A mid-sized market showing steady growth for buy and hold
RentRange, an industry leader in market data and analytics for the single-family rental (SFR) housing industry, found in its recent data report that the Cape Coral-Fort Myers, FL Metropolitan Statistical Area (Cape Coral-Ft. Myers MSA) is a mid-sized market that has been growing steadily. The market offers more stability versus the last recession and currently offers good value opportunities for buy and hold investors.
According to the 2018 Census/ACS data, the Cape Coral-Ft. Myers MSA is the 77th largest MSA in the U.S. with just over 750,000 residents. This metro area added nearly 15,400 residents between 2017 and 2018 (a 2.1 percent increase) and ranks 41st in the country for net population gain.
According to the Bureau of Labor Statistics (BLS) Job Report (containing data through March 2020), the Cape Coral-Ft. Myers MSA employment market has been steadily growing since 2012, yet it has been slowing in the past year.
Cape Coral-Ft. Myers ranked #41 in annual job gains with 0.9 percent growth between March 2019 and March 2020. In the last five years, the overall increase in non-farm payroll has increased 14.8 percent (ranking 12th in percentage gains), which added 36,600 jobs.
Job categories in the Cape Coral-Ft. Myers MSA through March 2020 are as follows.
|Industry Group||Mar 20 Employment||Share of Jobs||1yr chg||1yr percent chg||5 yr chg||5 yr percent chg|
|Professional and Business Services||39,100||13.8 percent||1,700||4.55 percent||7,300||22.96 percent|
|Mining, Logging and Construction||33,500||11.8 percent||1,400||4.36 percent||12,200||57.28 percent|
|Education and Health Services||31,800||11.2 percent||600||1.92 percent||4,600||16.91 percent|
|Financial Activities||14,200||5.0 percent||300||2.16 percent||2,100||17.36 percent|
|Government||44,300||15.6 percent||200||0.45 percent||3,500||8.58 percent|
|Other Services||11,900||4.2 percent||100||0.85 percent||1,200||11.21 percent|
|Manufacturing||6,400||2.3 percent||(100)||-1.54 percent||1,100||20.75 percent|
|Information||2,700||1.0 percent||(100)||-3.57 percent||(500)||-15.63 percent|
|Trade, Transportation, and Utilities||54,400||19.1 percent||(200)||-0.37 percent||2,300||4.41 percent|
|Leisure and Hospitality||45,900||16.2 percent||(1,400)||-2.96 percent||2,800||6.50 percent|
According to 2018 ACS data, the various industries in the Cape Coral-Ft. Myers MSA provides a median household income of $56,129, ranking the metro 70th in the country. This is marginally higher than the statewide median household income of $55,462 and 12 percent under the national median income of $63,688. Metro incomes have enjoyed a 5.1 percent increase from 2017 ($52,052), yet only a 9.4 percent increase over the 2010 household income of $50,362.
As of March 2020, the unemployment rate reported by the BLS for the Cape Coral-Ft. Myers MSA has risen to 4.3 percent from a low of 2.6 percent reached in December 2019. This number is expected to spike above 10 percent.
Unemployment Updates Through May 9th
The Department of Labor released their unemployment insurance weekly claim report for the week ending May 9, showing another 2.98 million people filed unemployment claims during this period. This brings the U.S. to over 36.8 million jobs lost in eight weeks, temporarily bringing the early May national unemployment to 14.7 percent. The unemployment claims in the state of Florida have increased drastically in the last report, adding another 220,000 claims and approaching 1.4 million.
By comparison, national unemployment peaked near 10 percent nationally during the 2008 Recession, where Cape Coral-Ft. Myers unemployment peaked at 13.1 percent in the fall of 2009.
As the economy reboots, various industries will bounce back faster than others. RentRange analysts forecast an end-of-year unemployment rate of 8-10 percent for the market, largely due to a slow rebound in the Leisure and Hospitality segment.
Information and statistics from the Bureau of Labor Statistics employment data, Department of Labor report, Census/ACS Tables and RentRange® data sources.
HOME PRICE METRICS
Cape Coral-Ft. Myers Home Values through March 2020
Given the current economic shocks due to COVID-19, reviewing past performance and current fundamentals can give us a clue where values are headed.
