Boca’s Rental Apartment Market Study-March 2013

The Supply & Demand for Rental Apartments in Boca Raton

The availability of inexpensive financing has led to a rash of rental apartment development and requests for approvals of yet additional developments. This trend is not limited to Boca Raton but is also occurring in all surrounding communities.

The developers of these units analyze the market before they go to the time and expense of developing plans and submitting requests for Individual Development Approvals (IDAs). For example, Archstone’s Market Analysis would have been completed over 18 months ago.  Much has changed in Boca’s rental market during these 18 months. The City Council has approved additional  rental developments and surrounding communities have new developments completed, in construction and with IDAs approved.

Supply of Small Rental Apartments in Boca Raton & Surround Communities

Existing Apartments

Archstone proposes a luxury, rental development. REIS, a widely used commercial, real estate information provider, divides rental developments into types according to the market they serve. , As a luxury rental, Archstone’s proposed development would be categorized as a Type A development by REIS.

The latest Reis report on the rental market in Boca Raton East contains data through the 3^rd quarter of 2012. These data indicate that rents increased by 0.6% in the 3^rd quarter. This growth represents a substantial decrease from the 2.3% increase in the 2^nd quarter of 2012 and indicates a slowing rental market in Boca Raton East. The slowdown is particularly noteworthy in the luxury sector of the rental market which Reis estimates had a 10.6% vacancy rate in the 3^rd quarter of 2012. Reis estimates that the rental stock in Boca Raton East grew by 6.1% during 2011, the latest data available. This growth rate exceeds by tenfold the 0.6% growth in the rental stock in Metropolitan Palm Beach County. In all, Reis indicates that 248 units were built in 2011, 232 of these units had been absorbed by the end of the 3^rd quarter of 2012.[1]

To update the Reis data, a group of Boca Citizens with experience in rental real estate and finance, visited luxury rental buildings in Boca Raton East in January and early February, 2013. We found that vacancy rates have continued to increase during the period from October, 2012 through early February 2013. A 384 unit, new luxury complex, Broadstone, began renting during this period. Our research indicates that the vacancy rate for luxury rentals in Boca Raton East now hovers between 10% and 15%. Luxury rental developments are responding to this weakness by offering both price discounts (e.g., 20% to 25%), lower move-in costs (e.g., no first and last month rental payment required) and shorter rental contracts (e.g., 7 month contracts).

New Apartments

The City has approved approximately 1800 rental apartment units for construction in the Downtown District, and a significant proportion of these units are less than 900 square feet in size.  In addition to this downtown rental development, the City has 3,755 rental apartment units at various stages of approval and construction in other areas of Boca Raton.  Further, the City Council’s Planned Mobility Ordinance allows up to 2,500 additional rental apartment units in the Northwest area of Boca Raton.

In total, the City is moving forward with over 7,500 new rental units in Boca, which currently has 10,000 rental units. This represents an increase of 75% in the number of rental units in Boca Raton.

Finance-driven development of small rental units is not limited to Boca Raton. It is also occurring in surrounding communities.  For example, Delray has approved almost 1000 new rental units and many are currently in construction and will come to market before Archstone.

Demand for Small Rental Apartments in Boca Raton

According to U.S. Census data, small rental units are mostly occupied for a transition period by young adults.  Standard Market Analyses of the demand for rental units consider population growth, expected changes in the young adult population because of employment demand or the presence of tertiary education facilities and economic/financial trends that might increase or decrease demand for renting vs. owning .  I consider each of these sources of demand below.

