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Will the Hurricane of New Construction Hurt Miami’s Apartment Market?

Developers are planning to open a record number of new apartments in the city by the end of 2018.

There’s a storm of new development coming to the Miami apartment market—and it’s likely to hurt the prices investors are willing to pay for apartment properties there. So far, however, cap rates in the city have remained stable as storm clouds gather.

"CoStar expects cap rates to increase in the face of these conditions,” says Pamela Stergios, market analyst for research firm CoStar Group. “But we aren’t yet seeing cap rates move any higher in Miami than they are in the rest of the country."

More new apartment units are now under construction in Miami as a percentage of the existing inventory than in any other city in the United States. Many of those are expected to open by the end of 2018.

Property sales strong so far

So far, despite the new construction everyone knows is coming, investors are still busy buying and selling apartment properties in Miami.

Investment sales volume for apartment assets in the city totaled $5.4 billion in the first half of 2018, according to Real Capital Analytics (RCA), a New York City-based research firm. That’s roughly equivalent to sales volumes recorded in 2015 and 2017, though below the figure reached in the first half of 2016, a record year for apartment sales.

The prices investors pay for these assets are still rising relative to the value of the properties. The median cap rate for apartment properties in Miami was 5.7 percent for the 12 months that ended in early August, according to RCA. CoStar, puts the average cap rate in Miami a little higher, but roughly in the same range.

But investors do demand higher cap rates when the buy apartment properties in Miami than they accept in other cities. “The average cap rate in Miami is 6.0 percent, which is much higher than other gateway metros, like Boston, Washington D.C., Seattle and L.A., which all have average caps well below 6 percent,” says Stergios. “This divergence has been lingering since the housing bust.”

However, the overall movement of cap rates in Miami has followed a similar trend to the rest of the United States. From 2010 through 2017, cap rates fell in both Miami and the broader U.S. market and have generally remained flat for the last 18 months, as property prices and income from properties have risen slowly, keeping pace with each other, according to CoStar.

International investors help Miami

International investors are helping to push prices higher in Miami, just as they are in other gateway cities.

“It is no secret that there is a lot of foreign capital in Miami, which certainly has the potential to drive pricing for multifamily assets higher,” says Stergios. “Regardless, it does not appear that foreign capital has had an outsized impact, at least compared to other gateway metros.”

The average price that investors pay per unit for apartment properties in the city has increased at nearly the same rate as in other “gateway” metropolitan areas. The top international investors in apartment properties tend to be from Canada. “Latin Americans tend to put more dollars into office and retail space,” says Stergios.

New construction clouds outlook

Developers are planning to open a record number of new apartments in the city by the end of 2018. That’s likely to push up apartment vacancies and sap the eagerness of investors to buy properties in Miami. “Vacancy is projected to finally jump above the national average and continue to remain elevated through at least 2020,” says Stergios.

Developers now have more than 18,000 new apartment units planned or under construction in Miami. That works out to 10.8 percent of the existing inventory—more than any other major metropolitan area, according to RCA.

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