South Florida Luxury Apartment Boom Eases Rental Rates

Surge in Luxury Apartment Constructions in South Florida Eases Rental Rates

Developers in South Florida are in a rush to construct luxury apartments, risking an oversupply in the high-end market segment despite the continuing influx of wealthy newcomers.

Too much of a good thing: The multifamily construction sector is booming across the U.S., particularly in the Sunbelt, with South Florida leading the charge. The Miami metropolitan area tops the list for units under construction relative to its existing inventory. Remarkably, 90% of the upcoming units are luxury apartments, with most set to be available in 2024. However, developers are facing pressure to quickly rent out these units, prompting concessions.

More vacancies, lower rents: Vacancies in South Florida have risen to 5.6%, with luxury sector vacancies up to 8.5%. CoStar forecasts a rise in the luxury sector's vacancy rate to 11% over the next two years. Rents for more expensive apartments in Miami witnessed a 1% drop in Q2 2023. This is attributed to the growing supply of luxury units and the longer time it takes to rent them.

Drivers of the luxury boom: The current tilt towards luxury development is largely attributed to increased costs in land, labor, and construction. It's difficult to profit from less expensive projects given these rising expenses. Moreover, numerous units that began construction pre-pandemic got delayed due to supply issues, further contributing to the upcoming luxury apartment glut. However, on the brighter side, elevated home prices and interest rates are ensuring a steady stream of renters in the market.

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Housing affordability concerns: Residents of South Florida have been allocating a significant portion of their earnings to housing for years, with current renters spending 10-15% more of their income on rent than a decade ago. The area has the largest percentage of "cost-burdened renters" in the U.S. This financial pressure has caused some residents to leave, resulting in Miami-Dade County's first population decline in many years. To address the affordability gap, a new legislation, The Live Local Act, has been introduced, providing incentives for developers to focus on affordable housing projects.

Two words: Dynamic Pricing.

It’s a simple concept, really. Dynamic Pricing is applied across all industries. It’s a valuable part of any good business’ tool belt.

Airlines charge more for popular flights and less for unpopular ones. Hotels increase rates when rooms are in high demand and decrease them when things are quiet.

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Amazon's Massive $11B Data Center Expansion in Rural Virginia

Amazon (AMZN) plans to funnel $11B into Louisa County, marking a substantial portion of its envisioned $35B investment across Virginia by 2040.

Why Louisa County: Last week, AWS announced an $11B planned data center investment in Louisa County, VA, a sparsely populated county located south of the industry hub in Loudoun County. Despite the county's low population and undeveloped land, Amazon's investment represents a significant development push beyond traditional data center hotspots.

This land is my land: Amazon's investment contrasts with other tech giants, as it primarily focuses on Virginia, a state that's quickly becoming pivotal for the data center sector. This concentrated growth in Virginia might be due to technological needs, especially latency considerations. With Virginia handling 70% of the world's internet traffic and housing key AWS customers, including the federal government, it's an essential locale for the company.

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Data drives the modern world: Virginia has positioned itself as a friendly hub for tech behemoths, with both state officials and AWS praising their collaborative efforts. Governor Glenn Youngkin, along with Amazon's $35B development commitment, proposed new legislation to introduce tax exemptions and other perks for data centers. The pending Mega Data Center Incentive Program, if passed, will further cement Virginia’s position as a data center powerhouse by making rural expansions like that in Louisa County more financially feasible.

📖 Read: An NYC law aimed at bad actors is putting rent-stabilized buildings at risk, causing landlords to face foreclosure and struggle to refinance as multifamily loans mature. The current trajectory is unsustainable, with expenses surpassing rents.

🎧 Listen: On this episode of the Odd Lots podcast, we hear from David O'Reilly, CEO of Howard Hughes Holdings (HHH), discussing the impact of rising interest rates, reduced credit availability, and inflation on the real estate market.

Construction Starts Slip as Dodge Momentum Index Drops by 6.5% in August

US construction industry momentum has been trending downwards lately, as highlighted in the most recent report from the Dodge Construction Network. However, it’s still up on a YoY basis.

Commercial and institutional decline: The Dodge Momentum Index decreased by 6.5% in August to 178, compared to July's revised reading of 190.3. The commercial side of the index dipped by just 1.6%, while the institutional sector plunged by 14.8%. Weak activity in the education, healthcare, and entertainment sectors contributed to the drop in construction starts. Commercial fared better due to strong hotel planning, making up for weak office activity.

Year-over-year improvement: Despite the MoM decline in August, the Dodge Momentum Index is still 4% higher than last year. The commercial sector recorded a 3% YoY improvement, while the institutional sector saw a 7% YoY increase. This indicates that although planning in the institutional sector has been dropping off since May, there’s still overall growth compared to last year.

Tightening the lending belt: Sarah Martin, associate director of forecasting for Dodge Construction Network, noted that a year of tightening lending standards and high interest rates has started to impact momentum, despite construction’s usual resistance to market headwinds. Martin predicts that commercial and institutional planning will likely stay constrained for the rest of this year. However, she anticipates growth will accelerate next year as the expectation of a stronger economy beyond 2024 boosts confidence.

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Growth expected in 2024: The Dodge Momentum Index's drop in August, primarily driven by institutional sector weakness, reflects continued challenges in construction and financing new deals. While commercial planning shows some resilience, the effects of tightening lending standards and high interest rates are impacting other sectors. Despite this, a YoY improvement in both sectors indicates overall growth and a positive future trajectory by 2024.

A year ago, 5.0% of San Francisco homes sold at a loss, but now 12.3% are selling in the red, significantly underperforming the national average of 3.0%. This rate is double that of Chicago and New York, three times Phoenix's, and four times Austin's. Moreover, San Francisco homeowners who sell at a loss now face a median deficit of $100,000, the steepest in the nation.

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