When Will the Miami Condominium Market Recover? Follow the Land, Man

Real Estate Issues, Spring 2009 by Langhorne, Richard, Blazejack, John

Note: The following is commentary. The opinions expressed belong solely to the authors.

SINCE 2003, DEVELOPERS HAVE BEGUN CONSTRUCTION ON 22,000 condos in downtown Miami, which is more than double the number built over the last four decades. "For sale" condominium inventory has doubled. Residential vacancies have doubled in the past year. Prices have slipped downward dramatically.

As lenders have tightened restrictions on mortgages for condos, the closing rate on downtown condo sales has dropped from 18 per day in 3Q 2008 to five per day in 4Q 2008. Everglades on the Bay, for instance, an 848-unit condominium facing Bayfront Park and Biscayne Bay started closings in November. By December 31st, it had closed 18 units. Another project of more than 700 units in the Brickell market closed 106 units and stalled. In that project, one of the penthouse units currently is being rented for $2,000 a month, or just $1 per foot per month.1

BACKGROUND

In 2008, nearly 2.7 million square feet of condominiums, townhouses and single-family homes in coastal South Florida sold at an average discount of 43 percent. According to the Vultures Database(TM) (CondoVultures.com) that tracks residences where the price has dropped by at least 10 percent or $100,000, a total of 1,717 properties east of Interstate-95 in Miami-Dade, Broward and Palm Beach counties traded last year for a combined price of $775 million, down from a historical high of $1.33 billion. The overall price drop equates to a combined discount of more than $550 million off the historical high asking price for the properties. In each of the 12 months in 2008, an average of 143 residential properties in the Vultures Database sold at 57 cents on the dollar. For comparison, in 2007, there were 1,272 properties in the Vultures Database that sold at an average discount of 29 percent.

On Dec. 31, 2008, the Vultures Database was comprised of 4,301 condo units, townhouses and single-family houses in South Florida that had dropped in price by an average of 39 percent. Condos and townhouses, which account for 69.6 percent of the total, are down an average of 38.5 percent. Single-family houses, which represent the remaining 30.4 percent of the inventory, are down an average of 40.0 percent. According to the Vultures Database, the average price drop for condos in Greater Downtown Miami has been 41.8 percent, while across the causeway in Miami Beach, the average discount has been 34.3 percent.

DOWNTOWN MIAMI

This article focuses on one submarket, downtown Miami, to show specific actions on the part of planners, city officials, developers, lenders and speculators that have led to overextension and overbuilding to the detriment of the market and the general public. In Miami, for instance, rental vacancy more than doubled from 2.6-5.8 percent from November 2007 to November 2008. For perspective, vacancy rate was 3 percent county wide in 2001 for buildings 18 months or older.2

We have seen the enemy. And the enemy is us.

The table and graph below indicate land prices from 2000 through the end of 2008.3

The land prices drop for high-density sites as the market becomes aware of the CMBS problems and financing availability diminishes. The new highest and best use for vacant sites today would include hotel, office and rental apartments, as well as retail. The big change will be a much smaller building envelope and lower FAR, all of which reduces the land value in a land residual model. This puts downward pressure on price points and elongates the recovery time frame. The two most recent sales are reflective of the 2002 prices prior to the run-up in values.

ON THE WATER, CIVIC OVERSIGHT IS FOGGY

In every urban area that has access to a large body of water, whether it be a lake, river, ocean or back bay, there almost always comes an initiative for commercial real estate development on what are likely the most pristine of waterfront locations. Often these locations are those that the general public should enjoy and that government should actively protect for future generations. But when markets overheat, the development community seems to be unable to resist the opportunity to get at these locations. In the case of South Florida and, particularly Miami, there has always been a struggle between preservationists and developers. In the case of Miami-Dade County, the ebb and flow of the public-private struggle for saving or developing pristine waterfront parcels is emblematic of each real estate cycle, whether it be a frenzied run of overbuilding or the aftermath of a complete market collapse.

One longstanding example is the development of the Bayside Marketplace in the center of the City of Miami's downtown waterfront known as Bayside Park. The struggle for this 230,000-square-foot development with its accompanying 1,200 space parking garage went on for years. By the time the development commenced, the real estate cycle which prompted the fervor to create Bayside Marketplace had long passed, and most could not even remember how the idea had even been conceived. At one point, the developer negotiated the land lease (which had the City participating in net income) without defining the expenses, resulting in the elimination of any financial return to the City.