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Bubble or not?
Even investors in Colombia debate S. Florida's condo surge
From the June 25, 2004 print edition
By Ed Duggan
South Florida - The Buisness Journal
If you build it, they will come.
If you announce it, they will line up to buy.
An abundance of buyers is keeping South Florida condo sales at a record-breaking pace, but signs of a potential glut are emerging. The key question is how many buyers are speculators who will seek a quick resale and investors who will need tenants.
The worst-case scenario is a bubble - too many speculators who won't have anyone left to flip the property to or so many investors that there aren't enough renters.
"I was making a presentation to a group of investors in Bogota, Colombia, and they were unanimous that there is a real estate bubble in Miami," said Craig Studnicky, VP of Aventura-based International Sales Group.
"I disagreed and said it was neighborhood-specific. I pointed out the terrific demand for waterfront property from end-users when a project is completed," he said. "They countered with the huge number of planned condo units - 18,000 so far, with a third already under construction - on the Brickell/Miami River corridor. I had to admit that Brickell has gotten ahead of itself, but demand for Intracoastal and oceanfront properties is still strong."
The best-case scenario: The region is creating a critical mass of attractive areas, such as downtown Miami, with a vibrant mix of residences, entertainment and shopping. There will be buyers: Young people and empty nesters already in South Florida, retirees from the north and the well-to-do from Latin American and Europe.
"Every developer I talk to is bullish, especially along the [tri-county] eastern corridor," said Manny de Zarraga, executive managing director in the Coral Gables office of Holliday Fenoglio Fowler, a major North American commercial real estate equity and funding organization.
But he sees the condo market as driven by speculators and investors.
A lot someones are buying
Someone - a lot of someones - is buying. Here are recent examples:
Swerdlow Boca Investors' Biscayne Landing, the largest new residential community in South Florida with 4,500 units, pre-sold 350 units in a first phase - mostly to investors - even before a permanent sales center opened. Two- and three-bedroom units are priced from $295,000 and will be part of the major mixed-use community in North Miami.
E.B. Developers sold 100 units in one week in its first phase apartment-to-condo conversion of The Belmont in North Lauderdale - and has 1,300 people on a waiting list for the remaining 202 condominiums. The units were priced from $100,000 to $200,000.
Paul McRae of the Galleria Collection of Fine Homes reports that 90 percent to 95 percent of Wilton Station's 272 proposed residences in Wilton Manors have been reserved within 90 days, with a growing back-up list as the units go to contract in the next two weeks. Pre-construction prices range from the mid-$300,000s to the $600,000s.
Cervera Related Realty Services reports 95 percent sellout in two days at The Plaza on Brickell, a new 1,000-unit high-rise condominium project developed by The Related Group. Buyers lined up to take a number and be processed by 20 sales representatives in a tent. Prices ranged from $170,000 to $500,000.
Speculative buying raises a key question: If non-users are buying them, are developers building the right products for eventual end-users?
Andrew Dolkart, president of Miami Economic Associates, doesn't think so. He warns that thousands of high-rise units, priced at more than $200,000 and offering less than 1,250 square feet, are being targeted to a market segment that accounts for less than 15 percent of overall end-user demand based on income and household size.
Some see large or tiny bubbles building, especially in the key downtown Brickell/Miami River corridor. Others don't.
Studnicky points to the time it takes to resell condominiums as a warning flag. The average life of a Miami-Dade County condominium resale listed on the Multiple Listing Service, he said, is currently two months when priced at market rates.
"The Brickell area resale period is currently four months," he said. "With thousands now under construction there, it's easy to see that in two or three years, it could take nine to 12 months to resell."
He contrasts that with Kendall's Dadeland area, where condo resales currently average less than a month.
"An investor has got to watch those warning signs," Studnicky said.
Rosalia Picot of Coconut Grove-based Picot Realty Advisors has heard it all before and says market forces smooth everything out over time.
"I've been in this business for 20 years and every single year, I've heard that prices can't hold or that there is a bubble," she said. "In the next 10 years, 2 million people will move to Florida. My worry is that with what's here and what's planned, there won't be enough properties to fill the demand."
Key corridor along U.S. 1
A drive north on U.S. 1 from the Rickenbacker Causeway provides a view of development near downtown Miami.