Population Growth

Population projections by the University of Florida indicate that Boca’s population will grow by 3.6% between 2010 and 2015, from 84470 in 2010 to 87620 in 2015. This is an increase of slightly over 3000 people. Most of these new residents, like current Boca residents, will be owners not renters. Boca’s population growth as projected by Florida’s leading university will provide only slightly more than 400 new renters between now and 2015 to fill the rental properties already approved by the City Council, much less additional rental developments currently in the pipeline.[2]  

College & University Students

It is neither in the educational institutions nor the City’s interest that large numbers of college and university students live in rental apartments in the downtown. FAU actively discourages downtown housing choices because they have found that it is detrimental to student learning, course completion and campus cohesiveness. Both FAU and the City are also concerned about the traffic congestion on Glades Road, one of the busiest roads in Palm Beach County.

During the last five years (from Fall 2007 through Fall 2012), FAU’s enrollment at the Boca Raton campus has been growing by a little over 5% per year.[3] Students that wanted to have found housing either on campus or in neighborhoods surrounding FAU, including some in downtown Boca.  However, one of the main goals of the University’s Strategic Plan is to “continue our development towards a traditional campus”.[4]

In the fall of 2012, FAU had on-campus housing for 3,478 of its students, 15% of enrolled students. The University plans to provide on-campus housing for 20% by 2015.[5]

FAU is also seeking to expand eLearning. In the fall of 2012, 10,217 students were enrolled in fully online courses.  One of the strategic goals of FAU President, Mary Jane Saunders, is to increase eLearning by 15% per year.[6] Students taking eLearning course will have less need to locate in Boca Raton.

The University is also seeking more off-campus housing opportunities close to campus (e.g., the 20th Street area). The Council has approved a 599 unit rental complex, University Park, designed predominantly with FAU undergraduates in mind at 135 NW 20th St. FAU opposed this approval because it felt that it conflicted with its goals of having more undergraduate students live on campus.[7] In addition; developers have proposed an additional 1572 rental units, University Village, on the Lamson property, between Spanish River Boulevard and FAU.

Taking into account FAU’s planned expansion of on-campus housing, projected FAU enrollment growth will yield less than 2000 new students that might fill Boca rental apartments. Some of these students will not choose to live in Boca, particularly with expanded eLearning options.

Typically, students rent a 2-bedroom apartment[8] so even if all 2000 new students chose to rent an apartment in Boca, they will provide demand for only approximately 1000 rental units. The already approved University Park project, and proposed developments on the Lamson property and in the Northwest will more than satisfy this student demand.

Conclusion: It is neither desirable nor likely that college and university students will fill the small one bedroom apartments proposed for the downtown.

Commuters

Recognizing the limited demand likely from either projected population growth or the student population, recent Market Studies submitted to the Council to support the development of large, rental complexes in Boca Raton have justified their proposed developments by claiming that workers currently commuting into Boca Raton will fill the apartment units.

Boca Raton is a City of cross commuters, 95% of whom use private automobiles for their commute. Almost 70% of Boca residents, many of whom are professional, managers and business owners, commute outside Boca for work. Almost 90% of workers in Boca Raton commute into the City for work. Most of those commuting into Boca Raton work in lower-level jobs at the hospital/university complex, retail establishments (e.g., Town Center, Boca Center), restaurants, the Boca Resort, condos and gated-communities. Most earn less than $3,333 per month and are between 30 and 54 years of age living in families with children.  Almost 85% of the commuters come from the North, South, Southwest and Northwest of Boca Raton. These are areas of lower rents with many single family homes and rental communities catering to families with children.[9]

Will Commuters Occupy the Archstone Units?

Archstone’s proposed development is in the downtown on land that cost over $20 million. According to a leading land use attorney, apartments in the downtown command a rent premium of 35%.[10]  Given this premium and current rental rates for rental units outside the downtown, we can expect rents of between $1800 and $1900 per month for the small, one bedroom rental units being proposed by Archstone and higher rents for the smaller number of larger units.[11] A single commuter making less than $3,333 per month, which most workers commuting into Boca do,  would have to spend 50% and 60% of their total earnings (not take home pay) to rent one of the new one bedroom units proposed by Archstone. A widely accepted rule of thumb is that a family should not pay more than 25% of take home pay for housing costs. Twenty-five percent of $3,333 is $833 far below the rents that Archstone would need to charge for an economically viable development.

