ApartmentResearch

M A R K E T R E P O RT
Palm Beach County Fourth Quarter 2011

Investment Surges as Vacancy Falls and Rents Rise

Limited construction and steady demand from newly formed rental households continue to exert downward pressure on large-property vacancy in Palm Beach County. The market remains mired in an extraordinarily slow period of multifamily construction, as ongoing challenges financing new projects relegate developers to the sidelines. The lack of supply growththe market is on track for one of its lightest annual completion totals on recordcontinues to provide a boon for existing property owners. Heading into this years final quarter, the market is riding a wave of eight consecutive quarters of positive net absorption. An additional 1,600 units were occupied countywide during that time as residents returned to work and former homeowners migrated to rentals. Additional gains in occupied units, and a more robust pace of rent growth will rely less upon the release of pent-up demand and more on vigorous job growth. The ongoing expansion of the countys biotech sector may provide a boost to property operations in the months ahead while housing-related fields recover. The upswing in property operations continues to stoke an active investment market. Deal flow surged over the past year, with institutional-grade assets a primary target. However, activity at the upper end of the market remains limited by a lack of product available for sale. Many of the large complexes that sold recently changed hands at prices in excess of $150,000 per unit, as investors presumably underwrote deals based upon expectations for significant rent growth. Pricing for performing, non-institutional assets, though, remains far more modest. Cap rates for the highest-quality, stabilized Class B product typically start around 7 percent, with rarely listed properties in places such as Boca Raton or Jupiter capable of commanding more aggressive pricing. Property owners with solid operations and the ability to sell may increasingly list assets for sale, especially as low interest rates and favorable financing spreads persist. The current climate also represents an opportune moment for owners to reconsider portfolio composition and re-deploy capital into properties with greater potential upsides.

2011 Annual Apartment Forecast

1.6% increase in total employment

Employment: This year, total employment in the county will expand 1.6 percent, or by 7,900 jobs. In 2010, employers added 1,200 positions countywide. Employment trends will not receive much of a lift from the leisure and hospitality sector in the fourth quarter, which is typically a slow period for visitor volume. Construction: Projects containing 318 units will come online in 2011, representing a minor 0.6 percent addition to the stock of large properties. Last year, 217 units were delivered after an average 417 rentals were completed annually in the preceding five years.

318 units will be completed

60 basis point decrease in vacancy

Vacancy: Solid demand growth will persist, resulting in a decline of 60 basis points in large-property vacancy this year to 6.9 percent. The release of pent-up demand triggered a decrease of 170 basis points in 2010.

2.0% increase in asking rents

Rents: Asking rents at large properties in the county will climb 2.0 percent in 2011 to $1,100 per month, and will be accompanied by a 2.4 percent jump in effective rents to $1,022 per month. In 2011, asking rents rose 1.6 percent and effective rents gained 1.7 percent.

Economy

Employment Trends
6%
Year-over-Year Change Metro Area United States

Private-sector employers hired 1,800 workers in the third quarter, accounting for all of the job growth in the county during the period. Year to date, total employVacancy Rate Trends Metro increased by 5,000 positions, marking a 1 percent increase. ment in the county Area 12%
United States

3% 0% -3% 6% -6% 3% 0%

10%

Employment Trends
Metro Area United States

As a result of job growth in the third quarter, six of 10 private-employment sectors created jobs in the first nine months of 2011. Expanding healthcare practices 8% contributed to the addition of 5,000 education and health services positions, while the countys Rate restaurants and hotels hired an additional 3,400 workers Vacancy bars, Trends 6% year to date. Metro Area 12%
United States

Number of Home PriceMedian Chg.) Median Chg.) Number of Units (thousands) Number of Units (thousands) ExistingUnits (thousands) Existing Home Price (Y-O-YExisting Home Price (Y-O-Y Chg.) Median (Y-O-Y Year-over-Year Change Year-over-Year Change

Vacancy Rate Vacancy Rate

07

08

09

10

11*

4% 10%

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

* Forecast Sources: Marcus & Millichap Research Services, Reis

-3% 6% 10% -6% 3% 07 0%

Employment Trends Home Price Trends

Metro Area Metro Area United States United States

12% 6%

Employment fell in four private-employment sectors and in the government sec07 08 09 10 11* tor in the first three quarters. Budget-cutting led to the loss of about 1,500 gov8% ernment posts, and 2,200 professional and business services positions were pared from payrolls. Vacancy Trends Rent Rate Trends 6%
Metro Area Asking Rent

