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Tampa Bay Area
Business Observer Friday, Mar. 20, 2015 6 years ago

Luxury Max

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Some spot a multifamily bubble forming. If it pops, it could catch luxury apartment developers in its wake.
by: Michael Hinman Tampa Bay Reporter

Traffic making use of Azeele Street to avoid downtown Tampa roads can't help but notice the five-story multifamily tower going up between South Packwood and South Rome avenues.

Broadstone at Hyde Park is a planned 259-unit luxury apartment complex developed by Phoenix-based Alliance Residential Co., where rents are expected to run as high as $1.56 per square foot. That's more than 50% higher than the typical $1 per square foot rent for apartments in the Tampa Bay area.

It's one of two major projects Alliance has under construction in the Tampa Bay region, with a 240-unit complex also underway in Clearwater.

Despite the recent popularity of this type of multifamily, some question whether the luxury apartment market will continue to have the demand to fill the rapidly increasing supply.

No longer a sure bet
“The luxury multi-story rental apartment market is perhaps getting a bit too overheated at this point in the cycle,” says Hank Fishkind, the prominent economic consultant and principal of Orlando's Fishkind & Associates. “I wouldn't be anxious to be building, and I wouldn't be anxious to be financing new multi-story luxury apartments in Florida's urban areas right now.”

The biggest obstacle facing those developers comes with the lag time between planning a project and opening for business, Fishkind says. That typically takes 18 to 24 months, and the real estate market can change a lot during that time.

When luxury projects started heating up in 2013 and 2014, many would-be homebuyers couldn't get a mortgage. So instead of sending a $1,500 monthly check to a bank, those residents turned to luxury apartments, only to find a shortage of available units at that level.

The pent-up demand made financing luxury rentals a near sure bet, and it didn't take long for developers to start scooping up land, especially urban infill similar to what Alliance did with Broadstone.

But the markets of 2016 and 2017 -- when many of these units will be delivered -- will be much different than a few years before. Banks are starting to relax when it comes to mortgages, especially for homes above the $250,000 mark. And potential renters might find it difficult to justify spending $1,500 a month on a rental, rather than on a new home.

No vacancy
But not everyone sees the market like Fishkind — who took some flak in 2008 for not getting the housing market's demise right in his projections.

For example, Randy Ferreira, managing partner for Blue Rock Partners in Tampa, has been on a bit of a buying spree locally of existing rental properties. He paid as much as $93,000 per unit for the 207-unit Cameron Lakes Apartments in Clearwater, among other acquisitions. The average price paid per unit for multifamily space is $72,609, according to the CoStar Group.

And there's no reason why he shouldn't. Vacancy in the greater Tampa Bay region is floating around 6% from nearly 10% just five years ago, according to Cushman & Wakefield.
Demand has outpaced supply so much, average rents have increased 18% during that same time period.

“The housing market is still difficult for would-be buyers to get qualified, and many others can't buy homes because of what happened previously with their credit,” Ferreira says. “The bubble, in my opinion, will come more from a ceiling for the renters, because at some point, they will be unable to pay the amount of rent that everyone continues to push and push up.”

Rising rents mean it's a seller's market for multifamily. Cameron Lakes, for example, is a 30-year-old community that just a decade ago sold for $69,000 per unit -- a jump of 35% from the height of the housing market boom.

“Prices are getting to the point where they barely make sense,” Ferreira says.

Avoiding bubbles
Bubbles are almost always a part of the real estate equation, but they don't always play out the way experts anticipate. Even Fishkind admits his crystal ball is getting worse and worse, especially as the housing market finds new twists and turns through its current recovery.

John Stone, director of multifamily housing for Colliers International Tampa Bay, agrees with Fishkind that luxury construction is heading for choppy waters. However, the developers who feel the biggest pinch will be the ones trying to cannonball into an already crowded pool.

“The problem doesn't lie with what are they, but more where they are,” Stone says.

He cites the building boom in downtown St. Petersburg, where at least three new luxury projects are coming out of the ground.

“They're not more than a half-dozen blocks away from each other,” Stone says. “They offer all the same things, the same rent, the same amenities, the same everything. I would say they might have some challenges filling up at the rents they expect to.”

Allen Morris isn't worried. He's building the 348-unit The Hermitage on First Avenue South in St. Pete. And when it opens in September 2016, he's confident he'll be charging the $1,800 average rent he expected when he broke ground earlier this year.

“It's not temporary. This is a systemic change in our culture, in particular, the two groups on either end of the demographics -- the millennials on the young side, and the empty nesters on the older side,” Morris says. “They don't want to be worried about the cost of the home, repairs and management. They'd rather go out to eat more, and go to shows.”

In fact, Morris admits there could be an overdevelopment bubble forming in luxury rentals, but it's years away thanks to not only the culture change in rentals, but the fact that there's been limited options for those renters since the housing bust.

If urban cores like downtown St. Petersburg and Tampa are affected, other luxury complexes like Ibis Walk Apartments and Tortuga Pointe in Pinellas County's Gateway area outside the city, might be more insulated, Stone says.

“Those projects are seven miles away, so they're not really competing with each other,” Stone says. “That's the defining line between overbuilding and having a problem, and not.”

What it means
What will luxury developers have to worry about if a bubble pops?

“You're going to have developers who can't meet their underwriting criteria,” Fishkind says. “Those could be units that are somehow restructured, or worse, foreclosed upon.

“I don't think that it will be the kind of bust that we had the last time, but it's one we have to keep a close eye on.”

Stone's outlook is less grim. He points out that despite the changes in single-family ownership trends, multifamily remains hot.

“Those $1,800 rents will become $1,500 or $1,400 instead,” he says. “Those lower rents will attract people who are more about rent, than about the fact that it's a new building downtown.”

Those units will eventually be absorbed, he says, and while it might potentially cut expected returns on investment in half, it likely won't put any developers in front of foreclosure court judges.

“That 4% might not be what some of these developers wanted, but it won't bankrupt them,” Stone says. “That might force some of them to hold onto these properties longer, but that longer hold might be worth it over time.”

Rents out of control?
Buying, building and owning multifamily rental property is the “in” thing when it comes to real estate, but even the National Association of Realtors -- which would prefer people buy rather than rent -- fears there could be a bubble soon.

A study released this week shows rents are up nearly 13% over the last five years in Tampa, St. Petersburg and Clearwater. However, the income of potential renters between the ages of 25 and 44 has grown just 6.1% during that same time.

That likely won't cause too many to shy away from apartment-living, however, says John Stone, director of multifamily for Colliers International Tampa Bay.

“Most of the people in their late 20s and early 30s have lived through one of the worst recessions that our generation has ever seen,” he says. “That took a lot of people out of their homes, and forced them to watch their own families kicked out.”

That created a sour taste for many would-be buyers, Stone added, who don't want to have to “deal with all that crap owning a home.”

Executive Summary
Industry. Construction, development Trend. Bubble could be forming in luxury multifamily sectors. Key. Firms that get into the market too late could be hurting.

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