Looking back to the 2000 to 2006 peak period, Cape Coral-Ft. Myers single-family home values shot up an incredible 158 percent as prices rose from $140K to $350K in six years. Unemployment rates hit a low of 2.5 percent in April 2006. A few months later, prices began to roll over by August, dropping a relative 60 percent over the next four years back down to the mid-2000 values of $140,000.
The market continued to drift slightly lower through 2010, meanwhile hitting peak unemployment of 13.1 percent. Finally, in late 2011, the job market began to improve, and home prices regained their footing.
In March 2020, the median single-family home value in the Cape Coral-Ft. Myers MSA was $264,000. Since the lows in 2011, the Cape Coral-Ft. Myers market has rebounded 82 percent over the last nine years, averaging nine percent year-over-year growth. In the last year, home value appreciation has slowed, up six percent year-over-year.
The multi-index trend shows the extreme moves in home price compared to rent, income, and employment. Household income has largely remained flat in the last 10 years. In the past 2-3 years, the rent and price trends have slowed growth trends.
WHERE ARE HOME PRICES GOING IN THE NEXT YEAR?
On the supply-side, there is a relatively low inventory of homes on the market, as active listings are down over 20 percent year-over-year in April. The Cape Coral-Ft. Myers market is 22nd in the country for new construction, adding 3,500 new units and 1,580 SFR properties YTD through March*. This rapid development pace alleviates some of the inventory squeeze and will keep price appreciation muted.
Buyer demand has not dried up, historically low interest rates have made current home prices affordable to a larger group of potential buyers. Additionally, steady population growth in the market has been adding around 15,000 new residents to the area per year since 2012.
Sales have been below average yet better than expected through April, while the metro was largely under stay-at-home orders. Real estate industry professionals adapted quickly by using digital platforms to provide virtual tours and even contactless closings to facilitate deal flow.
Demand headwinds in the market reduce the potential buyer pool due to rising unemployment, reduced wages, and uncertainty about their employment status as well as increased credit score and down payment requirements to qualify for loans.
*Census Building Permit Survey
Cape Coral-Ft. Myers MSA Home Price Forecast through 2021
Coming into 2020, buyer sentiment has been leveling off in the Cape Coral-Ft. Myers market.
Tailwinds of seasonality, low mortgage interest rates, the CARES act forbearance policies freezing foreclosures, and the improving buyer sentiment from reopening the economy are factors that should lift prices higher in the near term.
Q3 2020 Forecast: +2 percent to +5 percent
Tighter lending restrictions, a slow recovery for the large cohort of T&E jobs, seasonal slowing of market demand, and increasing defaults from non-GSEs are continued challenges to weigh on real estate prices. Medical professionals warn of a resurgence in COVID-19 cases in the fall-winter period, potentially restricting the economy again.
Q4 2020 – Q1 2021 Forecast: –5 percent to -2 percent
Analysts forecast the economy to recover by Q4-20 to Q1-21, although we expect unemployment to remain elevated near 10 percent into early 2021 but improving through the year. For those who do not qualify for an extension, the 6-month GSE-backed loan forbearance period expires in the fall (+6 months for foreclosure proceedings). The rise in foreclosures will have negative effects on home values.
Mortgage interest rates should stay low through next year and buyers & investors will snap up discounted inventory.
Q2-Q4 2021 Forecast: +2 percent to +5 percent
Disclaimer: The variability around this forecast is wide and dependent upon data available as of mid-May 2020. The severity and duration of the COVID-19 epidemic, as well as the response of the public and policymakers, continues to change daily.
As of March 2020, the average three-bedroom, single-family rental home in the Cape Coral-Ft. Myers MSA is $1,550/mo. Metro area one-year change for a three-bedroom detached SFR is down -2.3 percent, a $40 annual decrease.
Zip code level three-bedroom SFR rents range from $1,300 to $2,100. Long–term rents on the local islands and near the coast from Esthero to Bonita Springs are upwards of $2,000. Cape Coral rents range between $1,450 to $1,800. Fort Myers rents south of Highway 82 range from $1,750-$2,000. The least expensive rents in the market are in the Leigh Acres area, ranging from $1,200-$1,500.
