This article originally appeared on CoStar Insight. It has been republished here with permission.

Apartment vacancies across South Florida have continued their upward trajectory going into 2024, standing at 5.4%, 7.2% and 7.8% for Miami, Fort Lauderdale and Palm Beach, respectively. Fort Lauderdale has seen the widest vacancy expansion since the beginning of 2023, rising over 1.6 percentage points.

Vacancies have expanded across star ratings, though they remain the highest for four- and five-star properties, standing at 8.4%, 9.8% and 9.5% for Miami, Fort Lauderdale and Palm Beach, respectively. The vacancy rate for luxury buildings is expected to remain elevated through 2024 as a historically elevated supply wave continues to effect market fundamentals, specifically in downtown areas.

These new properties that have been completed, which tend to command the highest asking rents in the market, will continue to face leasing obstacles soon. Part of these challenges are supply driven as 56% of one-bedroom units built since 2019 have asking rents of over $2,400 per unit, and incoming supply will continue to focus within these higher-rent segments.

The other side of the coin is that these high-end apartments are tailored for a limited pool of renters, which has historically resulted in significantly higher vacancies for units asking over $2,400 per unit. In fact, over the past 10 years, vacancies for properties with one-bedroom units with higher asking rents have hovered between 12% and 14%. Although, these have recently come down, they remain well over 10%, two percentage points higher than the next bracket of units with asking rents of between $1,800 and $2,400 and more than double the vacancy of more-affordable units.

Despite their recent contraction relative to the 10-year average, luxury vacancy rates are likely to return to the long-term historical trend as new supply opens while the rental demand pool remains largely concentrated in lower-income residents. Over 78% of renter households in South Florida make $79,000 a year or less, according to 2021 Census data. Roughly 15% of renters make between $80,000 and $139,000, while only around 6% make more than that. Higher-income residents tend to favor homeownership, making up a significantly higher proportion of owner households.

It is therefore not surprising that apartments with lower asking rates have historically seen tighter vacancies, as a healthy rental rate for the typical South Florida renter household stands within the range of $2,000 to $2,700 per unit.

Despite South Florida enjoying an influx of high-income residents from other states, net migration, specifically in the Miami area, has historically been driven by international migrants. In fact, around 37% of South Florida renter households are non-U.S. citizens, compared to the national average of 14%. The international migrant to the area typically makes a lower income of around $30,000 per year, pointing to a significant share of the renter pool which remains significantly priced out of any new development.

Market participants have indicated an increasing use of guarantor companies, like TheGuarantors, which guarantee leases for renters who may not typically qualify based on income level, to lease-up their recently completed property. With an emphasis on filling units rather than increasing rents since 2023, this appears to be a short-term solution that is working out for some. That said, over the longer term, rising costs such as insurance and maintenance will warrant higher rents which will be hard to push on cash-strapped renters.

This mismatch between the rental price of new property and the existing renter demand pool in South Florida will become increasingly apparent as the bulk of the supply wave hits in 2024. Managers have already begun to increase concessions in 2023 and these will continue to be elevated this year as market competition heats up. This rise in concessions will essentially mute any rise in effective rental rates for the four- and five-star segment, as was the case in 2023. For now, there does not appear to be any relief in the near future, as the market will have to await for the supply wave to pass which is not expected until after 2026.

Read additional insights and updates about the South Florida CRE market in the March 2024 issue of BID Magazine. Download your free digital copy here!