Concessions Creep Into Latest Miami Apartment Entry

For Chicago-based Magellan Development, its first foray into Miami's hot multifamily market has been hitting the metrics it expected so far: Pre-leasing is on track. Rents are ticking well above $3/SF on some units.

What Magellan's Trudy Castle (above) said the developer wasn't counting on at Midtown Five was needing to bait some renters with incentives, like a free month to sign on the dotted line.

When pre-leasing began in September on the 24-story, 400-unit apartment high-rise at 3201 Northeast First Ave, Castle said the company added the incentive of a free month's rent to encourage people to sign leases during the pre-construction phase.

“Our initial pro forma did not plan on a first-month rent special,” she said.

Since opening its doors Jan. 1 to residents — nearly three dozen have moved in and 70 units were leased as of press time — Magellan has removed incentives on its most popular unit type: The studio apartments, which average nearly 600 SF and are achieving an average of $1,720/month (or rents in the high $2.80/SF range), she said. Rents overall range from the high $2/SF to mid-$3/SF range, depending on size.

“I can tell you that our first month free rent has been removed from the studios and off of our top floor,” she added. “We watch the market very carefully, and we watch the trends.”

Midtown Five is among a new stock of for-rent Miami apartments; more than 9,000 new units will hit the market through 2019, in addition to the 7,200 units that delivered last year alone, according to a Q3 2016 report by Marcus & Millichap. Miami is certainly not unusual in that regard; many of the U.S.' major cities are seeing a multifamily boom with robust supply of new apartment complexes in urban centers.

Despite the huge influx of apartments, fundamentals in Miami have remained strong, with Marcus & Millichap expecting a nearly 4% increase in average Miami-Dade County apartment rents, up to $1,351/month, matching the previous year's growth.

“Demand for rental housing so far [in 2016] has been at heightened levels on the back of solid job growth and a surge in home prices,” officials stated in the report. "New stock can’t come fast enough to meet this demand, pushing vacancy down to near-record lows as more households seek out a residence in Miami-Dade."

In Miami, long-term rent growth has maintained, with average apartment rents in Miami surging from $1,988/month at the start of 2011 to surpassing $2,300/month by the start of 2016, according to RentJungle.com.

Unlike other major cities, Miami's multifamily stock isn't just apartments, but a huge supply of new condominiums hitting the market, most of which have foreign, absent owners to in turn rent units out to residents.

According to the Miami Downtown Development Authority, rented-out condos were adding nearly 7,000 units to the market as of Q3 2016 in the greater Downtown Miami area alone. Add to that the prospect of 14,000 more units getting started if developers hit pre-sale numbers, according to the report.

All that could add up to some trouble in paradise. RentJungle's stats show average apartment rents in Miami have remained relatively flat since the middle of 2016.

"Actually, Miami, we're going to probably let it take a breather,” said Steve Patterson (on left), president and CEO of Related Development, Related Group's mixed-use and rental division. Miami is Related's home turf, but the firm is set to break ground this month on the redevelopment of the former Tampa Tribune building in Tampa — transforming it into an eight-story, 399-unit apartment project.

As for Miami — especially Downtown Miami — Patterson said Related was concerned that the condo production there would affect the rental market.

“We elected not to get in the middle of that,” he said.

Aside from the Tampa Tribune redevelopment, Related has a handful of mixed-use apartment projects targeted to start this year, including in Atlanta. And Patterson said Related has budgeted for possible concessions there, too.

He's bullish on the industry overall and dismissed fears that the market could collapse as the condo world did just before the Great Recession.

“Apartment vacancies are the lowest they've been in 20 years and we're worried about the market falling apart on us? That's nonsense,” Patterson said.

Yes, the rental rate increases we've seen in the recent past will probably decline, Patterson said, but a cohort of Millennials still living at home and expected to hit the rental market as job growth improves will bolster multifamily.

Multifamily growth has certainly spooked financiers, especially in banking, with many of the national banks pulling back on market-rate multifamily lending. At a recent Bisnow event, Walker & Dunlop managing director Brendan Coleman expressed concern specifically about Miami on a recent trip there when he saw all the construction cranes.

“I said, 'Oh, no, this is what was going on in 2007, and those didn't get built till 2010'” he said. “Now I look at those cranes over Miami and that feels like a bubble to me.”

For Magellan, optimism still runs high for Midtown Five.

“Personally, what I have seen at this building has been indicative of a very strong market for rentals,” Castle said. She cites its Midtown location and amenities — an entire fifth floor dedicated to socializing, with a pool, cabanas, an open-air kitchen with a handful of grills, an indoor/outdoor yoga studio, a lounge, a fitness center, a steam room and a dry sauna. Plus, at least for renters, apartment landlords aren't absent and located in other countries like many condo unit owners.

All that, Castle said, should feed demand for units at her project and would mean incentives should eventually bleed off.