Highly favorable demographic trends, Influx of new investors targeting lower yields, and added competition among buyers are driving up pricing.
After a pause due to the uncertainty around the COVID-19 pandemic in the middle of 2020, transaction activity is ramping up significantly for multifamily investments in Tampa, Orlando and across Central Florida. There is phenomenal interest from well-known, national investment groups and local investors entering the market.
Investment activity in the Tampa area spiked during the fourth quarter of 2020, jumping 80 percent from the third quarter. Record transaction volume is projected for the year to come, with activity expected to be largely focused on newer apartment properties.
An influx of new and very well-capitalized investment groups is fueling a dramatic upward shift in pricing. Cap rates in Central Florida are dropping 25 to 50 basis points for all product types: value-add, newer properties, and properties that are going through their initial lease-up. In recent years, many developers waited for properties to get near 90 percent occupancy before marketing them. Today, developers are starting the valuation and marketing process much earlier and often are getting unsolicited offers when they are 50 percent, 60 percent, or 70 percent leased. New properties that traded in the low 4s six months ago will trade for mid to high 3s this year.
There is very little pushback on where pricing is heading for well-designed assets in the best submarkets of Tampa, St. Petersburg and Orlando. We are also seeing a clear resurgence of investor interest in the submarkets in Orlando that are more dependent on the parks and tourism.
A big factor fueling the sales at the top end of the market has been new development. For newer, garden-style properties in Tampa, we recently experienced an 8 percent increase in less than one year. The average sale price was $214,000 in the first three quarters of 2020 compared to $231,000 in the last two quarters (Q4 2020 and Q1 2021).
Additionally, the development pipeline is robust. Developers are bringing new projects online to meet increasing renter demand, which should lead to ongoing, strong investment activity.
Many of the buyers that are making the best offers on top properties are well-known investment groups. Some have been active in Florida for years; however, a growing number are coming to Florida for the first time after building a large portfolio of multifamily properties in other markets across the United States. In addition, we also see growing interest in this market from investors in Europe, Latin America and Israel. There are often multiple offers on assets, and many properties are not even making it to the formal listing process before bids come in and a buyer is selected.
Why are apartments so hot and why Central Florida?
Since the multifamily sector has outperformed many other commercial real estate sectors during the pandemic, investors are chasing apartment deals. Central Florida is particularly sought after due to its healthy market fundamentals and influx of new residents. People are moving out of costly, densely populated urban areas, a trend triggered by COVID-19, and into more affordable cities like Tampa and Orlando.
According to a recent report by Redfin, Orlando had a net inflow of 61,000 residents in 2020, the third-highest city nationally, only behind Phoenix and Dallas. Tampa came in fourth with 47,000 new residents.
These migration trends and solid demographics are helping keep vacancies low while asking rents are ticking higher across Central Florida. While investors were active across several segments of the multifamily market in 2020, activity was more pronounced among newer projects, and that trend is expected to continue.