Palm Beach multifamily performance improving

WEST PALM BEACH - A recovering job market continues to support demand for rental housing in large properties in Palm Beach County, but rents continue to rise only modestly. While a limited number of jobs have been added in most private-employment sectors in the first half, payrolls were cut in two of six months this year, raising uncertainty regarding the strength of the economic recovery. 

Conditions for many residents have clearly improved from one year ago, but the lack of consistent, robust job creation has not provided rental property owners a sturdy platform to confidently elevate rents. While asking and effective rents continue to steadily rise, most submarket-level rents remain well below pre-recession peaks, and progress toward restoring those levels will remain slow.

In the Boca Raton East submarket, for example, Class A asking rents are about 9% less than their most recent peak. Deficits persist in most other submarkets as well, despite sizable declines in vacancy over the past year.

The pace of the current recovery in property operations remains deliberate, but it has nonetheless encouraged investors to accelerate activity. Transaction velocity surged over the past year as financing capacity expanded and opportunities to purchase seldom-listed assets emerged. Prices can vary widely in the market, from about $40,000 per unit for distressed assets to more than $100,000 per unit for best quality or well-located properties. Cap rates can also fluctuate considerably, but generally range from 7% to 8% for most stabilized non-institutional grade assets.

Valuations that remain lower than those posted at the peak of the market will continue to attract buyers seeking to fill out local portfolios with well-performing assets that were priced out of reach a few years ago. A primary consideration for prospective investors remains the probability that new rental construction will remain minimal for the next two years. Few developable sites have been sold, and permitting for multifamily construction remains at a near-record low level.

Forecast 

Employment: Private-sector employers will continue to gradually rebuild staffing levels over the remainder of this year, contributing to a gain of 9,500 positions countywide, a 1.9% increase. Local employers created 1,200 jobs in 2010 following three consecutive years of cuts.

Construction: Only 248 new rentals will come online in the county this year, up slightly from a similarly meager 217 apartments in 2010. Permit issuance appears on track to rise to 400 units, but will remain well below the historical average of about 4,600 units per year.

Vacancy: Minimal completions and steady demand from newly employed residents and others relocating from single-family homes will push down large property vacancy 100 basis points this year to 6.5%. A 170-basis-point drop was recorded last year.

Rents: Property owners will continue to gradually restore rents to pre-recession levels. This year, asking rents will rise 2.3% to $1,104 per month, while effective rents will climb 2.8% to $1,026 per month. In 2010, asking and effective rents rose 1.6% and 1.7%, respectively.