Miami An Appealing Apartment Market Despite Challenges

As an apartment investment market, Miami has its pros and cons. Strict building codes, high insurance premiums, and the threat of natural disasters are among the latter.

However, a new report from Freddie Mac on the area concludes that many residents and investors believe that the potential after-effects of climate-related disasters are well mitigated to justify that uncertainty as well as the higher cost of living.

Those challenges nonetheless are worth spelling out. The International Code Council, and the Insurance Institute for Business & Home Safety rank Florida as having the strictest building codes in place, “but that doesn’t mean more affordable housing can’t be built,” Freddie Mac said.

One new code update includes installing a sealed roof deck in a high wind zone, designed to keep out up to 95% of water entering the building, even if the roof has been damaged.

New properties located in flood surge zones must be raised up above the expected flood range. That means that in some places new buildings in these areas could be elevated as much as 10 feet off the ground.

But people are still willing to take that higher ground to live there.

As for insurance, the average insurance cost per unit as of 2022 was about $525. In Miami, however, costs are nearly double that.

Indeed, the median insurance cost is estimated at a little more than $1,000 per unit making it the third-most expensive metro, according to an August 2023 report from Moody’s Analytics CRE. That is nearly on par with the estimated cost in New York City but is still well below the nation’s top two metros of San Francisco at nearly $1,087 per unit, followed by New Orleans at about $1,020 per unit. Inflation is not the only reason for the sudden run-up in insurance costs, especially in Florida.

One major issue, which was resolved in mid-2022, was the so-called “25% rule” which was implemented in 2014 and stated that if 25% or more of a roof needed to be repaired or replaced, then the insurer would have to pay to replace the entire roof.

Today, if the rest of the roof meets the building code, only the specific section needs to be replaced.

All that said, there are key market fundamentals that draw investment to the region, consisting of lifestyle, warm weather, job growth, positive net migration, local amenities, and most importantly, demographic trends.

These factors have led to steady demand for multifamily rental housing with rent growth positive even after remaining flat in Q2 2023. In many instances, the pace of rent growth in the metro has exceeded that of the national average.

Freddie Mac states that renting is expected to continue to be a less expensive alternative to owning a home in Miami, making for another positive sign to investors.

“Despite the current lull in multifamily sales volume, once interest rates decline, then stabilize, and demand for multifamily remains strong, coupled with higher for-sale housing prices, investors will pick up the pace of multifamily transactions, returning to more normalized activity levels,” according to the report.