The Small Balance Intersection Update - August 16, 2024

South Florida Rent Drops Amidst Surging Apartment Supply

South Florida's rental market is experiencing a notable shift, with several municipalities seeing a drop in apartment rents, a sharp contrast to the significant rate hikes witnessed in recent years. According to a Zumper report, 13 out of 25 municipalities analyzed saw a decrease in rents for one-bedroom units over the past year. Sunny Isles Beach led the decline with a 10.2% drop, followed by Homestead at 5.3%, North Miami at 4.6%, and Sunrise at 4.4%. Other areas like the City of Miami, Hallandale Beach, and Aventura also experienced reductions, albeit smaller. These declines are largely attributed to the surge in new apartment constructions across the region, which has led to a balancing of supply and demand, tempering the previously skyrocketing rental prices.

The region had previously seen unprecedented demand for apartments, driven by an influx of out-of-state transplants during the pandemic, attracted by Florida's early reopening, favorable tax conditions, and desirable weather. This surge pushed median monthly rents up by 58%, reaching an average of $2,988 by March 2022. Developers responded with aggressive construction plans, resulting in over 7,800 new units completed by the end of Q1 2024, with a total of 23,800 units expected by year's end—the highest number of new units since 2002.

Despite these shifts, some experts remain cautious about predicting a long-term downward trend in rents. Ken Johnson, a real estate economist at Florida Atlantic University, suggests that while certain submarkets may experience temporary rent declines due to localized supply and demand factors, overall average rents across South Florida are likely to stabilize rather than drop significantly. He notes that the region's rental market remains overvalued, with average rents still higher than expected based on market fundamentals.

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Caution: Market Volatility Ahead

California Hotel Deals Plummet 50% in 2024, But Market Recovery Anticipated

California's hotel market saw a sharp decline in dollar volume for deals in the first half of 2024, with transactions plummeting nearly 50% from $2.3 billion in 2023 to $1.2 billion. Despite this drop, the number of deals only fell slightly, from 124 to 122, suggesting the decline was driven by smaller, lower-value transactions. Factors such as financing difficulties, particularly for larger properties, and increasing labor costs due to unionization have contributed to the drop. The average sale price of hotels also fell significantly from $18.6 million last year to $9.7 million this year, reflecting the smaller scale of transactions. The most significant deal in the period was the sale of the 122-key Pacific Edge Hotel for $80 million.

Atlas Hospitality Group's President, Alan Reay, noted that the market is facing one of its lowest dollar volumes in the past 25 years, comparable to downturns seen during the Great Recession and the COVID-19 pandemic. However, there is optimism for a rebound in the latter half of the year, driven by expectations of lower interest rates and an increase in distressed property sales. Potential buyers are likely to take advantage of reduced prices and favorable financing conditions as the year progresses, which could lead to a more active market. Reay predicts that the momentum from these developments will carry into 2025, with the market unlikely to drop further from its current low levels.

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Student Housing Market Crossroads

Student Housing Market Sees Slower Preleasing and Rent Growth Amid Evolving Dynamics

The student housing market displayed resilience during the summer of 2024, although key metrics showed signs of deceleration from previous highs. Preleasing for the Yardi 200 schools reached 89.2% in July 2024, slightly below the 94.6% occupancy achieved in fall 2023. Despite this, 41 schools have already surpassed their fall 2023 occupancy levels, including 18 that failed to reach 90% preleasing last year. Average advertised rent per bed increased by 4.7% year-over-year to $897 in July 2024. However, rents have remained stagnant for the past five months, with rent growth slowing from nearly 7% earlier in the leasing season as preleasing activity decelerated. Throughout the leasing season, student housing has seen average rent growth of 6%, which contrasts with the 0.7% growth in conventional multifamily rents since October 2023 and the 0.8% growth observed in July.

Yardi Matrix’s updated supply forecast projects 41,432 beds will be delivered at Yardi 200 schools in 2024, marking a 6% decrease from the previous forecast and a 5% reduction from 2023 levels. The 2025 supply forecast also declined, while the projection for 2026 increased to 33,805 beds, still below the long-term average of close to 40,000 beds annually. The sector is also bracing for the peak in high school graduates expected around 2025 or 2026, which could impact college enrollment. Complications with FAFSA have added uncertainty to enrollment projections for fall 2024, though a recent announcement from the University of California system suggests that record-high freshman enrollment may offset some of these concerns.

Transaction volumes in the student housing sector remained consistent with the previous year’s pace, with 45 properties sold by July 2024 at an estimated average of $81,627 per bed. While the number of transactions remains lower than in a typical year, most property types have seen a noticeable decline in activity compared to the previous year. Preleasing trends also varied widely, with 19 schools achieving 99% or higher preleasing rates, while 25 markets were under 75%, reflecting a divergence in market performance. The wide variation in preleasing and rent growth underscores the mixed dynamics in the student housing market, which continues to navigate supply and demand shifts amidst evolving enrollment patterns.

Read the full report here https://www.yardimatrix.com/

Rent Decline Avenue

Asking Rents Fall Across All Bedroom Counts for First Time in 4 Years

In July 2024, the nationwide median asking rent dropped to $1,647, marking a $53 decline from its peak in 2022. Notably, rents for three-bedroom or larger apartments fell the most, decreasing by 2.4% year-over-year, while smaller apartments saw marginal declines of 0.1% to 0.3%. This marks the first instance since June 2020 where rents fell across all bedroom sizes. The Sun Belt region, especially Florida and Texas, experienced significant rent reductions due to a surge in new apartment constructions post-pandemic. The rental vacancy rate remained at 6.6% for the fourth consecutive quarter, with larger buildings (5+ units) reporting a 7.8% vacancy rate, up from 7.4% a year ago. Despite the rental declines, affordability remains a concern, with renter households earning significantly less than needed to afford typical apartments. Interestingly, the median rent for all bedroom counts rose 0.4% year-over-year due to statistical nuances, although rents remain below the 2022 peak. This period represents a favorable time for renters, particularly those seeking larger apartments, to secure better deals.

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