Jacksonville Business Chronicle | Why Jacksonville's multifamily construction is dwarfed by other major Florida markets

Tampa, Orlando, Miami — and elsewhere in the Southeast — have seen somewhat of a boom in multifamily development, with tens of thousands of apartment units constructed in the past few years.

But not Jacksonville.

Only 12 complexes were built on the First Coast last year, and only 1,600 units were under construction at the start of this year.

Of the major metro markets in the state, Jacksonville has the fewest new complexes by far, with most large metro areas seeing more than 30 new apartment complexes delivered last year. Dallas, Nashville, Houston and others have also seen more growth.

That could be a problem for Jacksonville: With so much capital having already been spent on multifamily development in this economic cycle, it’s highly unlikely that apartment construction here will catch up.

The silver lining for development: If the population continues to grow, a shortage of apartment buildings could lead to rising rents, eating away at the $200-a-unit premium seen in markets like Orlando or Tampa. If rental income does go up, Jacksonville could be well situated to attract developers looking for the next place to put their money.

For now, most of the investor interest in Jacksonville comes in the form of buying existing properties, with $708 million worth of property changing hands in 2015. (By comparison, Tampa and Orlando saw about $2.5 billion in sales.) Just two weeks ago, the 310-unit Brooklyn Riverside came close to a local cost-per-unit record when it sold to a New York real estate investment trust for $58 million.

Brian Moulder and Dhaval Patel, both executive vice presidents with CBRE Inc., represented the seller in that deal and are involved in about 90 percent of the multifamily sales in Jacksonville.

While Jacksonville isn’t seeing the same level of development or sales as other cities, Moulder said, it’s still “guns blazing” in Jacksonville’s multifamily market.

“People need somewhere to live,” Moulder said. “And that’s not going away anytime soon. Multifamily does very well during the ebbs and flows of the economy.”

Even during a recession, investors look to the multifamily developments, Patel said.

He said Jacksonville’s multifamily real estate is very steady: While it doesn’t have the same peaks as South Florida or even Central Florida, it doesn’t have the same lows either.

“Jacksonville is steady Eddy,” he said. “Middle of the market with 4 percent or 5 percent rent growth, and there’s nothing wrong with that.”

Nothing wrong — but for institutional investors, those peaks are important.

And while the dearth of construction here may mean opportunity, the growth rate of other cities in Florida have made them more attractive.

Tampa has 2.9 million people and Orlando has 2.4 million people compared to Jacksonville’s 1.4 million. And it will grow less in the next five years than either Orlando or Tampa, which are each estimated to add more than 250,000 people, while Jacksonville is expected to add about 150,000 people, according to commercial real estate firm Jones Lang LaSalle’s fourth quarter apartment market update.

Still, Jacksonville is adding jobs and population — especially in financial and professional services, with projections putting the area in the top 10 in the country in job growth by percentage of population.

But both Tampa and Orlando are ahead of Jacksonville in that category as well, and their larger populations plus better job growth numbers have caused developers to pick those metros over Northeast Florida.

This matters because there’s only so much capital banks are willing to lend out to multifamily development.

Matt Wilcox, a managing director of Jones Lang LaSalle’s capital market group, said some of the large players in funding multifamily developments have lent out billions to multifamily developments across the country and are hesitant to lend more in that sector for new construction.

And that’s why the economic cycle is important.

Thousands and thousands of apartment units have been built over the past five years across the country, and Wilcox said some financiers are waiting for some of their money to come back before continuing to invest more in that asset class.
The hottest markets have been Atlanta, Raleigh and Nashville, Wilcox said.

“These markets have dominated the multifamily market in the Southeast,” Wilcox said.

Jacksonville, though, hasn’t seen as many of the large institutional players — private equity funds, real estate investment trusts and public real estate companies have large enough pools of capital to invest millions in large-scale projects.

“When institutional buyers are in the market, it lessens the perception of risks,” said Conor McNally, chief development officer at the Atlanta-based real estate firm Carter.

That could change, though — although it’s anybody’s guess as to when.

Institutional buyers have begun to look at smaller markets in search of higher yields, McNally said.

Prices have been pushed up in the larger markets as more foreign investment floods the U.S. with the global economy sputtering.

“A lot of the institutional buyers are looking to the smaller markets because there is so much competition in the bigger markets,” McNally said. "When you look to the future, yes, Jacksonville should see more development, but one thing that is going on in the macro level, is a pull back on the capital side of the equation.”

He said that even though Jacksonville has not over built, there’s a lot of concern that some markets have an over supply concern.

“Unfortunately some lenders may take a one-size fits all attitude,” he said.

RENTING BY DEMAND

One of the drivers of multifamily development, and why experts are optimistic about the future of the industry, is that more and more people are choosing to rent, instead of needing to rent.

“Well after the economic meltdown, there’s a lot of people that could a ord to buy, but they are choosing to rent instead,” said Conor McNally, chief development officer at the Atlanta-based real estate firm Carter.

That reality is reflected in how apartments are designed, with higher- level materials and more care put into projects, said CBRE Executive Vice President Brian Moulder.

“The amenities will just blow you away,” he said. “You walk in and it’s like a Four Seasons.”

Granite counter tops, craftsman finishes and fitness centers are now commonplace and expected from the renters.
Pickier tenants, meanwhile, are often willing to pay more. “You are seeing much higher prices,” McNally said, “and people paying much, much higher rents because they are choosing to rent.”

People saw what happened in the last economic crash as home values evaporated, said CBRE Executive Vice President Dhaval Patel, and it’s no longer the American dream to own residential real estate: In some of the apartment complexes they have sold, the average income of renters is $90,000 to $100,000.

It’s not just the younger generations that are abandoning single-family residential; empty nesters have sold o large homes and have chosen not to buy again.

Carter’s most recent delivery of an apartment complex saw average incomes above $100,000 and the majority of the units rented by people above the age of 50.

“The younger generation wants the flexibility and the older generation doesn’t want the burden,” Moulder said.

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By Derek Gilliam - Reporter, Jacksonville Business Journal

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