08

09

10

11*

Year-over-Year Rate Vacancy Change

United Outlook: ThisEffectivetotal employment in the county will expand by 7,900 workyear, States Rent 4% an increase from 1,200 jobs created in 2010. ers, 10%

3% 07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

0% -10%

* Forecast Sources: Marcus & Millichap Research Services, Reis

8% Housing and Demographics 0%

-3% -20% 10% -6% -30%07 0% 07 -10% -20% 10% 4 -30% 0% 07 3 -10% 2 -20% 1 4 -30% 0 3 07 2

Home Price Trends

Metro Area United States

6% jump -3% 6% 4% -6% 3% 07 07

* Forecast * Trailing 12-Month Period Sources: Marcus & Millichap Research Services, BLS, Economy.com Sources: Marcus & Millichap Research Services, Economy.com, NAR

08 08

09 09

10 10

11* 11*

Median Median Price per Unit (thousands) Price per Unit (thousands)Price per Unit (thousands) Median Year-over-Year Change Year-over-Year Change

Reduced prices brought homebuyers off the sidelines, sparking an 11 percent Rent Trends in sales of existing single-family homes over the past year. The median price Asking Rent Effective Rent is plummeting, however, declining by 9 percent over the past year to $201,700.
08 08 09 09 10 10 11* 11*

* Forecast *Sources: Marcus & Millichap Research Services, Reis Forecast Sources: Marcus & Millichap Research Services, Reis

Home Price Trends ConstructionTrends

Metro Area Apartment Completions United States Multifamily Permits

Construction of single-family homes will pick up modestly in the months ahead. During the 12 months ending in the third quarter, single-family permit issuance 0% rose 5 percent to 1,400 units. Rent Trends Sales Trends -3%
6% $120 the In
Asking Rent

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

Effective Rent third quarter, the average Class B/C rent in the county was nearly $200 -6% than the monthly mortgage payment on the median-priced home. In the less 3% 07 08 09 10 11* $100 Century Village and West Palm Beach submarkets, Class B/C rents are more than * Forecast Sources: Marcus & Millichap Research Services, Reis $300 short of the monthly mortgage payment. 0%

$80

Construction Trends
Apartment Completions Multifamily Permits

* Trailing 12-Month Period * Forecast Sources: Marcus & Millichap Research Services, Economy.com, NAR Sources: Marcus & Millichap Research Services, U.S. Census Bureau

07

08 08

09 09

10 10

11* 11*

* Trailing 12-Month Period Sources: Marcus Millichap Research Services, CoStar Sources: Marcus && Millichap Research Services, Reis Group, Inc., RCA

Sales Trends Outlook: A significant slowdown in permitting activity for both multifamily $60 $120 single-family homes indicates development will remain restrained for several and more months. Greater availability of construction financing, however, may refill -6% $40 07 08 08 09 10 11* $100 construction pipeline. 09 10 11* the 07 * Forecast
-3%

1 4 0 3 2 1 0

Construction Trends
Apartment Completions Multifamily Permits

Construction Sales Trends

$80

$60 In the $120 $40 $100

12 months ending in the third quarter, only the 248-unit Heritage at Boca Raton was completed. The property came online in the second quarter this year. Construction continues on the Peninsula on the Intracoastal, which will deliver 70 units in Boynton Beach during the fourth quarter this year. Approximately $80 2,300 rentals are planned in the county, marking a slight increase from midyear. More than 1,300 units are planned in Delray Beach, representing a potential 10 $60 percent increase in large-property rental stock.
07 08 09 10 11* The former Levitz Plaza shopping center in Boca Raton will be redeveloped as multifamily rentals. To be named the Broadstone at North Boca Village, the complex will have 386 units. Lease-up will start in late 2012. $40 07 08 09 10 11*

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

* Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Outlook: In 2011, 318 units will come online, representing a 0.6 percent addition to the stock of large properties. Last year, 217 units were delivered.
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Apartment Research Report

Vacancy

Year-over-Year Change

During the third quarter, an additional 100 units were occupied in large properties, reducing countywide vacancy 20 basis points Employment So far this year, to 7.1 percent. Trends Metro Area 6% vacancy has decreased 40 basis points, following a decline of 130 basis points in United States the preceding three quarters.
3%
Vacancy Rate

