As South Florida apartment rental prices rise to record highs, the residential income property market — a niche that consists of duplexes, triplexes and fourplexes — is surging in Miami-Dade, Broward and Palm Beach counties.
Investors who want to own small rental buildings with two, three or four units are snapping up properties at an increased pace to take advantage of strong lease rates and low vacancies in South Florida.
Many of these residential income properties cater to tenants who aspire to be homeowners but are struggling to purchase their own places for a variety of reasons, including a still challenging mortgage environment and rising real estate prices in South Florida.
It is against this backdrop that sales of South Florida residential income properties are up 7 percent on a year-over-year basis to about 1,380 transactions in the first 10 months of 2015 compared to fewer than 1,290 deals during the same January through October period in 2014, according to data from the Southeast Florida MLXchange.
A year earlier in 2013, buyers acquired fewer than 1,275 residential income properties in the tricounty region.
Even as the number of transactions has steadily increased, the prices of residential income properties have surged at a double-digit pace annually during the last three years in South Florida.
In 2015, residential income properties are selling at an average price of $124 per square foot. By comparison, residential income properties sold for an average price per square foot of $112 in 2014 and $90 in 2013.
The South Florida market for residential income properties has spiked since 2010 — near the end of the last real estate cycle — when 1,069 deals transacted at an average price of $61 per square foot.
In fact, today’s prices for residential income properties have more than doubled in the last five years.
Even with the recent jump in prices, South Florida’s residential income property market has not yet recovered to the levels experienced during the peak of the last real estate cycle.
Back in 2006, more than 1,080 residential income properties sold at an average price of about $181 per square foot. This means that today’s prices for this category of residential property are still down more than 30 percent from a decade ago.
Based on the current resale market, investors are optimistic that residential income properties have an upward trajectory at a time when other housing sectors are slowing down from the rapid transaction pace of a few years ago in South Florida.
For instance, year-over-year resales in South Florida are down 1 percent in the condo and townhouse sector while the single-family house category is up about 5 percent in the first 10 months of 2015, according to the Multiple Listing Service data.
At this time, more than 800 residential income properties are on the South Florida market at an average asking price of $191 per square foot, according to the data.
The current average asking price reflects nearly a 6 percent premium over the levels achieved in 2006.
Before dismissing the current asking price levels as overly optimistic, it is important to consider that South Florida has about 5.8 months of supply of residential income properties on the market.
In residential real estate, a six-month supply of properties is typically considered to be a balanced market. Fewer months of supply generally suggest a seller’s market, and more months of supply indicate a buyer’s market.
The bullishness about South Florida’s residential income property sector is rooted in rising rental prices.
Consider that the median rental transaction price for a residential property is $1.47 per square foot monthly in South Florida during the first 10 months of this year, according to the data.
By comparison, the median rental price per square foot in recent years was $1.35 in 2014 and $1.25 in 2013.
Currently, South Florida has about 2.5 months of supply of rental properties actively available for lease at a median asking price of about $1.98 per square foot, according to the data.
The unanswered question going forward is whether rental prices will continue to increase at record levels in the months and years ahead as tens of thousands of new apartment and condo units are currently in the development pipeline in South Florida.
Peter Zalewski is a principal with the Miami real estate consultancy Condo Vultures. Zalewski, a licensed Florida real estate professional since 1995 and founder of CVR Realty and Condo Vultures Realty LLC, advises developers, lenders and institutional investors. Zalewski also runs the preconstruction condo project website CraneSpotters.com in conjunction with the Miami Association Of Realtors.