Walter Duke + Partners enjoys a unique perspective having been through many real estate cycles in the Florida market over the past 40 years. One question I get asked a lot from many of our clients, is about the state of the Miami Condo Market. Below are some of my most recent observations.
Tapping the Brakes
The Miami market is definitely plateauing due to growing over supply. Developers are shelving plans but there are still many more units to be delivered. We are also noting many more end-buyers putting their units on the market which will compete against current pre-sales. Fortunately, this is nothing new. Rising construction costs, increased competition, and a vastly devalued dollar against struggling South American economies, have served to tap the brakes on the Miami market for over a year now.
Financial restrictions imposed by the Feds on the source of funds has hampered high-end sales. Up until that restriction was imposed, the affluent high-end projects were the market stars. This will impact Miami Beach, Miami, Surfside, Bal Harbour, Sunny Isles Beach, and Coconut Grove.
Circling the Wagons
Developers are circling the wagons to lure domestic buyers. Domestic buyers move much slower than foreign buyers. Sale paces will definitely trend slower. Many are also seeking to penetrate the Chinese buyer market which has been largely untapped.
Some underwriters have started asking for 2009 value reference points to assess downside risks.
Hold and Land Bank
We see smarter, more experienced developers pivoting to a “hold and land bank” position. One example is Terra Group in Coconut Grove. Rather than raze a 12-story Class C MF deal to build Phase II of Park Grove, they are rehabbing the building and going to operate it until the next cycle.
Developers seeking to keep their momentum have shifted to rental product. However, this market is also getting crowded and equity is increasingly on the sideline letting their early deals cycle out while they wait out the presidential election. Some developers like Greystone are rolling out niche concepts, like Dadeland Overture, which caters to Active Adults in the 70 year old category and are priced above market rate projects, but below Independent Living product. There are much more services and common space in this Active Adult product. The construction cost is also about 25% more than typical luxury multi-family product.
Less Expensive Dirt
Much of the capital has fled north to Broward and Palm Beach seeking less expensive dirt and more affordable markets. Now markets like Fort Lauderdale are starting to get heated in the multi-family space.
There has been a noticeable pullback from the big banks in the Miami condo market, except for the best developers, on the best sites, with the best product. Secondary lenders, such as Bank of the Ozarks, are now trolling the market in search of opportunities that produce greater yields along with the cycle risk. Private lenders and equity sources are now underwriting “loan to own” scenarios as developers that lack staying power struggle to hang on.
Best in Class
Those who bought land in Miami after 2013 and don’t have their projects out of the ground by now are at the greatest risk of significant financial losses. Those whose projects are under construction and/or are “best in class” are the most insulated.
I still don’t believe that we will see anything like the Great Recession, but there is growing evidence that the Miami market is entering into a hyper supply mode that will result in lower prices and financial losses. The upside is that maybe, finally, there will be more affordable opportunities for domestic buyers to afford urban residential product.