Dear Investors,
Our 3rd quarter continued our march towards stabilization. Wenonah Place is through Mechanical, Electrical and Plumbing, while Australian Pines is through framing and stucco and just starting MEP. Drywall and Durock and Tile are next at Wenonah. We are, as usual, in the tail end of a hurricane season and keeping our collective fingers crossed for a smooth end. As you read this, the majority of activity will have passed as over two thirds of Atlantic activity occurs between August 15th and October 15 (on average). So far, our portfolio remains unscathed, aside from some minor landscaping clean-up. We were fortunate this year as Hurricane Milton generated tornadoes in neighboring Wellington and Palm Beach Gardens, despite the hurricane making landfall in the Tampa area and crossing the state up north of Port St. Lucie. As I did last year, I want to take the 3rd quarter report as an opportunity to discuss the general environment we see and how it fits into our investment criteria. There is a very simple number that we track which can be broken down in far more detail, but which we think, even in its plainest form, is helpful for evaluating municipalities: Population Growth. Markets throughout Florida have seen populations booms and the accompanying increase to prices and rents that go with it. At its most basic level, this is a supply and demand issue. Places like West Palm Beach, Miami, Tampa, Sarasota, Orlando and Jacksonville have experienced significant changes to their housing markets over the past two decades that differ from national averages, but look familiar to other localities with growing populations. Orlando's boom has been particularly noteworthy recently and has drawn our eye to the smaller, neighboring (and coastal) Space Coast.
Our analysis gets more complex as we attempt to make predicative claims about
sub-markets in an attempt to understand where we will find rent growth next.
Many of the data points associated with multi-family residential real estate are
highly correlated, so we search for indicators that are not related to income growth,
population growth, employment growth or construction starts. These indicators
end up in a "Status Worksheet" that we draw from and include "Right to Work"
status for every state, state and municipal rent control, rent stabilization and lowincome
(or workforce) housing policies. We include every state's ranking in the
annual U-Haul One-Way Rental Report and have a list of all of Starbucks' openings
and closings since 2005 (courtesy of a wild guy named Winter who endeavors to
visit every Starbucks in the world). We include information from the National
Report Card to see how each state's school system does at educating their youth
and rates of violent crime to measure how a municipality does at keeping its
citizenry safe.
What we find is not novel and it is partially why our investment in West Palm Beach
has worked out so well. Cities grow at much higher rates when they are smaller
and the effects of that growth on downstream measures such as rent are much
larger. West Palm Beach is a city of roughly 125,000 people, though the greater sub-market, which includes Delray Beach, Stuart, Boca-Raton and Lake Worth, is
roughly 1.6 mm people. The national list of markets with the highest rent growth in
Class C multifamily over the past ten years is filled with small to mid-sized cities:
Hilton Head, SC.... Gainesville, GA.... Melbourne, FL (a city we are targeting for
future acquisitions).... Sebastian, FL all have rent growth between 85% and 110%
over the past ten years and their populations range from 170,000 (Sebastian) to
670,000 (Melbourne). Santa Fe, NM, also a city of 125,00 people (though with a
small surrounding market) was #5 in the nation with rent growth of 84.9% over the
past 10 years. It takes until #7 on the list of national cities, in terms of rent growth
over the last ten year in Class C Multifamily, to find a market with a population
greater than 1 million and that is Las Vegas, NV (2.36 mm people). The next
market with over 1 mm people is the West Palm Beach MSA at #11 overall
(+81.2% rent increase). All told there are only 14 markets with over 1 million
people in the top 50 of rent growth over the past 10 years. As an aside, 12 of those
50 markets are in Florida. The representation when looking at 5 year figures is,
perhaps, more impressive:
What our analysis, which is imperfect, but improving as we add variables and refine
our model, tells us is that we want to identify promising markets they should between 100,000 and 750,000 people in size, be located in states without state
level rent control or rent stabilization laws (with an added bonus if these laws are
prohibited by state legislation), have net positive Starbucks opening in excess of the
national average for all states, be located in a state that consistently ranks in the top
half of the county in the U-Haul One-Way report. A market such as this, which still
applies to the city of West Palm Beach, is a good candidate to experience population
growth and outsized rent growth.
We will get back to our own portfolio in much greater depth next quarter, but there
is plenty of information contained within our management report.
Thank you for your continued support.
Regards,
Clem
