are seeing an increasing degree of equilibrium return to the market,” says John Selby, a multihousing specialist and senior vice president with CB Richard Ellis in Tampa, Fla. “As such we are encouraged to enter 2008 with some clarity as we seek to provide guidance to our clients.”
Smart Business talked with Selby for his insight on this segment of the real estate market that truly hits home for many.
Can you quantify what the ‘conversion’ effect has been on the Tampa Bay apartment market?
Between 2004 through 2006, approximately 35,000 apartment units were purchased for the purpose of converting to condominiums. That number represents about 18 percent of the total multihousing inventory in the Tampa Bay area. Most were Class A properties, but many were older buildings that required extensive renovation and upgrades. Initially, sales were very strong as buyers made very aggressive offers, capital was readily available for 100 percent financing, and qualification and income standards were relaxed. In the midst of this buying frenzy was always the question of real demand by buyers intending to occupy their home versus artificial demand from investors or speculators. By early 2007, the weaknesses suspected in this over-heated sector became evident, forcing some property owners to start leasing unsold units by offering reduced rent and substantial concessions. These new offerings of upgraded condominiums, as well as investor-owned single-family homes, began to affect the traditional apartment properties. These properties had been benefiting from high occupancies from tenants previously displaced by conversions. In the end, approximately 25,000 of the original 35,000 units purchased for conversion will remain as fee ownership.
How did this scenario in Tampa compare to other Florida markets?
On a stand-alone basis, the area fared very well, especially as much of the growth via new construction served to foster opportunities for residential living in Tampa’s central business district. Statewide, the comparison that draws the most interest is to the phenomenal plan to deliver nearly 60,000 units in Dade County alone. While there are a variety of opinions attempting to assess that market, it is interesting to follow the current activity taking place. Foreign investors seeking to take advantage of quality product, softening prices and a weak U.S. dollar are now aggressively buying in the international city of Miami.
Overall, Tampa’s underlying strong fundamentals have served to bring a quicker sense of stabilization to its market.
Is ‘work force housing’ viable in today’s market?
Yes, if there is a will to make it happen. While there are a variety of incentives potentially available to deliver affordable inventory, the only true variable factor is the cost of land. For instance, if publicly controlled sites can be made available, and there is some flexibility in issues such as density and parking requirements, then the numbers can work. This is a very important component to the overall housing picture in any major city.
From an investment standpoint, what is the status of the multihousing market as we begin 2008?
With equilibrium returning to the market, there are still opportunities for both sellers and buyers. For the seller, cap rates have not increased in proportion to the rise in interest rates and loan spreads. Subsequently, values have held up well and the demand for quality product is still strong. For the buyer, a recovering market that should be back to full strength by the third or fourth quarter, combined with moderated but solid employment and job growth, as well as limited new sites for new development, bode well.
An additional key factor is the increased demand from renters. Many simply chose the flexibility of renting as a lifestyle and now have more attractive options. Additionally, there is an expanded pool of tenants who will rent by necessity based on issues caused by the effects of the adjustable and subprime mortgage fallout.
JOHN SELBY is a multihousing specialist and senior vice president with CB Richard Ellis in Tampa. Reach him at (812) 273-8413 or by e-mail at email@example.com.