Last Cast Letter #2: Asset Class and Location

The case for workforce housing on Miami Beach.

February 28, 2023

Hi All - Happy Tuesday. It’s the last day of the month, which means it’s time for the Last Cast Letter.

This is the second send. If you’re new to the list, or you missed the first one from January 31st, here's the link.  

Last month I covered who I am, what I’ve been up to since I left Blackstone, where the name “Last Cast” comes from, and “why Miami” real estate makes sense from a macro perspective.

Now, with that said, “Miami real estate” is a pretty broad descriptor. There are 25+ neighborhoods in the city. Each of these unique pockets is defined by a distinct property mix that includes offices, industrial warehouses, retail locations, restaurants, shopping centers, single-family homes, multifamily apartment complexes, specialty outlets, healthcare centers, golf courses, land, and more.

Today, my goal is to dive deeper into which exact neighborhood and property type sound attractive, and why. Without burying the lede that would be workforce housing in Miami Beach.

Before we begin, I want to make a quick note: Last month I said, “the primary focus will be affordable housing in Miami, Florida, and even more specifically, Miami Beach.” This wasn’t the exact right description of what I’ll be focusing on, but it wasn’t completely wrong either. Workforce housing and affordable (or subsidized housing) are slightly different but still related. This explainer on the Minneapolis Fed's website is helpful. TLDR: Affordable housing is a subset of workforce housing.

"The terms workforce housing and affordable housing are often used interchangeably... We define ‘workforce housing’ as housing that is affordable for the local workforce. Now, that might be across a span of different incomes depending on what the local wages are. ‘Affordable housing’ intends to be defined as housing affordable usually with some assistance or subsidies often for low or moderate-income households. So, while affordable housing might be a certain set of the housing spectrum, workforce housing is slightly larger in that it might incorporate both affordable units and some market-rate units that are affordable based on most local wages."

Why Miami Beach & Why Workforce Housing?

Last month the 30,000-foot view and argument for why Miami broadly makes sense boiled down to two things: supply and demand. Zooming in, these two drivers underpin the investment thesis for Miami Beach workforce housing as well. Here’s an oversimplified way to look at it:

  • Supply: It’s an island with limited to essentially no available land for new development.

  • Demand: It’s an international destination that saw a major pop during the pandemic.

I want to pull at the supply thread first using recent reporting that I’ve saved over the past month.

Supply Part 1: Limited Product

At the end of January, the Miami Herald published a piece from Aaron Leibowitz titled, “‘It’s embarrassing’: Why does Miami Beach keep failing to meet affordable housing goals?” Remember, there’s a distinction between affordable housing and workforce housing, but in this case, we’ll use the lack of affordable housing as a proxy for the lack of workforce housing as well. Leibowitz writes:

"In 2011, Miami Beach officials set an ambitious goal to address the city’s need for more affordable housing: 16,000 units for 'low and moderate income households' by 2020. By 2017, when it was clear that goal wouldn’t be met, the city set a new benchmark in its comprehensive plan: 6,800 affordable units — more than one in 10 housing units citywide — by 2030."

Fast forward to today and Miami Beach has about 2,000 units of income-restricted, subsidized housing. Moreover, officials say there’s no clear path to 6,800. Leibowitz outlines how “regional forces have combined with factors unique to Miami Beach to limit progress.”

“Vacant land in the city is sparse. Land values are high, especially near the water. About one-third of the city’s housing units are vacant, mostly for seasonal use, according to U.S. Census estimates. And officials have struggled to slow the proliferation of short-term rentals, which can drive up rents and take housing options away from locals. The result is that most developers are flocking to the beach to build luxury condos, not affordable housing.” 

  • Finite resources (land)

  • Seasonal use

  • Short term rentals

These three factors sap the supply of workforce housing which caters to professionals such as police officers, firefighters, teachers, health care workers, retail clerks, and in the case of Miami Beach, hotel staff.

Now, before I outline the demand side of the equation, using the tourism industry as a jumping-off point, I want to highlight another supply-related theme. To me, it makes Miami Beach slightly more attractive compared to other areas in the city when I think about the next 2-5+ years and it has to do with all of those cranes you see on the other side of the causeway.

Supply Part 2: Fundamentals 

Right now, “a record 28,000 apartment units are currently under construction in the Miami metro area, with 10,500 set to complete by the end of the year, with another 9,960 opening in 2024,” David Matthews wrote for Loopnet on January 30th. “At 15.9%, Miami leads the nation in apartments under construction as a share of total inventory.”

More specifically, as noted by The Real Deal, “South Florida multifamily developers are expected to complete 22,541 units in 2023, which would surpass annual deliveries for at least the past decade, according to a Berkadia report. The volume of new units is almost double the 12,179 apartments completed last year and more than the roughly 13,000 apartments finished in each of 2021 and 2020. (All numbers are for market-rate units only.)”

Although, “Miami's third-quarter 2022 net absorption as a percentage of inventory ranked first among the nation's 50 largest apartment markets and exceeded the three-year pre-pandemic average by over 70%,” Matthews writes, The Real Deal also points out that “the forecasted number of new units would surpass this year’s expected net absorption of 16,179 units.”

Matthews notes that “More than half of the 28,000 apartment units under construction in the Miami market are in downtown Miami and are in new 4- and 5-star buildings charging an average monthly rent of $3,070, which is about $200 higher than downtown’s average.”

So what does this mean? There is a lot of new supply coming online this year and next, and a lot of it is being delivered on the bay side. As of 3Q2022, the demand was still fairly robust, however, the verdict is still out on whether or not that will hold up in 2023.

One thing I’ll never forget Jon Gray saying at Blackstone is:

"If you see cranes and capital, you’re too late.”