Commuters with families would be unlikely to find a one bedroom unit with 900 or fewer sq. ft. appropriate. Larger units, some of which might be appropriate for smaller families, would likely encounter rents between $2,500 and $3,900 at luxury developments like Archstone.  These rents would be affordable by very few of the workers commuting into Boca Raton.

In summary,

• The incomes of the commuters are not high enough to support the rents required for the rental apartments proposed by Archstone,
• The family structure of commutes make small rental units unsuitable.

Conclusion: Very few of the 378 rental units proposed by Archstone will be filled by workers currently commuting to Boca Raton for work.

Economic Implication of Lower Cost of Home Ownership for Boca’s New Rental Developments

Since 2011, it has been more advantageous to buy rather than to rent in South Florida. The latest research available on the relative merits of buying vs renting in South Florida indicates that currently it is between 55% and 60% cheaper to buy than to rent in the Broward/Palm Beach Counties.[12] Increasingly, those wishing to live in Boca are choosing to own rather than rent.[13]

Conclusion: Housing market trends in South Florida will make it harder to fill Boca’s new rental properties. 

What About the Young Professionals

Archstone has claimed that it will rent to successful, young professional who want a vibrant, pedestrian-friendly, downtown experience. This seems unlikely. Young professionals are moving to downtown Boca, but they are moving to 2 bedroom, 2 bath, 1700 sq. ft. and up, luxury condominiums like 200 East Palmetto Park.[14] Successful young, professionals will not want nor will they find it economically advantageous to reside in small, one bedroom rentals. They are successful because they are smart and these professionals will recognize the substantial economic advantages of owning rather than renting.

What Kind of Downtown Will Small Rental Units Give Us?

As documented in U.S. Census data, most renters are transient.  The average length of rental for smaller units outside major metropolitan areas such as NYC is about 1 year.

Conclusions: Archstone’s proposed units will bring a transient population to the Downtown that will not contribute to the family-friendly environment that Boca is known for.

What Can Be Done If the Properties Don’t Rent?

The small rental apartments proposed by Archstone will be ill-suited for conversion to condominiums.[15] According to the U.S. Census Bureau data for 2010, 72% of condominiums have two bedrooms. Two bedroom condominium units typically have 1200 sq. ft. or more.

Wiser and more successful developers than Archstone, which was in bankruptcy proceedings and now has been sold to Sam Zell’s Equity Residential, are developing units to condominium specifications (e.g., finish, amenities and a predominance of 2-bedroom units of around 1200 sq. ft.).  The rental units approved and proposed in Boca are predominantly one bedroom and have less than 1000 sq. ft.

Conclusions: Rental projects with a large proportion of small, one-bedroom units are expensive to turn into condominiums if, as seems likely, sufficient renters cannot be found.

What Approach to Downtown Development Makes Economic Sense?

Both economics and good urban development indicate that gradual, multi-use development is most likely to lead to the livable, pedestrian-friendly and vibrant community that we all want Boca to be. The Master Plan is the design for the type of community that Boca residents want. The plan calls for multi-use development of the Downtown District. It designates major arteries (e.g., Dixie Highway and US 1) for higher density development. It designates other areas (e.g., Palmetto Park Road East) for lower density, pedestrian friendly development. Archstone proposes to build its project on a section of Palmetto Park Road East designated for lower density, pedestrian friendly development.

Overall Conclusion: The Archstone project should not be approved since it makes neither planning nor economic sense and does not accord with the City’s Master Plan.

Ann D Witte*

*Ann Witte has been a tenured Professor of Economics at Wellesley College, Florida International University and the University of North Carolina at Chapel Hill. She is a Research Associate at the National Bureau of Economic Research and is the Principal at ADW Consultants, a financial and economic consulting firm that has done work on urban development. She is the Treasurer of the Townsend Place Condominiums.