Vacancy Rate Trends

12% 10% 8%
Metro Area United States

Class A vacancy was 6.3 percent in the third quarter, representing an increase of 0% 10 basis points from the midyear level. More than 300 units were occupied over the first nine months of this year, though, supporting a reduction of 80 basis Employment Trends points in the upper-tier vacancy rate. -3% Metro Area 6%
United States Number of Units (thousands) Median (Y-O-Y Year-over-Year Change Year-over-Year Change Number of Units (thousands) Existing Home (thousands) Existing Home Price Median Chg.) Home Price (Y-O-Y Chg.) (Y-O-Y Existing Number of Units PriceMedian Chg.)

6% 12% 4% 10% 07 8%

Vacancy Rate Trends

Metro Area United States

Employment Trends Home Price Trends Outlook: In 2011, vacancy will decrease -3% basis points to 6.9Area 60 Metro Area Metro percent, following 6% 10% United States United States a 170-basis-point plunge last year.

Vacancy Rate

-6% The Class B/C sector also continues to regain ground lost during the recession,11* 3% 07 08 09 10 Forecast as vacancy fell 40 basis points in the *Sources: Marcus & Millichap Research Services, BLS, Economy.com second quarter to 10.9 percent, the fifth consecutive quarter in which strengthening demand reduced vacancy. 0%

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

6% 12% 6% 4% 10% 07 3% 8% 0%

Vacancy Rate Trends Rent Trends

Metro Rent AskingArea United States Effective Rent

Rents

08

09

10

11*

Vacancy Rate Year-over-Year Change

-6% 3% 07 0%

08

09

10

11*

* *Forecast Average countywide concessions tickedTrailing 12-Month 7.2 percent of asking rents in down to Period Sources: Marcus & Millichap Research Services, BLS, Economy.com Sources: Marcus & Millichap Research Services, Economy.com, NAR the third quarter as a result of a 0.9 percent rise in effective rents to $1,014 per -10% month. Leasing incentives equaled 7.5 percent of asking rents in the third quarter Construction Trends Home Price Trends last year, but many property owners have-20% pulled back ApartmentArea more significantly. Metro Completions

08 08

09 09

10 10

11* 11*

Median Price per Unit (thousands) Price per Unit (thousands) Price per UnitChange Year-over-Year Change Year-over-Year (thousands) Median Median

0% -10% Asking rents in large properties advanced 0.7 percent in the third quarter to $1,093 per month. Over the first nine months of Home Price Trends gained this year, asking rents -3% 0.8 1.4 percent, an acceleration from growth -20% percent over the final three quarof Metro Area 10% United States ters of 2010. -6% -30% 0% 07 07

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

* Forecast Sources: Marcus & Millichap Research Services, Reis

6% -3% 6% 4% -6% 3% 07 07 0%

Rent Trends
Asking Rent Effective Rent

08 08

09 09

10 10

11* 11*

**Forecast Forecast Sources: Marcus & Millichap Research Services, Reis Sources: Marcus & Millichap Research Services, Reis

10%4

MultifamilyStates United Permits

-3% 6% $120 -6% 3% 07 $100 0% $80

SalesTrends Rent Trends

Asking Rent Effective Rent

In the third quarter, average Class A asking rents surged 1.2 percent to $1,304 per -30% 0%307 08 09 10 11* month; year to date, upper-tier rents have climbed 1.5 percent. Class B/C ask* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR ing rents ticked up 0.1 percent from July to September to $920 per month and -10%2 advanced 0.9 percent over the first three quarters. Construction Trends Outlook: Countywide asking rents course to rise 2 percent this year to $1,100 per month. Effective rents will increase 2.6 percent to $1,024 per month. 0 -30% 07 10 307 08 08 09 will sit10 11* As a result of the projected increases, asking and effective rents09 about 11* 3 *Trailing 12-Month Period Forecast * Sources: Sources: Marcus Millichap Research Services, U.S. Census Bureau percent below the pre-recession peak level. Marcus &&Millichap Research Services, Economy.com, NAR
2 1 4 3 -20%1 4 remain on
Apartment Completions Multifamily Permits