This quote articulates my hesitation about buying on the bayside. Although Miami is squished between the everglades and the Atlantic Ocean, there’s still more room to build over there. Available land on Miami Beach is essentially capped, so when rent growth slows, which it already is, I think mainland properties will be more heavily impacted.

I don’t think Gray’s quote means Miami should be avoided altogether, I just think you need to be a bit more targeted in your approach right now and extra conservative in your underwriting.

In summary: the lack of workforce housing on Miami Beach combined with the incoming housing product on the bayside illustrates why I favor one over the other right now.

Demand Part 1: Miami Beach’s Backbone

I’m hopping around a little bit here, but in the first supply section above I noted that a lack of workforce housing is an issue that’s already been rearing its head for Miami Beach’s tourism industry.

In what I believe goes without saying, Miami-Dade’s tourism industry is worth tens of billions of dollars annually. In 2021, 24.2 million overnight and day visitors came to the Miami-Dade area. They spent an estimated $19.2 billion. Each year Miami Beach specifically hosts 30-40% of these visitors.

The critical cogs in the machine that run Miami-Dade’s multi-billion dollar tourism industry are the receptionists, the housekeepers, the waiters, chefs, storeowners, lifeguards, and valets. This group, like everyone else in the world, would prefer not to commute.

However, with a lack of options available, many spend multiple hours getting to work. In 2017, the Miami Herald profiled a hotel housekeeper named Odelie Paret who gets up at 4:30 a.m. every weekday to catch two busses to her job in Miami Beach. She is one of the 43,000 who commutes there every day.

On an overlapping note, the Herald’s real estate reporter, Rebecca San Juan, published a piece in September titled, “Where are essential workers? South Beach employers can’t retain them in housing crunch.” Here’s a snippet:

“South Beach employers are struggling to run their businesses due to the inability to hire and retain enough essential workers. They blame the scarcity of talent on the city’s skyrocketing apartment rents and lack of housing workers can afford.” 

Given the option of living closer to work, many would. In fact, in the very first article we cited above, “Demand for affordable housing in the city far outweighs supply for those who need it most,” Aaron Leibowitz writes.

“Wait lists for affordable housing in Miami Beach point to the need. More than 12,000 people applied in 2019 to be placed on a wait list for studios in five affordable city-owned buildings. Of 1,000 randomly selected, nine have since been housed, according to city officials. … Meanwhile, almost 44,000 people applied for a lottery last year for approximately 3,000 housing choice vouchers administered by the Miami Beach Housing Authority.”

Again, affordable housing is a slightly different product than workforce housing, but the figures highlight the demand for both. Or, the demand for housing that supports the workforce that supports the multi-billion dollar tourism industry.

Demand Part 2: Pandemic Pop

It’s a story that’s been told a thousand times by now, and one that I outlined in the first edition of the Last Cast Letter, but to reiterate: Americans are moving south. The more pertinent question is whether or not this is a short-term phenomenon. Reports released over the past month seem to indicate that the answer is no. Take a look:

Besides the abundance of sun and salt water in Florida, I think people voted with their feet during the pandemic for two main reasons: finances and freedom.

  • On the financial front, “New residents have been lured by year-round sun, Florida’s low taxes and cheaper housing costs, which — despite the recent increases — are still lower than the cities people were leaving,” Hugo Cox writes in the Financial Times.

  • On the freedom front, Florida ranks second behind New Hampshire on the Cato Institute's Freedom in the 50 States index. Here’s how this is calculated if you’re curious and please keep in mind the outlet’s Libertarian slant. With that said, on the other end of the spectrum New York came in dead last at 50, California ranks at 48, and Illinois at 37. Florida attracted many people from these states, which I think is telling.

Now, not every one of these newcomers ended up in Miami Beach. In fact, what I’ve learned after living in Miami for a few years is that the city has certain pockets that speak to certain people. A friend of mine who lives in Coconut Grove can’t imagine living anywhere else. He says he hardly ever goes to the beach and plans to stay there for the foreseeable future.

Meanwhile, I know people on the beach who can’t imagine living in Coconut Grove. Why on earth would you move to Miami and not be walking distance from the beach, they ask? The traffic is horrible in Coconut Grove because of the schools and parts of the neighborhood are a little bit sketchy. In reality, both areas are fantastic and like everything in life, they have their pros and cons.

My point is that for every 100 new people that moved to Miami over the last three years, not everyone chose Miami Beach. But the area still saw above-average demand, which led to above-average rent growth.

What’s Next

As I mentioned above, now the question revolves around the staying power of these shifts. Here are a few thoughts before I go:

  • If this population shift happened in 2008, I don’t think the demand would be as sticky. Miami’s economy is much more diversified than it was during the Great Financial Crisis. Major financial institutions and technology firms are planting flags in the city. This is something that just didn’t exist on a similar scale 15 years ago. Bosses would have been able to call their employees back to the office easier back then. I think a more diversified local economy, combined with a greater acceptance of remote work, means people will have an easier time staying in and moving to Miami.

  • Even if these trends do persist, I think it’s important to be a realist. The rent growth we saw over the past few years won’t last forever, and I’m seeing that firsthand with some of the individual units we bought last year. My plan for next month is to highlight a few of the units we purchased and outline what they were renting for, where they are renting now, and how I’m thinking about forward assumptions.

Final Thoughts:

  • If you are interested in investing in any future opportunities, please don't hesitate to contact me. I can explain my thoughts more broadly and where we are in the process.

  • If you know of anyone else who might be interested in investing, please feel free to make a connection. I can add them to this list and schedule a time to speak with them.

— Brooks

Complete Footnotes and Related Reading