Florida's rental markets latest to suffer ill effects in housing crunch

July 7, 2008

GAINESVILLE, Fla. — The spread of “For Rent” signs is the latest bad news as Florida’s real estate market declines in all forms of rentals, a new University of Florida study finds.

The results from the most recent quarterly survey of Florida real estate trends shows fewer takers for all kinds of properties for let — retail, office, industrial and particularly apartments — as the rental market slides down the slope paved by the foreclosure crisis and slumping economy, said Wayne Archer, director of UF’s Bergstrom Center for Real Estate Studies.

“The decline in consumer spending is finally beginning to show up in rental markets,” Archer said. “Either people are becoming increasingly cautious or they have already been impacted by declining real estate sales or the state budget cuts.”

The survey was completed in May and released this week. It is the 11th in a series and draws on responses from appraisers, who represent about 55 percent of the 275 respondents, followed by brokers and consultants.

“The biggest surprise is how notable the downturn in the state of the apartment market appears to be,” Archer said. “It could be that people are trying to save money by doubling up and sharing accommodations with roommates, reducing the demand for apartments.”

There also has been a softening of the retail market, with fewer firms going into business, a larger number consolidating operations with other companies and some closing up shop altogether, Archer said. Sharp declines are also forecast for warehouse and distribution space, as well as other industrial properties, he said.

The worst outlook continues to be for single-family housing sales, with record numbers of foreclosures stemming from the subprime mortgage crisis, particularly in places such as Lee and Osceola counties as well as along the Gold Coast north of West Palm Beach, he said.

“If our survey respondents were physicians, they would be telling us that Florida’s condominium markets and some single-family development markets have pneumonia and Florida’s rental real estate markets have the flu,” Archer said. “That is to say the condominium markets and some single-family development markets are very sick and there may be casualties. Meanwhile rental markets — apartments, industrial, office and retail — will suffer varying degrees of pain and discomfort in the months ahead, but it will pass and they will recover.”

Although the outlook for apartment occupancy declined for the first time in the two-year history of the UF survey, expectations for apartment investment remained steady and even improved noticeably for investing in apartments for the purpose of converting them into condos, Archer said. “As long as the United States economy has bright prospects and particularly as long as Florida has good prospects, it’s very hard I think to make a case for a long-term picture that’s negative,” he said.

The UF study has been more positive about the real estate outlook than media reports because it surveys respondents for their perceptions on long-term investment in addition to short-term markets, Archer said. It also includes questions about rental property as well as the more commonly addressed ones relating to ownership properties, such as single-family residential housing and condominiums, where the problems in the real estate industry began and continue to bring the gloomiest news, he said.

“I don’t see any signs to suggest a quick bounce back for the housing market in 2008,” he said. “It looks like we’re going to have to endure some more months of quiet suffering at least into the spring of 2009, which would be a more logical time for market cycles to change.”

A positive development in the latest survey is that respondents expect no further declines in the price of single-family homes, Archer said. Condominium prices, however, will likely continue to drop because that market is overbuilt and tends to attract naïve speculators, he said.

Perhaps the best news is that capitalization rates, the measure of how fast an investment pays off in net cash, have remained steady for all types of property except apartments since 2006, a sign that Florida continues to be regarded as a positive real estate investment, Archer said. “Cap rates are a fundamental benchmark because they are the ratio between cash flow and value,” he said.

The biggest impediment to real estate investment right now is that while there is ample potential capital, banks are so nervous about falling prices that they have become very restrictive in issuing loans, Archer said. Once lenders are reassured that the markets are stable, they will be willing to come back into the market and start lending again, he said.