Cape Coral-Ft. Myers ranks 42nd in the U.S. for five-year SFR rental price increases with a 22 percent gain. Less expensive areas on the northern part of the MSA have seen the largest rental price appreciation up to 30 percent. The more expensive areas to the south end of the market have increased a moderate 15 percent.
The overall rent-to-income ratio of the Cape Coral-Ft. Myers MSA comes in at 33.2 percent, slightly above the national average of over 32 percent. However, areas along the Caloosahatchee waterway can have elevated rent-to-income ratios between 35–45 percent. High rent-to-income in the MSA is just over 50 percent, with the lowest at 22.5 percent
WHERE DO RENTS GO FROM HERE?
During the previous recession in Cape Coral-Ft. Myers, RentRange measured a 25 percent decrease in SFR rents from the peak of $1,250 in 2007 to $890 in 2012. Since the lows, rental rates have rebounded nearly 75 percent to current market prices.
Rental rates in the Cape Coral-Ft. Myers MSA have recently been flattening over the last 2-3 years as buy vs. rent affordability leans to the buy-side. The market average rent price of $1,550 equates to nearly $350-400,000 of purchase power (assuming 20 percent down, 30-year fixed).
On May 14th the Federal Reserve reported that nearly 40 percent of workers in households earning under $40,000 had lost their jobs by early April. These numbers will bounce back as economies restart; however, this is a very large cohort of the renter pool across the U.S. Additionally, many job sectors in the lower income range have a slower recovery trajectory ahead.
In the meantime, the Cape Coral-Ft. Myers MSA demand for short–term rentals has been severely impacted from travel restrictions. This popular tourist destination has around 4,400 short-term rental properties. Owners are faced with a tough decision to hold through low occupancy, convert to a long–term rental, or sell the property. RentRange analysts forecast that the majority will choose to hold the property as a long-term rental for one or two years. This trend will add new inventory to the mid-high end of the rental market, and the extra supply could put downward pressure on prices in the near term.
Cape Coral-Ft. Myers Rental Rates Prediction 2020
Some areas are cheaper to own than rent, which will reduce demand heading into peak season. Economic effects will increase demand for affordable housing, and there will be significant increase in demand for Section 8 subsidized rentals. High-end rentals will see a drop in demand along with increased inventory from short-term rental conversions.
Q3 2020 Rent Price Forecast: -5 percent to 0 percent
Winter-spring months are higher activity times for vacationers. If travelers feel safe, this will spur economic activity in the area to help support prices heading into spring. If home prices dip during this time, more demand could be lost due to low rates turning renters to homeowners.
Q4 2020 – Q1 2021 Rent Price Forecast: –10 percent to –5 percent
The last five years have provided nearly seven percent year-over-year gains, and Cape Coral-Ft. Myers is due for a cooling period to allow job growth and wages to reconnect price support. Rent vs. Income metrics show the market is above the national average, and wages are not projected to rise until the economy recovers. Rental rates will see limited appreciation until the job market begins to recover.
Q2-Q4 2021 Rent Price Forecast: 0 percent to +5 percent
Our forecast for the near and long-term is that Cape Coral-Ft. Myers is still a good market for investment, even with the challenges of COVID-19. Low rates provide many opportunities for investors to find affordable rental properties. Relatively low home prices in the market, and post-2012 appreciation has been modest, but has not overshot fundamentals this time around. In fact, the market has only just recently surpassed the April 2005 median home price.
Inward population migration will support demand for real estate for people looking to rent and buy. Rent prices have recently surged ahead of median household incomes; however, home prices are still relatively affordable compared to other large metro areas, and low interest rates help overall affordability.
Be aware that the rental price outlook is expected to fall due to current economic factors. So, investors looking for buy-and-hold rentals would be wise to focus on lower cost properties and set lease rates at a competitive price in the near term. Lastly, virus fears will need to abate before tourism industries can rebound, so for now it is not a good market for short-term rentals.
Fred Heigold III is the senior data analyst at Altisource / RentRange®, an industry leader in market data and analytics for the single-family rental housing industry.