Miami is bolstered by a strong tourism sector and population growth, but how has the market fared through the economic tumult of 2023? Multifamily & Affordable Housing Business (MAHB) recently interviewed Robert Kaplan, executive managing director at Cushman & Wakefield, about the state of the market. Kaplan and his team are the newest members of Cushman & Wakefield’s Equity, Debt & Structured Finance group, which provides a full-spectrum financial services platform to both domestic and international clients.
MAHB: Can you contrast the differences in multifamily transactions in Miami between 2023 and 2022?
Kaplan: The number of multifamily sale transactions in Miami dropped dramatically in 2023, down over 60 percent compared with the record high activity in 2021 and the first half of 2022. All brokerage firms are still facing that trend going into 2024, including Cushman & Wakefield.
The increase in interest rates that kicked off in March 2022 has been making its way through the system, pushing up financing costs as well as cap rates, which means lower values for properties. Since late 2022, multifamily properties have generally been taken to market out of necessity, typically through pressure from lenders where refinancing loan proceeds were insufficient to take out the existing debt, and investors were either unable or unwilling to contribute additional equity to make up for the shortfall.
Owners who can hold on or refinance and wait for better times will do so, save for merchant builders who are motivated to exit deals as quickly as possible, even if the exit value is lower than anticipated. Merchant builders’ interests are tied to a deal’s internal rate of return, which erodes quickly over time. In response, the Cushman & Wakefield team has been focused on arranging debt and equity for multifamily developers and investors looking to recapitalize properties to take advantage of what we all assume will be brighter days ahead rather than potentially taking losses today.
MAHB: A recent Wall Street Journal article reported that Miami has the highest number of multifamily units under construction based on percentage of inventory. What figures do you have to support, or refute, this claim? How many units are currently actively under construction, and what percentage of the total stock is that figure?
Kaplan: In terms of having the highest number of multifamily units under construction as a percentage of existing inventory, the figures depend on whom you ask. Different data sources define the geographical area or the date of the data differently.
In any case, Miami competes with several other cities for the title, including Nashville, Austin, Raleigh and others. A recent tally from CoStar Group, for example, does place Miami at the top of the list with a ratio of 14.9 percent (27,293 units). Austin is close behind at 13.8 percent (39,719 units), trailed by Nashville at 11.7 percent (19,077 units). In Raleigh, the number of units under construction is 14,010, which accounts for 11.3 percent of total inventory.
MAHB: Most data indicates that approximately 90 percent of the units under construction are luxury/Class A apartments. Can you provide any additional context or insight about the idea that the Miami market is over-loaded toward the affluent renter? Is that true?
Kaplan: Yes, the vast majority of units under construction are in the luxury category, which has been driven by the demographics of new residents relocating here in recent years, particularly since the start of the pandemic. New residents are primarily coming from metropolitan areas with much higher income levels compared with the historical and current averages seen in Miami.
These new, wealthier residents essentially bought up most of the existing stock of luxury single-family homes and condominiums, leaving a severe lack of for-sale inventory. This impact, coupled with South Florida’s relative scarcity of land available for new homes, is driving many new residents to seek luxury rental apartments as the only alternative, and this is before even considering the growing trend of affluent renters-by-choice.
Whether the market is overloaded with such product is still to be determined, however, with the development pipeline slowing down as a result of the current interest rate environment, we suspect that the new inventory will eventually be absorbed. This may mean a temporary increase in vacancies and reduction in rent growth in the near term, but it will likely lead to a new equilibrium.
It is also important to keep in mind that we are coming off a couple of years of blistering rent growth driven by the influx of new residents, which was not sustainable, so it is no surprise that rents are retreating to some extent or that concessions are returning even at otherwise stabilized properties. Looking forward, we predict the next wave of multifamily rental units will be even more luxurious and high-end, responding, again, to the tremendous demand of the very discerning new renters expected to continue coming into the market in the foreseeable future.
We interact closely with other teams at Cushman & Wakefield, including our office and retail leasing teams. Their experience with commercial properties mirrors what we see in multifamily, which is that there is very strong, continuing demand in Miami, and throughout South Florida, for a higher level of quality demanded by newcomers not historically found here.
Another interesting point is that while many new-to-market companies have announced new office leases, many employees of those firms, including executives and managers, have not yet relocated to the area. These incoming renters will contribute to future demand.
MAHB: What will make these high-end properties attractive to investors? Who’s going to want to buy?
Kaplan: The biggest challenge today is uncertainty looking forward regarding cap rates, financing costs and even operating costs, particularly insurance. Equity investors require significantly higher projected returns to compensate for these risks, which is essentially an impossible hurdle today, further reducing the number of new projects coming out of the ground or new acquisitions. Reaching a new level of equilibrium is critical to rebalancing the market, including less volatility in revenues and expenses, more predictable growth trends and, ideally, lower interest rates relative to the peaks we have seen since March 2022.