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

$60 -3% $120 $40 -6% 07 $100 $80 $60 $120 $40 $100 $80 $60 $40 07 07

Sales Trends

08 08

09 09

10

11* 11*

Trailing **Forecast 12-Month Period Sources: Marcus & Millichap Research Services, Reis Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Sales Trends**

Construction Trends
Apartment Completions Multifamily Permits

Sales Trends

An increase in deals across all price points underpinned a near tripling in the 0 number of transactions in Palm Beach County over the past 12 months.
07 08 09 10

11*

08

09

10

11*

The median price of properties sold in the past year was $62,300 per unit. A 2 smaller set of properties were sold at a median price of $76,000 per unit during the preceding 12-month period. 1

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Sales of large, Class A assets sought by institutions have slowed due to a lack of 0 07 08 09 10 11* listings, but cap rates in recently closed transactions were in the mid-5-percent * Forecast Sources: sell from 6.5 percent to 7 Census Bureau range. Stabilized Class B complexes tend to Marcus & Millichap Research Services, U.S. percent. Outlook: Large properties will attract intense interest when listed for sale. Pricing benchmarks for Class B assets will be set as more assets trade, providing additional guidance for property owners contemplating a sale. Minimal construction will enable many owners to restore property performance.
u

07

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

** Data reflect a full 12-month period, calculated on a trailing 12-month basis by quarter.

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Apartment Research Report

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Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com or call:

Increased Fed intervention, such as Operation Twist, should keep interest rates relatively low through the end of the year. As of late-October, the yield on the 10-year Treasury was hovering around 2.3 percent, approximately 175 basis points below the 10-year average. Apartment mortgage originations more than doubled in the first half of 2011 when compared with the same period last year, driven largely by agency lenders Fannie Mae and Freddie Mac, life insurance companies and local/regional banks. While agency originations increased over past year, the re-emergence of life companies and banks caused their market share to drop from 62 percent in 2010 to 44 percent in the first half. Lenders view apartments as preferred assets and are moving down the quality chain to finance Class B properties in strong locations, encouraged by healthy occupancy gains and firming values. Nonetheless, financing lower-tier properties in secondary and tertiary markets remains a challenge. Portfolio lenders generally originate new loans at 55 percent to 75 percent LTVs, while agency lenders provide up to 80 percent leverage on high-quality assets in core metros. All-in rates for $3 million-plus mortgages start around 3.75 percent for a five-year term, with seven-year loans pricing in the low- to mid-4-percent range, and 10-year notes averaging 4.5 percent to 5.0 percent. All-in rates for smaller loans are typically 10 to 25 basis points higher.

John Sebree National Director National Multi Housing Group Tel: (925) 953-1700 john.sebree@marcusmillichap.com

Submarket Overview

Nova Southeastern University opened a new facility in Palm Beach Gardens, providing a potential generator of rental housing demand in the vicinity. The school will employ 80 workers, in addition to an unspecified student enrollment. Two projects in Boca Raton that were classified as planned early this year have been removed from the construction pipeline, presumably as a result of cancellation. The projects were the 105-unit Palmetto Park City Center; and an unnamed project with 276 rentals. The presence of Scripps Research Institute continues to have a positive impact on economic development in the county. Recently, the town of Jupiter approved a loan guarantee for ESI Florida, a company that provides funding for biotech startups. The firm plans to create 150 jobs.

Prepared and edited by Art Gering Senior Market Analyst Research Services For information on national apartment trends, contact John Chang Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com Fort Lauderdale Office: Gregory Matus Regional Manager gmatus@marcusmillichap.com 5900 North Andrews Avenue Suite 100 Fort Lauderdale, Florida 33309 Tel: (954) 245-3400 Fax: (954) 245-3410 Price: $150

Submarket Vacancy Ranking

Rank
1 2 3 4 5 6 7

Submarket
Boca Raton East Green Acres City/Palm Spgs./Lake Worth Boca Raton West Century Village Boynton Beach/Delray Beach West Palm Beach/Palm Beach North Palm Beach

Vacancy Rate
5.6% 5.6% 6.1% 6.9% 7.4% 8.3% 9.6%

Y-O-Y Basis Point Change

90 -140 -70 -80 -230 -40 -40

Effective Rents
$1,172 $955 $1,085 $839 $1,115 $956 $920

Y-O-Y % Change
4.7% 0.7% 2.3% -1.2% 2.6% 0.3% 1.3%

Marcus & Millichap 2010 www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.