With Construction Down, Florida Apartments Once Again a Good Option For Investors
Apartments have become a worthwhile real estate investment again, reports the Sarasota Herald-Tribune.
When Sawyer Realty Holdings LLC bought the Town & Country Trust for $1.5 billion this spring, at least part of the attraction was the real estate investment vehicle’s Southwest Florida apartment holdings. The reason? A backdrop of condo conversions and rising construction costs are putting the clamps on new development, and Town & Country has 742 local rental units.
The units are comprised of three well-maintained complexes in Sarasota and Manatee counties, and appear to be a solid investment. Not coincidentally, complexes like those previously owned by the Baltimore-based REIT are in higher demand, and prices are pushing skyward as a result.
“Property costs now are very high,” said Dale Okonow, president of Sawyer Realty, the privately-held management company based in Massachusetts that bought Town & Country’s 37 complexes. “But even so, we’re always looking to add to our portfolio.”
Adding to a Southwest Florida real estate portfolio these days is no easy task, however. At least part of the reason is that so many apartment units in Southwest Florida have already been recently sold. Since 2003, 5,000 rental units in complexes like the Bermuda, Hampton Bay and Saddle Creek apartments have “gone condo,” converted by real estate developers looking to cash in on a real estate frenzy.
“There’s not a lot of product out there because of all the conversions,” said Gary Alvey, president of Sherwood Holdings Ltd., owner of the 386-unit Tuscany Apartments on University Parkway.
In most segments of the Southwest Florida housing market, the shrinking inventory would kickstart a wave of sales and development. Two decades ago, similar dynamics touched off the home building frenzy that resulted in hundreds of new units. Vacancies soared and rents deflated. But today’s Southwest Florida climate is different, with multifamily transactions few and far between.
Likewise, new development has been virtually non-existent, which has shoved occupancy rates in many complexes into the high 90 percent range. Even new apartment projects have fallen victim to the conversion craze. At Serenata-Sarasota, a 240-unit complex at Tuttle Avenue and University Parkway, the $62 million development was conceived as apartments. But, by the time the construction was completed late last year, the developers decided to sell its units rather than rent them.
The projected construction slowdown has been caused by rising construction and land costs. The cost of land over the past four years has in some cases tripled — a significant rise for acreage-heavy apartments. Tuscany, for instance, spans 41 acres. Construction material costs have been just as extreme, with the cost of concrete jumping about 40 percent in the past year, and similar hikes seen with lumber, aluminum and other materials.
What hasn’t gone up, at least to the same degree, are rents. In most towns in Southwest Florida, renting costs have inched up about an average of 4 percent annually since 2000 to stay in line with inflation. While that may be good news for renters, the lack of rent hikes has kept investors and would-be apartment developers on the sidelines.
The Florida housing market and its rising costs have become indicative of much of the country as well. Trends have collided, leaving all but big, deep-pocketed buyers like Sawyer to ponder how to acquire properties in desirable areas of the U.S.
“All the markets where Town & Country had properties are very strong, places like Maryland, Virginia and Delaware. Florida is no exception,” Okonow said.
For some apartment investors, unusually strong occupancy rates and a lack of competition may turn out to be too much of a good thing. Will it be a stronger market going forward, or will the fallout from years of over-development continue to stymie investment growth? Will rising borrowing costs of Florida home loans factor into the mix? Stay tuned.
