Tampa Bay's apartment market has been white hot for years. Coronavirus is the correction no one saw coming
By Ashley Gurbal Kritzer
Tampa Bay Business Journal
Published: Apr 9, 2020

Developer Anthony Everett has long predicted that luxury apartment rents in Tampa Bay would start to backslide — for years, he's steered his firm toward more affordable projects to guard against an inevitable downturn.

But a global pandemic certainly isn't how he thought it would happen.

"I was expecting a correction, but I expected it to be much slower and primarily due to overbuilding," said Everett, the Central Florida director for Atlanta-based Rangewater Real Estate. "Not something like this."

Apartments have been by far the most booming sector of Tampa Bay's commercial real estate market, from development to investment sales. Even as Everett and others fretted that the top end of the market — the high rises with big amenity packages — could be squeezed, construction pressed on, and new projects were still being pitched throughout the first quarter. As recently as early March, Nine15 in downtown Tampa sold for a top-of-market $331,000 per apartment; on March 19, a new project in St. Petersburg's Kenwood neighborhood landed a $16 million construction loan.

Just a few weeks later, those types of deals are on hold, at least temporarily. The National Multifamily Housing Council on Wednesday said that around 30 percent of renters did not pay April rent, and it's difficult to underwrite a new deal when so much is uncertain in the face of the novel coronavirus, which has brought with it an unprecedented economic crisis.

"Unless there was a pending maturity and a need for liquidity, most sellers have decided to pull back and pause," said Matthew Williams, executive managing director with Newmark Knight Frank in Tampa, "and do their best to manage the properties and maintain collections."

Before coronavirus, Tampa Bay's apartment boom showed no signs of slowing. For the last five years, the Tampa Bay region developed an average of 4,300 apartments annually, and absorption of those units has outpaced delivery, according to CBRE Group Inc. In 2019, more than 4,000 apartments were delivered, with just over, 8,300 under construction.

"Concessions to new residents have recently dipped, as has been the case in many other markets, suggesting that the recent construction boom remains in line with demand," CBRE wrote in its 2020 outlook for multifamily real estate.

Some submarkets, however, were already showing signs of strain before the pandemic, with rent growth slowing as more new units were delivered, said Darron Kattan, managing director at Franklin Street in Tampa.

"There is a good chance that a jolt like this will cause similar rent reductions as the great financial crisis," Kattan said. "In those times, we saw up to 30 percent or more swing on the income for multifamily owners."

Luxury rents began to fall as the pandemic took hold, according to data from CoStar Group.

"Annual rent growth has already felt the impact of coronavirus, with the high-end average rents slipping over 1 percent since early March," according to a CoStar report released April 3.

If the market were showing early signs of a correction, coronavirus will speed up the process, Everett said.

"When you have events like this, they exacerbate the situation and make everything occur much more rapidly," he said. "We had an overbuilt situation in several submarkets, so to have a black swan event like this — it’s like the tide going out and who has a bathing suit on or not? Who has the conservative projects?"

While it's early, Everett said his approach to multifamily development seems to be holding steady. One of his properties in the Tampa area signed nine new leases last week, mostly through virtual tours.

"I’ve been trying to put us in a defensive posture for a couple years, and in Central Florida we’ve done a good job of that," he said. "It’s because we’ve been focused on this more approachable rent level."

Kattan thinks the stay-at-home orders meant to slow the virus' spread could reverse a longstanding trend of small urban apartments that command top-dollar rents — rents that are based more on the buildings' amenity packages and the surrounding neighborhoods than the units themselves.

"You may be OK with a small apartment since the amenities were great and you were living in a vibrant core," Kattan said. "Being trapped in your small apartment will likely leave a mark and dissuade a bit of that growth."

But there's an upside for deals that were already well underway: Everett said he's pricing out a new construction project in Orlando, and general contractors' bids are coming in 8 percent to 9 percent below what was expected. That's likely because labor is more readily available after some homebuilders and major projects halted construction.

"That’s the only reason the deal is moving forward," Everett said. "So there may be some bright side to this if we can get through it."