First is the traditional residential area along the part of the highway known as Brickell Avenue, which turns into the financial district closer to the Miami River. The area is teeming with more than 20 projects either completed, under construction or planned.
The city that once turned its back on the river is now embracing it with projects such as Brickell on the River, Neovertika and Latitude on the south side.
As U.S. 1 jogs to the east just north of the river and turns into Biscayne Boulevard, motorists can see the Dupont Plaza Hotel, expected to be torn down and replaced by 1,200 condos. Across the street, site work is beginning on Metropolitan Miami, with 800 condos and 700 apartments. Also, next door, the 896-condo One Miami/Riverwalk is rising along the mouth of the river.
In the blocks further, developers from Mexico are planning Everglades on the Bay, with 866 condos. An additional 1,232 units are planned in three projects near Museum Park, which will be rebuilt.
On the north edge of downtown, a new, $370 million performing arts center is helping fuel development of 2,700 more condos and apartments.
Just like Henry Flagler fueled development a century ago with his railroad, developers from outside South Florida have moved in.
E.A. Fish, a Boston-based privately held family firm is developing the Latitude through Miami Riverfront Partners.
Steven Gelb, Florida partner for the project, said that the success of the historical Charles River development in Boston, as well as river projects in San Antonio and Fort Lauderdale, attracted them to the Miami River.
Jade Residences at Brickell Bay is the upscale poster-child condominium for the area's redevelopment. It's a joint project between Fortune International and Swire Properties. The sold-out $290 million, 48-story tower with 347 residences opens for occupancy in August.
Ready to pop? Experts disagree
All of the development adds up to a divided opinion among the experts.
While de Zarraga sees the local market as speculator and investor driven, he points out that even investors are putting up substantial equity, generally a 20 percent deposit. Many developers also require closings before a resale can take place.
"This is not like some instances in the past when buyers had little on the line and could walk away from a deal," he said.
The quick sales are good, especially when getting a project off the ground.
But speculators make lenders nervous and financing may be withheld from developers who have a record of building "quick-flip communities." If a project is built in phases, developers can end up competing against speculators.
Jeff Morr, CEO of Majestic Properties, is keenly aware of the speculative climate. His firm is the exclusive sales agent for Ten Museum Park at 1040 Biscayne Blvd.
The Chad Oppenheim-designed 50-story, 200-unit condominium reached a $130 million sellout in just two weeks. Ground-breaking is planned for September.
"These are real buyers, end-users, people who want to live here," Morr said.
Loaded with amenities, including a spa by Clinique La Prairie and a 25,000-square-foot sky garden, the apartments sold at prices ranging from $300,000 to $4 million.
"We don't seek out investor-buyers, nor fly junkets here from South America, or make presentations there," Morr said. "Our marketing is localized in South Florida and New York, where the bulk of our buyers originate."
Possibility of rate increases
Real estate pros who have seen more than one real estate cycle warn that the speculative road to wealth may be paved with some rugged speed bumps. They warn of higher interest rates and the financial ability of new developers to handle rising construction costs.
Michael Y. Cannon, managing director of Integra Realty Services, sees a warning sign in the 8,500 unsold Miami-Dade condominium units on the market.
"When it gets to 10,000 units, I know there is a problem," Cannon said. "Unfortunately, the data from the courthouse is at least six months behind because of a computer upgrade program under way there. We are monitoring it closely."
Oversupply at $750,000 and up
"In every hot market, there are cold spots and in every cold market, there are hot spots," said Ed Easton Sr., chairman of the Miami-based Easton Group. His firm warned of the high-tech stock bubble in early 2000 and advised clients to move into commercial real estate. Those who listened caught the strong real estate market upturn and avoided the dot-com fallout.
He cautions now about rising interest rates and an over-supply of luxury condos in the $750,000 and up range.
Kevin Tomlinson, a Realtor with Esslinger Wooten Maxwell in Miami Beach, agrees, saying developers are building to a perceived coming demand by baby boomers for estate-size condominiums.
He sees an imbalance in the $750,000-plus Miami-Dade condo market, according to figures from The South Florida Regional MLS.
"There is currently a 22-month supply of resale units in that range," Tomlinson said. "The market is considered in balance when there is a six- to nine-month supply. If new inventory stopped coming to market, there are enough super-luxury units for approximately two years. Clearly, it's a buyers' market [in that range]."