Investment Debate Over Houses Versus Apartments Plays Out in Florida
A familiar decision facing many real estate investors across the country is playing out in South Florida: whether to bet the U.S. housing market is peaking and seek more stability in investments like large-scale apartment complexes.
Convinced the multifamily market will generate strong returns indefinitely, a 10-year-old private equity investment firm is shedding its portfolio of single-family homes and plans to acquire institutional-grade apartments across the U.S. Southeast.
Miami-based Property Investment Advisors Group wants to own 10,000 units in the next seven years.
It recently sold 200 single-family homes in South Florida for $47 million to Cerberus Capital Management, a New York-based firm with an executive team that includes former U.S. Vice President Dan Quayle.
Property Investments still has 250 more homes to sell between now and December.
At its peak, the firm owned and managed a portfolio of 600 homes in South Florida, according to co-founder and partner Jimmy Levy.
But he said that many of the properties were in such bad shape from the housing meltdown that they required major renovations, if not total rebuilds. Even after the firm rented the homes, Levy said, maintenance was a constant struggle because they were spread across three counties, and some of the tenants didn’t care about upkeep.
“If you can manage that,” he said with a chuckle, “you can manage anything.”
Levy expects the multifamily venture to be lucrative, and easier to oversee than individual homes.
“With homes, we were replacing hundreds of roofs, but with multifamily there’s but one roof,” he noted. “There are more parts to a home than there are to a unit in a building.”
The change in strategy comes amid a still-thriving market for single-family homes, with median prices rising in Florida and across the nation because of a persistent shortage of properties for sale.
The Florida Realtors trade group said this week that South Florida’s median price for single-family homes in June was $359,900, up 4 percent from a year ago. Prices have been on a steady climb since 2012.
The firm could hold onto its single-family portfolio and keep watching prices rise, but Levy is resolute that selling now is better than trying to time the market.
Many analysts expect multifamily fundamentals to stay robust nationwide, even as the sector slows in comparison to the exuberance of recent yearsthat saw extremely low vacancy rates and double-digit rent gains.
The large rental rate increases are slowing, according to CoStar Market Analytics. In South Florida, for instance, CoStar projects growth to increase by only 1 percent in the next couple of years, with rent reductions possible in some buildings.
L. Keith White, president of Reinhold P. Wolff Economic Research in Oakland Park, FL, said the dizzying pace of multifamily construction across South Florida in recent years is just making up for the dearth of activity during the last decade’s housing bust. And before that, developers converted apartments to condominiums by the thousands, which also depleted the supply of rentals.
A report last week from commercial real estate services firm Berkadia showed that demand in South Florida still far exceeds supply.
Despite all the new buildings, landlord concessions are relatively rare, White said. Still, the market is bound to soften, though it’s difficult to predict the timing, he noted.
“Down the road somewhere, it’s going to level off,” he said. “It’ll happen. It’s just a question of when.”
Moving from homes to rentals makes sense for investors because it provides efficiencies in property management while also diluting vacancy risk, explained Daren Blomquist, senior vice president of ATTOM Data Solutions, a research firm based in Irvine, CA.
Still, investors should be wary of all the multifamily construction, particularly in the luxury arena, according to Blomquist.
“If someone is looking to invest in multifamily at this point in the real estate cycle, they really should be aware of the supply landscape in their particular market,” he said.
But Levy, who started the firm with his brother Saul and second cousin Danny Kattan, is confident that multifamily investment is a smart play long term – particularly in the value-add segment that the firm is targeting.
With value-add investing, firms buy rentals that need renovations. That allows the owners to raise rents and potentially resell for large profits.
Levy said it may be a challenge buying properties in major metropolitan areas such as Miami, so the firm is focusing on secondary markets with high-growth potential.
“Millennials are not really buying homes,” he said. “They want the flexibility to move from one place to another.
“The only problem I see with multifamily is that it’s a seller’s market,” he added. “But there are still good opportunities out there. We just have to be patient and not trigger happy.”