Rising interest rates slow apartment deals across South Florida

Rising interest rates slow apartment deals across South Florida

By   –  Reporter, South Florida Business Journal
Oct 24, 2022


Rising interest rates are making it difficult for developers to build more apartments and investors to close on multifamily building deals.

Matthew Jacocks, principal of Lee & Associates Commercial Real Estate Services' South Florida office, said rents will likely remain high and vacancies low as more people move from other parts of the nation to South Florida to avoid state income taxes and over-regulation. But with construction costs 25% higher than in December 2021, and the cost of lending elevated, market conditions for new developments are less than ideal.

"Some projects may not happen, get delayed or not make any sense," he said.

At the same time, Jacocks said there's a "ton of capital" willing to purchase existing apartment buildings, but they're having trouble finding landlords willing to part with their properties at a decent price. And when a landlord does name a price, it's often for a highly inflated amount, he added.

"Why would someone who has a beautiful property in South Florida sell...and then be in a position of having to buy [another building] at higher interest rates?" Jacocks asked.

Most apartment building owners who sell, unless they're intent on retiring and cashing out, will reinvest their profits in another multifamily property in what is known as a 1031 exchange, Jacocks said. Under the federal tax code, an investor who sells a real estate property for a similar one can defer capital gains taxes.

Even without the higher interest rates, buying an apartment building in South Florida has become increasingly expensive. In 2019, prior to the pandemic, apartment buildings sold at an average price of $213,000 per unit. By 2021, the average price per unit reached $278,000 a unit. Year-to-date apartment buildings trade at $302,000 per unit, according to figures by Lee & Associates Commercial Real Estate Services.

The rise in value correlated with the rise in rents. In 2019, the average monthly market rent of an apartment unit was $1,628. In 2021, the average rent was $1,960 a month. By the third quarter of 2022, the average monthly rent reached $2,048 a month.

But, this year's third-quarter rents are slightly lower than the second quarter's average rent of $2,056 a month. Jacocks said this is a sign that rents are no longer rising as high as 32% year-over-year as they had earlier this year and, instead, are plateauing. It's a situation that real estate investors have long expected, Jacocks said.

"You can't squeeze water out of a rock. At some point you got to reach a cap," he said.



About Lee & Associates South Florida

Lee & Associates South Florida is a fully vertical commercial real estate brokerage firm focused on industrial, office, retail, multifamily, investment and land sectors. Our dedicated team of professionals is led by Matthew Rotolante, CCIM, SIOR a 4th generation South Florida native in a family that has owned and operated commercial property here since 1928. Lee & Associates is the largest agent owned brokerage in the nation with Senior Agent’s ability to earn profit share resulting in the highest splits while still receiving full resources, support and leads from our national network. Our collaborative and cheerful culture allows for open communications throughout the company, fostering the sharing of information and best practices to better enable client decision making.  The Lee & Associates’ robust national network that sold and leased nearly $32.4 Billion in 2021 offers clients a cross-market platform of expertise and deal opportunities across all asset specialties and representation roles. For the latest news from Lee & Associates South Florida, visit leesouthflorida.com or follow us on FacebookLinkedInTwitter and Instagram, our company local news.

About Lee & Associates

Lee & Associates is a commercial real estate brokerage sales, leasing and management firm. Established in 1979, Lee & Associates has grown its service platform to include over 75 offices in the United States and Canada. Lee & Associates is the largest agent owned commercial real estate brokerage where agents get the greatest return for their efforts and hence are more committed and better enabled to provide superior results for their customers.  For the latest news from Lee & Associates, visit lee-associates.com or follow us on FacebookLinkedInTwitter and Link, our company blog.