Rising Rental Rates Not Exactly Good News For Owners

, Daily Business Review

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Elliot Shainberg, Franklin Street’s senior director and specialist in multifamily brokerage
Elliot Shainberg, Franklin Street’s senior director and specialist in multifamily brokerage

"It's not necessarily the price of materials that's going up," said Steve Patterson, president of Related Development LLC, which has multiple projects in the works and has broken ground on 3,000 units in Miami-Dade, Broward and Hillsborough counties. "What is going up is profit taking. All the vendors and contractors that have been suffering for the last five years are finally having the opportunity to take a profit."

That practice is inflating cost projections, especially as builders cope with a tight labor market and too few resources to match booming demand.

"Right now, construction companies are optimistic about their future pipeline. They're trying to be cautious about growing their companies, because they don't know how long it will last," Patterson said. "But they're probably going to contract with numbers that are much lower than are being quoted today. Quoted deals are seeing some pretty eye-opening numbers, but I don't think that's real."

Record Rates

What is real, though, is the steady rise in rental rates.

"Once you get past $2 a foot, you're at record rental rates for the Miami and Brickell corridors," said Craig S. Studnicky, principal of International Sales Group LLC. in Aventura. "Most developers realize that once we reach an average of $2.50 to $3 per square foot, most renters are going to look for alternatives. Within a year it's quite possible to hit $3 per square foot. But unfortunately salaries and wages don't go up that fast. It means investors and developers will have to settle for lower yields. And if construction prices continue to rise, what will happen is we'll stop building at the rates we're building now."

But for now, observers are optimistic.

"In general a lot of people are predicting that 2014 will be a strong season. We're very well positioned to see increase pricing values. I don't see any desperation in the market at all," said Douglas Elliman's Parker. "We're in a very healthy environment, driven by the most basic of economic principles—supply and demand. The investors coming in are patient investors or second- or third-home buyers. Their dollars are still looking for places to park. And as long as that exists, prices are going to continue to rise."

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