REGIONAL MARKETS: SOUTHEAST

APARTMENT FINANCE TODAY • FEBRUARY 2008

Under the Radar

Tallahassee doesn’t garner the attention of other Florida markets, but prying eyes know what they see: steady, strategic growth.

By Dana Enfinger

Tallahassee—This market is not one you think of when talking about the multifamily climate in Florida. The state capital may shy away from the spotlight, but a growing student population and a fairly stable job market positions it for a starring role.

“When people are talking about Florida markets, you assume that they are going to launch into a conversation about condos in South Florida,” said Sam Chandan, chief economist for Reis, Inc., a real estate research firm based in New York City. “There’s a whole other part of the state that’s not getting a lot of attention, and that’s Tallahassee.”

At the 2000 Census, the city recorded a 12.4 percent growth in population— higher than both Miami and Tampa. Plus, the Tallahassee metro did not experience the glut of rentals that many other Florida markets have witnessed.

“The market has slowed a little bit because of a little more construction in 2007, but overall the trend is very positive. Demand is good,” said Chandan.

‘Stable’ is good

On average, the Tallahassee market has about 700 rental units being built annually, said Charles Dalton, president of Real Data, an apartment market research firm based in Charlotte, N.C. At the end of 2007, the market recorded about 1,000 units under construction.

“With those units coming online over the next year, we’ll probably see a little more competition, a few more concessions,” said Dalton. “But [the multifamily market] should stay relatively stable. A good portion of the growth in Tallahassee is due to the growth of the universities. We consider about a quarter of the market to be product specifically built for students.”

The college student population in the capital is recording an annual growth rate of about 7 percent to 8 percent. Florida State University (FSU) is expected to build new medical school facilities.

“In the area around the campus, that’s where rents are staying strong,” said Gordon MacLean, investment adviser for Sperry Van Ness. MacLean is based in Fort Walton Beach and is involved in multifamily transactions from Tallahassee to Mobile, Ala. He revealed that Seminole Oaks, an apartment community built in 1965, recently sold for $15.7 million, representing a per-unit price of $60,000.

“That figure is a bit high for that type of product,” said MacLean. “It’s not specifically set up to house students, but the property’s good location to campus makes it very appealing. So it will no doubt attract students.”

Dorothy Jackman agreed. She is a senior associate for Marcus & Millichap in the real estate firm’s Tampa office. She specializes in student housing and has been involved in a number of apartment deals in Tallahassee.

“This older product located close to college campuses is attracting a number of institutional investors who are obviously looking down the road for redevelopment play,” said Jackman.

In 2006, the Tallahassee market recorded 14 multifamily transactions. The average deal size was $16.2 million, according to research firm Marcus & Millichap. At the end of 2007, only nine transactions had been closed, but the average deal size was higher than in 2006 by more than a million dollars at $17.3 million.

Everything from Class A to Class C product traded hands in 2007, said MacLean. He predicted that investors might seek out more Class A units in the next five years as students from upperincome families are increasingly attracted to the college town. If MacLean’s theory plays out, it would be good news for developers of new Class A properties. Properties built before 1970 recorded a healthy vacancy rate of 2.9 percent at the end of the third quarter of 2007, according to Reis, while properties built after 1999 experienced a vacancy rate of a whopping 8.7 percent.

“We may see more of a separation between families and students,” said MacLean. “Many of these former homeowners [displaced by the mortgage crisis] aren’t going to want to be moving into a complex full of students. And students are going to want more amenities catered to them that a student housing complex provides. We’ll likely see more by-the-bed housing going up.”

MacLean added that developers would need to get creative to get that type of housing built, as land is scarce around FSU and Florida A&M University.

The mortgage crisis has definitely affected the multifamily climate in Tallahassee, said Jackman, maybe for the better.

“Potential buyers are really doing their homework before they put in bids,” said Jackman. “Sellers are getting more realistic about what the value of their properties are. The number of deals is down a little but not significantly so. Obviously, the loan-to-values are lower, and buyers continue to be cautious. But these people that can get a good loan on a good product are still willing to invest. We may not see as many offers to deals, but now those offers are well thought out.”

The careful analysis of the market in the capital extends to developers, she said. They are looking more carefully at forecasts, and Jackman said she figures this will help Tallahassee avoid the rental glut that has plagued many other Florida markets.