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

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

The current inventory of new condominium units in this sub-market exceeds 22,000.6 In the current marketplace in Miami-Dade County, using fundamental demand, and without making adjustments for the bulk sale of unsold condominium units, it is reasonable to assume that a 10- year supply of condominium units exists. Sales at prices less than the hard cost of construction would likely mean that the value of the land, the developers' initiative, design fees, soft costs, legal fees, marketing costs and interest expenses are burned to the ground and lost forever. This would be a scorched earth outcome.

RESET PRICING: ANOTHER STEP DOWN THE DEATH WALK

What does reset pricing mean for existing condominium housing stock where mortgages are at prices that are higher than bulk sale prices of new inventory? The reset pricing of formerly mature and stable projects is creating a disconnect throughout the urban condominium asset class in Miami. One project finished in 2003, known as Jade, was sold out prior to Certificate of Occupancy; 70 percent of its units were sold by October 2002.7 There were 300 reservations within two weeks of releasing the first 30 units in August 2002.8 Jade now has a significant number of its 340 units in foreclosure. There are now three mature buildings in the Brickell submarket with disproportionate numbers of foreclosures pending.9 In 2008, The Vue at Brickell had 49 foreclosure actions pending, and The Club at Brickell had 54.10 Combined, these three buildings in the same submarket (Jade, the Vu, and the Club) exceeded $100 million in mortgage foreclosures11, which puts unforeseen financial pressure on the condominium associations, and would cause a good faith purchaser to take pause at any price because of the uncertainties with respect to the viability of the condominium association and its ability to maintain the asset. It is important to note that when lenders foreclose on condo units, they are not required to pay the monthly fees that accrue during the foreclosure process; those costs are borne by the association. Lenders often delay foreclosure sales to avoid paying association fees. Financial pressure on condominium associations is a second barrier to recovery of the luxury condominium market in Miami.

THE TRIPLE BYPASS

The securitization of mortgage loans has fostered a complete abdication of prudent underwriting and has resulted in a new phenomenon which we will call "the triple bypass."

In the triple bypass, three important underwriting protocols were ignored. First, businesses were created with telephone boiler rooms to conduct "inspections"-actual site visits for property inspection did not occur. Second, due diligence modeling, such as a rental income analysis, was bypassed as part of construction loan underwriting. Third, the real structure in condominium purchase agreements, including meaningful deposits being placed at the time of execution of the contract, the time of commencement of the project and at a time certain during the construction phase, were ignored. Such contract provisions would have ensured a high degree of certainty that contracts would close.