Can Miami Absorb 30K New Apartments?

Miami has lost residents in recent years, but its growing skyline tells a different story.

A longtime playground for the wealthy, Miami now boasts a bevy of new luxury apartment towers featuring rooftop pools and dog parks, pickleball courts, private home offices and spectacular water views. These amenities are meant to attract employees of blue-chip companies including Goldman Sachs, Blackstone Group and Citadel, which are opening new offices in South Florida.

A record 28,000 apartment units are currently under construction in the Miami metro area, with 10,500 set to complete by the end of the year, with another 9,960 opening in 2024. About 5,600 units were delivered in 2022. That’s all on top of the then-record 8,400 that were delivered in 2020. At 15.9%, Miami leads the nation in apartments under construction as a share of total inventory.

This development frenzy begs the question of whether Miami renters can absorb so many new apartment units coming online. The short answer is that investors might need to lower their expectations for short-term rent growth in the area. But there is nuance to Miami’s booming rental market — starting with the fundamentals.

Miami’s apartment market has been one of the strongest in the nation since the start of the pandemic. Miami's third-quarter 2022 net absorption as a percentage of inventory ranked first among the nation's 50 largest apartment markets and exceeded the three-year pre-pandemic average by over 70%, according to CoStar, the publisher of LoopNet. The 6.8% rent growth reported at the end of the third quarter was nearly double the national average of 3.7%.

More than half of the 28,000 apartment units under construction in the Miami market are in downtown Miami and are in new 4- and 5-star buildings charging an average monthly rent of $3,070, which is about $200 higher than downtown’s average. The spread in average rents between Miami’s new apartment supply and the downtown average is surprisingly narrower than in other Florida markets such as Tampa. However, that narrow spread speaks to how high existing rent already is in Miami.

“Miami is the most unaffordable market in the state of Florida,” said Lisa McNatt, an Orlando, Florida-based director of market analytics at CoStar.

You’ve heard plenty about companies moving to or opening new offices in South Florida, including the institutional investment firms mentioned previously.

Local observers call it “the Citadel effect,” after the hedge fund company that is relocating from Chicago to Miami and bringing good-paying jobs with it. This growth in business relocations and disposable income offsets Miami’s total population loss of 0.9% since the beginning of 2020, McNatt said.

The evidence supports the effect — Citadel signed a lease for over $150 per square foot at 830 Brickell, a 55-story office tower set to open later this year in Miami’s sought-after Brickell financial district. The 5-star tower is about 90% pre-leased, according to CoStar data.

“That bodes well for office fundamentals, that bodes well for employment in the urban core, and that bodes well for accompanying multifamily demand,” McNatt said.

As far as predicted population gains, Miami is expected to grow at the same rate as the United States overall moving forward. Miami also benefits from being a gateway to Latin America, which lends itself well to foreign investment. Fifty-four percent of Miami-Dade County residents are foreign-born, according to 2021 data from the U.S. Census.

Signs suggest that Miami’s multifamily market will cool down soon. First, the limited amount of developable land in the market will slow apartment construction after this development wave, especially in Miami’s urban core. Second, the number of apartments opening in the next few years is projected to be more than enough to absorb new residents moving into Miami.

After a record net absorption of 13,400 units in 2021, CoStar projects net absorption of 6,200 units in 2023, compared to more than 10,000 deliveries.

“We are going to have some short-term supply and demand imbalance because of these new units coming online. But they’re needed because of the long-term projected population growth coming in, not only to Florida but to South Florida [specifically],” said McNatt. “We must have housing to recruit jobs. You must have higher-end apartments if you’re going to recruit companies to expand in a city. So, it’s not indicative of any long-term distress, and we’re going to have more supply than demand for the next couple of years. It's a similar trend playing out in most markets across the country.”

The current wave of apartment development in Miami is so strong that many lenders are now reluctant to finance apartment construction in the area, McNatt said. In addition to a tapered development market, investors should also taper their expectations for rent growth, McNatt said.

CoStar projects Miami rent growth to tally around 3% over the next two years, falling in line with historical trends.

“Just don’t chase rent growth, because that ship has kind of sailed,” McNatt said.

Still, 3% growth is solid, said McNatt, who expects apartment building sales to thrive in future years.

“Three percent per year is still pretty strong and in line with what most owners try to get their management companies to produce for them,” she said. “There’s an opportunity for investors, and as a result of all these things, foreign investors may help to drive sales activity in Miami in 2023.”