- November 27, 2020
Over a two-day period in early February, two out-of-state investment firms spent nearly $250 million on a couple of apartment complexes in Fort Myers.
While outside investors dropping large sums of money on Florida property dates back to the days of Henry Plant and Henry Flagler, the price tags for the two properties were eye-popping because the pair of complexes are not large, luxury condo developments on the water, but average, bread-and-butter apartment communities that dot every city and suburb nationwide. Just as eye popping is how much these two properties have appreciated since late 2019 and early 2020, the last time the complexes changed hands.
Together, the purchases of the two complexes is even more proof of what anyone with even a passing interest in real estate already knows: With a shortage of housing to meet the demands of a growing population, the need for solid multifamily properties to house both current residents and new ones is extremely high. Big money investors see the demand and solid cap rates due to rising rents as an opportunity.
The deals are also a signal that if you are lucky enough to own one of these coveted communities, you may want to think of cashing in.
“It’s hard to say whether it’s going to be the new normal because we haven’t seen sales like that previously,” says David Sepulveda, an associate specializing in multifamily at the Fort Myers commercial real estate firm CRE Consultants. “But with the influx of people (who) have been coming to Lee County, it could very well be the new normal. You have a lot of national money coming in, you have a lot of REITs that are coming in investing in this hot market. And they are willing to pay what they may see as a fair amount to secure a spot in this market.”
The first property to sell was Las Palmas, on Marquina Boulevard, to Charleston, South Carolina-based PassiveInvesting.com. The investment firm paid $109 million for the 300-unit complex Feb. 10, according to Lee County property records. That is almost $100 million more than the $7.5 million it sold for in October 2019, records show — and an appreciation of 1,353.33% in 28 months.
The following day, Feb. 11, The Retreat at Vista Lake on Winkler Avenue sold to Dallas-based real estate investment firm Crow Holdings for $139.5 million, according to county property records. The same 640-unit complex sold in February 2020 for $96 million. That's an appreciation of 45.31%.
The prices shattered the price per unit average in the area, with The Retreat selling for $217,968.75 per unit and Las Palmas going for $363,000 per unit. In Southwest Florida, the average unit price for multifamily properties was $158,432 in 2019, $157,359 in 2020 and $229,780 in 2021, according to data from Real Capital Analytics, provided by Colliers.
Neither investment company responded to questions about how the properties were found, what made them attractive investments or what the plans are for the communities.
While the price tags may seem enormous, from an investor’s point of view they offer a solid return. Why else would they invest, correct?
The properties, and similar ones likely to follow, are B and C Class assets — meaning there is room to make improvements in individual apartment units and on amenities. This will both attract new residents and justify increasing rents on current ones.
One common misconception, say some industry executives, is investors buying properties at the higher prices now are basing their decision on the skyrocketing rents in Fort Myers. Once those rents stabilize or begin to fall as more housing inventory comes along, the returns will be much lower.
That’s not necessarily true, says Nelson Taylor, market research director for LSI Cos. in Fort Myers.
Taylor says most multifamily complexes sell at a 5% cap rate. He says it’s not that new buyers are willing to take lesser yields, it’s that it so happens the rents have gone up so much year-over-year “that that same 5% cap rate on a rent that’s up 40% year-over-year produces a higher value per unit.”
“As costs go up, so does everything else,” Taylor says. “So, they’re basically buying these things on similar rates of return as they have been. So, if income on the apartments are up and I’m still willing to pay 5% cap rate on that rent, well, then the price of the unit goes up 40% as well. So that’s why we’re effectively seeing what we’re seeing.”
The demand driving the high prices is likely to keep on going. According to a January report from Freddie Mac’s Multifamily Research Center, for one, forces that “have pushed multifamily market fundamentals to record-breaking levels” are unlikely to change any time soon.
The report found there were nearly $79 billion in sales of multifamily properties in the third quarter of 2021. That brought total sales for the first three quarters of the year to $179 billion. Moving into this year, “demand is expected to remain strong and, given recent elevated levels of permits and starts, completions should also remain elevated.”
“For 2022, we forecast gross income growth of 3.6% and the vacancy rate to remain flat at 4.8%,” says Freddie Mac, the Federal Home Loan Mortgage Corp.
But with the growing rents, there is also a major need for housing that’s affordable to average residents. And those type of developments are bringing in big dollars as well.
One example? New York-based Redburn Development Services announced March 4 it will build a 336-unit workforce housing complex at 2010 Hanson St. in Fort Myers. The total project, the first for Redburn in Florida, is expected to cost $71.7 million.
Elizabeth Young Jojo, executive vice president at Redburn, says the company was able to get a tax increment financing (TIF) rebate of $8.2 million from the city to help with costs. The project, expected to break ground in May with the first phase completed by late next year, is in its early stages. So much so that in an email with renderings attached Jojo warns “these are still conceptual, as we are working through the planning process and making tweaks as needed.”
(This story has been updated to include the correct number of units and a per-unit price for The Retreat at Vista Lake.)