Overbuilt Class A Apartments Triggering Concessions in B/C Buildings

Vacancies are at a new high of 9% as 16,000 new units came into the market. Rents are up by 5.4% to an average $720 per month, the highest among Central Florida metropolitant statistical areas.

This is a good time to sell B and C properties, the brokerage suggests.

"Vacancy is anticipated to continue to move upward this year as there is no end in sight to apartment development" in metro Orlando, Steven M. Ekovich, vice president, regional manager, Marcus & Millichap, tells GlobeSt.com.

"Rent concessions are becoming more common in the B and C sectors, a trend which will continue as these properties have a more difficult time retaining tenants," Ekovich says.

Apartment starts totaled 14,800 last year. Demand for class A product remains strong because the cost of single-family homes are still too expensive for most renters, the broker says.

Job creation in the services sector is driving the demand, but it is an engine that may not be firing on all cylinders, Ekovich projects.

Services sector workers "earn relatively low salaries and are especially sensitive to rent increases," he says. "Eventually, class A rents will become unaffordable to many of these service sector employees. When this occurs, class B and C units will become more affordable units," a trend expected to take hold this year.

Even as this scenario is moving onto center stage, the report notes the Southeast-Airport and Seminole County submarkets are showing "definite signs of softening." Mentioning Seminole County as soft is a surprise since Seminole is the most affluent county in Central Florida.

Ekovich explains it this way: "These markets have high levels of construction; rents that have seemingly peaked; and sky-high (construction) prices ($90,000 to $150,000 per unit). Owners in these areas should be aware that while new properties are filling quickly, vacancies are rising in older properties with fewer amenities."

The broker concedes construction is slowing, but contends that "as long as potential renters continue to flock to new product, now is definitely a good time to consider selling, or at least repositioning older class B and C properties."

Investment sales have increased steadily in the past three years, a direct result of the large number of class A transactions, the report states. "They experienced greater rent increases and thus greater value increases than class B and C properties," Ekovich says.

Orlando's apartment inventory of 137,000 units has a higher number of new, large complexes than other areas of Central Florida as "developers have taken advantage of the area's growing population and availability of land," he says.

But the downside to that scenario is "the enormous amount of new apartment construction in Orlando during the last five years has left no outstanding areas for future projects," Ekovich believes.

The highest investment sales have been in the Southeast-Airport and Seminole County, two submarkets the broker feels are softening. The average sale per unit in Airport-Southeast is $58,000; in Seminole, $50,000.

On the buying side, the report predicts the Apopka-Ocoee submarket in the city's northwest quadrant is the strongest of Orlando's submarkets for potential buyers. "If there is a solid multifamily investment area in Orlando, this is it," Ekovich says.

For developers, there should be abundant capital for new product even with the cautionary overbuilding note. "Once again, lender demand for multifamily product will lead all commercial real estate categories "as key performance indicators for the (apartment) sector remain favorable for the next 12 months," the broker predicts.

"Apartments will be in a strong position even if the economy falls into recession, as home purchase become less of a possibility for many," Ekovich concludes.