Higher Borrowing Costs Cool South Florida’s Sizzling Multifamily Market
Higher Borrowing Costs Cool South Florida’s Sizzling Multifamily Market
Buyers are offering less, lenders are pulling back, and developers are slowing down
South Florida has been one of the hottest rental housing markets in the nation. But even in sunny Miami-Dade, Broward and Palm Beach counties, higher interest rates have cast a shadow on debt-funded acquisitions of apartment buildings and multifamily development.
Despite the fundamental strengths of South Florida, including low unemployment and a growing population, the five interest rate hikes by the Federal Reserve from March through September are proving to be tough hurdles. The hikes raised borrowing costs, restraining apartment investments by leveraged buyers and complicating construction financing.
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Lofty rents and low vacancy rates also have encouraged apartment development despite higher interest rates. South Florida apartment rents average around $2,500 a month, and apartment vacancy rates are lingering in the low single digits, according to a third-quarter 2022 market report by brokerage firm Lee & Associates. In June, the apartment vacancy rate was 3.6 percent in Fort Lauderdale and 4 percent in West Palm Beach, and vacancy in Miami was likely to settle at 2.6 percent by year end. Developers expect to deliver 11,957 newly built apartments in the three metro areas in 2022 — about half of them in Miami, a third in Fort Lauderdale, and a fifth in West Palm Beach.
But even in development, higher borrowing costs are having an effect. Though rental housing market conditions remain strong in South Florida, pricey construction loans could imperil projects by compounding the problems of lofty labor and material costs. “There’s just a lot less construction financing available now,” said Trez Capital’s Forman. “A lot of the banks have pulled back.”
“A lot of the lenders who normally would be hungry to do new deals are indicating that they want to revisit projects in the first quarter of next year,” said Peter Mekras, president of Miami-based Aztec Group, a commercial real estate lender. Mekras was working with several developers who were set to start construction of multifamily projects. “But there’s probably just as many [multifamily] projects that are teed up and ready to go that will be shelved temporarily, or for a longer term,” he said, citing tougher terms for construction loans.
Some developers say higher costs for labor and materials are a bigger challenge than elevated borrowing costs. “The interest rates are not that big of a deal,” said developer Matthew Jacocks, a principal of Lee & Associates South Florida, who plans to build 245 apartments together with 10,000 square feet of commercial space in Lauderhill, a suburb of Fort Lauderdale. Jacocks expects to obtain a construction loan with an interest rate in the range of 6 percent to 9 percent, which he would pay off with a permanent loan. “We’ve talked to FHA lenders about permanent financing, and FHA is pretty aggressive; we’re looking at 5 percent,” Jacocks said in an interview in early October.
“The more prohibitive aspect is the construction costs that have increased,” he said, citing price increases since 2021 for various types of cement that range up to 19 percent, or $30 per cubic yard. “That has a bigger effect than interest rates, really.”
Development sites are expensive, too. The Everglades, the Atlantic Ocean and other geographic constraints limit land availability as South Florida’s population and economy expand. “There is a lack of housing, and there’s more product needed,” Weaver said. “But there’s a limited amount of land in South Florida. It’s not like, say, Dallas or Las Vegas, where they just build and build.”
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About Lee & Associates South Florida
Lee & Associates South Florida is a fully vertical commercial real estate brokerage firm focused on industrial, office, retail, multifamily, investment and land sectors. Our dedicated team of professionals is led by Matthew Rotolante, CCIM, SIOR a 4th generation South Florida native in a family that has owned and operated commercial property here since 1928. Lee & Associates is the largest agent owned brokerage in the nation with Senior Agent’s ability to earn profit share resulting in the highest splits while still receiving full resources, support and leads from our national network. Our collaborative and cheerful culture allows for open communications throughout the company, fostering the sharing of information and best practices to better enable client decision making. The Lee & Associates’ robust national network that sold and leased nearly $32.4 Billion in 2021 offers clients a cross-market platform of expertise and deal opportunities across all asset specialties and representation roles. For the latest news from Lee & Associates South Florida, visit leesouthflorida.com or follow us on Facebook, LinkedIn, Twitter and Instagram, our company local news.
About Lee & Associates
Lee & Associates is a commercial real estate brokerage sales, leasing and management firm. Established in 1979, Lee & Associates has grown its service platform to include over 75 offices in the United States and Canada. Lee & Associates is the largest agent owned commercial real estate brokerage where agents get the greatest return for their efforts and hence are more committed and better enabled to provide superior results for their customers. For the latest news from Lee & Associates, visit lee-associates.com or follow us on Facebook, LinkedIn, Twitter and Link, our company blog.
