Job and population growth make Tampa apartment market fundamentally sound

(First of three parts)

Of all the commercial real estate sectors that have experienced significant growth during this prolonged economic cycle, none has added more square footage to existing inventories or taken down more land than apartments.

Multifamily rental development along the Gulf Coast and into the Interstate 4 Corridor has exceeded that of the industrial, hotel, retail, office and self-storage sectors thanks to a number of macro-economic trends, but the key drivers are two figures: Sustained employment growth and population in-migration.

In the nine-county region comprising Hillsborough, Pinellas, Pasco, Polk, Manatee, Sarasota, Charlotte, Lee and Collier counties, more than 44,000 new apartment dwellings have undergone construction — roughly one for every full-time resident of the city of Sarasota — in the years from 2015 to 2019.

The Tampa Bay submarket has by far been the most active of the region’s three, adding more than half of the entire new inventory, with 26,062 new units, according to building permit data collected by real estate researcher CoStar Group and an analysis of government documents and brokerage firm materials.

The new multifamily rental complexes, with names like Nine15 Apartments, Channel Club, Element, The Pearl and Camden Pier District, to name but a few, offer in many cases urban locations and amenities that reflect modern apartment living.

"We’ve had a growing economy all along the Gulf Coast and in Florida as a whole over the past five years, with population growth that’s been at least twice the national average and job growth some two to three times above the U.S. average in many places,” says Brian Alford, CoStar’s director of market analytics in Central and West Florida.

“The Tampa area, in particular, has experienced really tight multifamily rental vacancy and strong real estate fundamentals.”

Hillsborough County, which includes Tampa, led the way in the four-county submarket, adding 13,006 new units in the five-year period. Pinellas County, where St. Petersburg is located, followed, with 7,140 new apartments during the same period.

Polk and Pasco counties saw a combined 5,917 new units start construction.

Hillsborough also is the only one of the four counties to add at least 1,000 new multifamily rental units in each of the years since 2015, according to the data.

Brad Capas, an executive director at commercial real estate brokerage firm Cushman & Wakefield who specializes in apartment sales, says the growth in rental units has dovetailed with the transformation of the region’s economy and its employment drivers.

“Tampa used to be considered strictly a back-office town,” Capas says. “For years, it was a hub for call-center employment, jobs that were plentiful but were relatively low paying. Today the city’s labor market is much more well rounded, and there’s a tech base that’s evolved with a higher paying workforce, and as a result, developers are targeting the area.”

At the same time, demographic and socio-economic shifts have catapulted rental interest and demand throughout the Gulf Coast and Florida.

Most notably, renting an apartment for many is no longer considered a stepping stone to home ownership.

The so-called “renter-by-choice” class includes Millennials aged 18 to 37 years old who want the perceived freedom renting can bring as well as baby boomers, born from 1946 to 1964, who are often empty nesters seeking relief from the obligations of owning a single-family home.

“The housing crisis of the past decade was so significant that it resulted in a cultural shift in America,” Capas says. “Case in point: I’m 59. When I got out of school my main goal was to buy a home. Today, people that age are less enamored with home ownership. Many saw what happened to their parents or their friends in the recession and have decided to take a different path.”

Unlike previous generations, too, that phenomenon may not change with age. A recent survey of renters by Apartment List found that 12% of Millennial renters say they plan to “always rent.”

For developers, the potential pool of eager renters, combined with abundant available financing for multifamily rentals as an asset class; the sector’s traditional status as being largely recession proof; sustained occupancies over the past five years; and projected incremental rental rate gains through at least 2022 have driven new construction.

Moreover, many apartment investors target newly constructed apartment projects for purchase because they require less capital investment, at least initially, than older product, thus generating higher yields on a cash-on-cash basis. That, in turn, provides developers with a potential exit strategy — a critical factor in development.

But by far, sustained occupancy levels and rental rate gains are the most compelling factors that have led to new product.

In the greater Tampa Bay area, for instance, average occupancy rates have stayed relatively level — from 95.3% in early 2015 to 94.6% at the close of last year — despite the introduction of more than 100 new apartment complexes, according to commercial real estate brokerage firm Newmark Knight Frank.

Meanwhile, rents have risen an average of 31.6% percent from 2015 through the end of 2019, Newmark Knight Frank data shows, to $1,285 monthly.

Some analysis paints an even rosier picture. A recent Property Club survey found that rental rates for a two-bedroom apartment in Tampa rose 52% during the same five-year period, with rents rising there to an average of $1,400 monthly.

And despite that growth, some forecasts contend rental rates will continue to rise incrementally, at least in the near term. AxioMetrics, another real estate research group, concludes that rental rates in the Tampa-St. Petersburg-Clearwater metropolitan statistical area will rise by another 2.6% annually through 2022.

“Tampa, specifically, has been one of the leaders in terms of job growth in Florida,” says Arturo Pena, vice president of development for the Miami-based The Related Group, which has developed a handful of new apartment projects in the Tampa Bay area over the past five years, including the 21-story Icon Harbour Island in downtown Tampa, which sold last November for $131.5 million.

“And the city, the leadership, has invested to make that growth possible. Tampa International has invested more than $1 billion in improvements over the past 10 years, and they’re expected to invest another $1 billion in the next few years,” Pena says. “That’s important, because it makes Tampa easier to get to and do business in. That’s part of the reason it’s becoming more a hub for jobs.”

But while the region has experienced significant growth because of new employment, there are few signs that the apartment boom is waning.

Although development in the four-county submarket of Tampa Bay peaked in 2017, with starts of 6,784 new multifamily rental units, CoStar data indicates, last year 6,077 units commenced — the second-highest figure since 2015.

Most of those units won’t be delivered until late in the second half of this year or into the first two quarters of 2021. As a result, consumers will have a plethora of new product to choose from.

By contrast, 3,318 new units were begun in 2015 in Hillsborough, Pinellas, Polk and Pasco counties.

Developers, though, have to date largely shrugged off concerns about oversupply.

“With the new job and in-migration figures that are projected, I don’t see new inventory being impacted all that gravely,” says Granville Tracy, president of Miami-based American Land Ventures, which is planning to start work later this year on a 22-story apartment tower in downtown St. Petersburg at 334 Third Ave. South.

CoStar’s analyst Alford agrees.

“Demand numbers among renters have held up, especially in the Tampa area,” he says, adding that CoStar anticipates Tampa Bay’s residential rental market will remain strong through at least through mid-2022.

“I think we’re past the peak of supply throughout the Gulf Coast, with the only exceptions being downtown Tampa and downtown St. Petersburg.”

Capas says capital markets will restrain new supply if either population or employment growth begin to dip.

“Lenders and investors will put the brakes on if or when we hit a point of saturation, based on in-migration,” he says. “And remember, development doesn’t occur on a straight-line basis. It ebbs and flows.

“We do anticipate some moderation in development in the Tampa Bay area over the next few years, but that’s logical,” Capas says. “Then again, a lot of folks thought we would have experienced some level of moderation by now.

“It’s hard to look out five years or more, but the West Coast of Florida has really set the stage for a much stronger, much more well-rounded economy than ever before, which would, in turn, bodes well for multifamily developers.”