Optimism Prevails in Apartment Sector

(Carl Cronan is editor of Real Estate Florida.)

ORLANDO-The local market for apartments appears to be stable in the long term, despite a slight overall decrease in employment, according to multifamily experts. Job losses in the construction, retail and government sectors are being offset by gains in the hospitality industry, a continual strong suit for the nation’s theme park capital, as well as in the burgeoning medical field.

As a result, investors are optimistic about the area’s long-term prospects and more robust apartment fundamentals in upcoming quarters, says Bryn Merrey, regional manager of Marcus & Millichap’s offices in Orlando and Tampa. Capitalization rates appear to be settling on either side of the 7% mark, and first-year returns could ratchet up as expectations between buyers and sellers realign, he says.

“Buyers may be able to negotiate favorable terms in the early part of 2009,” Merrey says. The trend will be most evident in sales of fractured condominium conversions and deals involving newer properties with low occupancy, especially near major employers in south Orange County, he says.

Although investment activity is expected to remain slow during the first few months of this year, so are additions to Orlando’s apartment supply, according to Marcus & Millichap research. Developers are slated to complete 2,200 apartments in 2009, 500 fewer than last year, while multifamily building permits are expected to total 4,000 units, two-thirds of the amount issued in 2008.

While reductions in professional, business services and financial employment are expected to continue into 2009, Marcus & Millichap forecasts a yearlong decline of 10,600 workers in Orlando, down 1% overall and at least 500 fewer job losses than last year’s total. The anticipated opening of 6,100 hotel rooms will result in 1,200 new jobs in the leisure and hospitality sector, whose employees lean more heavily toward renting apartments than purchasing homes.

Adding to the area’s stronger housing prospects in the coming year is the emerging medical services corridor from Lane Nona to the University of Central Florida campus. Employers such as the Burnham Institute for Medical Research and the UCF College of Medicine are expected to create more than 6,000 jobs.

“Moderate job loss, with some late-year job growth, and improving fundamentals should lead to a stabilization of the Orlando apartment market in 2009,” observes Jay Ballard, senior director with Cushman & Wakefield in Orlando. He points out that the area’s employment market has performed well over the past decade, adding more than 184,000 jobs.

Orlando’s multifamily market continues to recover from a spate of condo conversions that started in 2005 and pulled nearly 20,000 apartment units off the market, according to Cushman & Wakefield research. The number of rental units has steadily increased since that time, to just over 150,000, with the number of apartment communities topping 600, an all-time high.

Cushman & Wakefield points out that total sales volume in the Orlando multifamily sector totaled just over $650 million last year after topping $1 billion in 2007, while the number of completed transactions fell by half over the year to 23. Prices per square foot remained relatively stable at $87, off by only a dollar from the previous year.

Absorption of local apartments is estimated by Cushman & Wakefield at more than 800 units per month, its highest level since 1987, even though current vacancy rates hover just below the 90% mark. One positive note is that the supply side of the equation should be held in check by the challenging capital markets, which limits financing for new construction.

Rent growth in the Orlando market will remain flat through the new year, with asking rents averaging $883 per month, according to Marcus & Millichap. Effective rents are forecast to drop 1.6% to $805 per month as owners offer greater concessions to attract tenants.