MAHB: With so much of the spotlight on luxury rentals in the city, are there any multifamily investor opportunities flying under the radar that we might see in 2024?
Kaplan: One quiet trend we’re seeing is that certain prime sites previously slated for multifamily rental projects are being re-evaluated for potential for-sale condominium use. In Florida, developers are able to use buyer deposits, which today range anywhere from 30 to 50 percent of the purchase price, toward construction costs. With proof-of-concept achieved through presales, unlike multifamily rentals subject to whatever market conditions exist down the road upon delivery, and lower leverage required by way of using the deposits, financing is much more readily available for condominiums than multifamily rentals.
MAHB: With investment sales down 60 percent between 2022 and 2023, do you expect to see more trades in 2024 than you did last year?
Kaplan: Yes. In the savings and loan crisis of the late 1980s and early 1990s, distress in the real estate market led to widespread foreclosure sales at deep discounts, which only benefited the buyers.
In the financial crisis of the late 2000s, and similarly in the initial phase of the 2020 pandemic when loan defaults spiked, rather than forcing borrowers to give properties away for pennies on the dollar, lenders opted for an ‘extend and pretend’ approach. Lenders understood that it made sense to let qualified borrowers continue owning and operating properties through the downturn instead of taking properties back and selling into a distressed market.
In the current environment, however, while this approach has been employed widely by lenders, we are starting to see them put more pressure on borrowers, driven in part by more pressure from regulatory agencies intent on maintaining the overall integrity of the financial system, albeit with some pain involved for everyone. We expect this trend to compel more sales in 2024 than seen in 2023.
MAHB: This past year, we’ve heard a lot about capital that’s been sitting on the sidelines, riding out the unstable-interest-rate environment. Can you provide a little more insight and color about this pent-up investor demand and how it might play out in Miami?
Kaplan: Again, a lack of clarity on future cap rates, financing costs and operating costs, particularly insurance, has many investors frozen until market conditions stabilize. Additionally, as happens in every downturn, many investors have piled up cash preparing to pounce on properties in distress, and those distressed opportunities are just not materializing in large numbers.
We don’t foresee the dam breaking, so to speak, on asset dispositions until investors feel more confident about predicting future conditions or lenders start putting more pressure on borrowers. Once more properties start coming to the market, whether through pressure from lenders or as a result of market stabilization, we expect private investors, including family offices and high-net-worth individuals, to benefit the most, at least initially, since their biggest competitors, institutional buyers, tend to move more slowly and cautiously.
Private investors also tend to have longer investment horizons, allowing more leeway in prices offered and other terms of the sale. Regarding the types of properties that will garner the most attention, it will likely be the best-located, highest-quality properties, reflecting a flight to quality, as well as affordable and workforce housing, which is more readily financeable than market rate properties.
MAHB: Which submarkets in and around the metro are growing the most right now and why?
Kaplan: Over 50 percent of new multifamily projects under construction in Miami are located east of I-95 between the Miami River to the south and I-195 to the north. This includes downtown Miami, the Arts & Entertainment District, Miami Worldcenter, Wynwood, Midtown and Edgewater.
Aside from Brickell, these areas offer the highest density of office employment, shopping, and dining and entertainment options in the county and all of South Florida. This dense area is also well served by public transportation, unlike most areas outside the urban core.
MAHB: What unique or surprising trends are you seeing emerge in the Miami market that would be most interesting for apartment investors to think about?
Kaplan: One new, unique factor for Florida came about last year that could have a significant impact on the multifamily market. In March 2023, Florida Senate Bill 102, known as the Live Local Act, was signed into law.
In a nutshell, the law allows developers to build multifamily projects on sites that are not zoned for residential use, including sites intended under the zoning code for industrial and office, if at least 65 percent of the square footage is for residential use and at least 40 percent of the units are restricted as affordable for at least 30 years. Under the law, the density is limited only to the highest density allowed for other residential projects in the jurisdiction and height is limited to the higher of three stories or the highest allowed for commercial or residential developments within one mile.
Additionally, the development plans must be administratively approved without public hearings or meetings. The law was intended to promote the development of much needed affordable housing, but has unsurprisingly run into complaints and litigation from municipalities who feel control over their neighborhoods is being usurped by the state. Between proposed amendments and litigation, the dust has not yet settled, but we are following the topic closely.
Robert Kaplan is executive managing director at Cushman & Wakefield. Prior to joining Cushman & Wakefield, Kaplan was a principal of The Ackman-Ziff Real Estate Group and head of the firm’s Miami office.