We recently completed our periodic market visit in Central Florida and combined that with the Multifamily Mastery 5 real estate conference. In today’s quick snippet we will share our market observations and key takeaways from the conference.
Deal flow is slowly increasing, with more deals coming on the market due to sellers looking to exit in order to avoid future losses and/or preserve capital. However, sellers have not adjusted their pricing expectations just yet, resulting in return compression on prospective deals and therefore more limited buyer appetite or re-trades. Buyer demand is tapering off also in light of the continuously rising interest rates, slow-down in rent growth, and cap rate reversion.
The rent increases over the past couple of months are normalizing (and in certain markets declining). Wage growth has not quite kept pace with the rent growth, thereby making it more difficult for tenants to qualify. In some cases people are choosing to take on roommates, which makes 2-bedroom or large 1-bedroom units more attractive (vs. studios or small 1-bedroom units). Vacancies are starting to increase. This has led to operators either minimizing the planned rent increase or re-calibrating tenant qualification criteria related to min credit score requirements and in some cases minimum income requirements.
The future of the recently voted rent control measure in Orange County Florida is still unclear. While the measure was put on the ballot due to it being voted 4-3 in favor, a lawsuit was filed in September by the Florida Apartment Association and the Florida Association of Realtors, seeking to invalidate the ballot measure. However, the judge ordered that the ordinance stay on the ballot. The ruling was successfully appealed, albeit late, as the measure was already printed on the ballot. Technically the measure is not to be certified based on the appellate court’s decision but that remains to be seen. Miami-Dade, Hillsborough (Tampa), and Pinellas (St Pete) counties are watching closely as they too are considering implementing a rent control measure.
Particularly in Florida, insurance has become another hot topic, with premiums increasing rapidly and in some cases by 30%+.
Labor and material costs remain elevated, which is also putting pressure on capex and rehab costs as well as repair and maintenance expenses.
Cap rates are reversing faster than expected, currently at approximately 4.6% in Central Florida vs. 3% last year, with most assets expecting to trade at 5% (with some variance of the above, depending on the submarket).
How are we adjusting to the changing environment? How to win in this environment?
We are being patient and good stewards of our investors’ capital.
On the acquisition front, while we continue to look for deals, we are being more selective focusing on newer properties (1985 or newer) in strong submarkets and staying true to our investment approach and acquisition criteria. From a balance sheet perspective, we are looking at lower leverage (60% LTV) and fixed rate debt with a minimum hold of five years. We are also increasing the reserve requirements and the cap rate reversion pace. From a p&l and cash flow perspective, we are normalizing rent growth closer to historical rates, sensitizing interest rates and vacancy factors, and making sure expenses (particularly insurance, tax, and maintenance) are in line with current market dynamics. We are also evaluating creative financing strategies that sellers may be more open to entertaining in the current market environment.
On the asset management front, we are focused on tenant retention and minimizing vacancies. As Jake Stenziano said during the recent MM5 conference, “the most expensive unit is the vacant unit”. However, we are not lowering the minimum income requirements in order to qualify tenants. We are also being more selective with various capex projects and only focusing on the must haves vs. nice to have.
We are in unprecedented times and no one knows what the future holds. The more restrictive rate and lending environment is likely to persist in the short run. Unfortunately operators who forecasted exiting the deal at low cap rates or refinancing at low rates or entered into short term bridge debt will be faced with some difficult decisions. This will lead to opportunity to acquire good assets later in 2023 and early 2024 in the markets we operate in and allow us to continue to build long term wealth for us and our investors.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.