Many proposed rentals could become condo conversions

Article Courtesy of The Miami Herald

By Peter Zalewski

Published May 29, 2012


Rising lease prices are prompting developers to build -- increasingly with bank financing -- apartment projects to capitalize on the spike in rents.

If history is any indicator, South Florida's next generation of residential condo conversion units are currently being proposed, financed, and built in Miami-Dade, Broward, and Palm Beach counties under the auspices of rising rental rates. 

In a trend reminiscent of South Florida's last condo boom and ultimate bust, rising lease prices are prompting developers to build -- increasingly with bank financing -- a new wave of apartment projects to capitalize on the spike in rents. 

If the South Florida condo market returns to any form of normalcy, where most residents users can actually purchase units, many of today's newly proposed rental projects would be expected to be converted into condominiums and sold off for a premium. 

During the last South Florida real estate boom, several proposed and existing rental towers were converted under such a scenario into condominiums, including the Skyline and the Vue in greater downtown Miami, the Tides and the Wave in Hollywood Beach, and the Las Olas By The River and the Village East in downtown Fort Lauderdale. 

For the last six months, developers from various real estate specialties -- ranging from office towers to industrial warehouses -- have been rushing forward with plans to construct at least 3,000 new rental units scattered in locations from Kendall to Coconut Creek with everything in between, including Miami's Upper East Side, downtown Fort Lauderdale, and Hollywood's Young Circle neighborhoods. 

The proposed residential rental units are slated to be developed in a variety of projects, ranging from a pair of 20-story high-rise towers with 400 units on 79th Street at Biscayne Bay in Miami to nearly 400 units in a series of low-rise buildings on a 24-acre site in Coconut Creek. 
Construction of these projects -- often on former condo development sites -- is in the early stages of development but expected to begin by the end of 2012 with the first units scheduled to be ready for tenants by late 2013. 

The new residential rental units are targeted toward users who cannot -- or choose not to --  purchase in South Florida for a variety of reasons, including an inability to pay all cash for a property, credit problems, difficulty securing mortgages, or the fear that the market has not yet bottomed. 

Regardless of the reason for not purchasing, South Florida's rental population is faced with lease prices that are rising at rates two and three times that of annual inflation. 

For example, the median price per square foot monthly for a rental property in the first quarter of 2012 was $2.01 in the greater downtown Miami market, $1.21 in the downtown Hollywood and the beach area, and $1.26 in the downtown Fort Lauderdale and the beach neighborhood, according to an analysis of the Southeast Florida MLXchange. 

Compare this to the first quarter of 2009 when the U.S. economy was on the brink of financial disaster, the median rental price per square foot per month at that time was less than $1.60 in greater downtown Miami, $1.00 in downtown Hollywood and the beach, and $1.05 in downtown Fort Lauderdale and the beach, according to the data.  

As the rents have increased, the operating expense for landlords has remained somewhat consistent or even decreased in condo projects as governing associations have used the foreclosure process to recoup unpaid fees, thereby, reducing or even eliminating special assessments. Adjustments in property taxes are somewhat mixed depending upon the specific market. 

For developers of the new rental projects, the financial returns have the potential to be even greater as apartment residents usually expect less in terms of amenities, finishes and service compared to condo owners. This translates into lower costs on the construction and the operations. 

Contributing to the potential upside for developers of today's rental projects, the cost of the developable land -- often times with the necessary planning approvals already in place from previous developers who failed to build -- is significantly less than the price levels achieved at the height of the South Florida real estate boom. 

The unknown is whether today's renters will ultimately become tomorrow's owners given the financial and personal hardships that many experienced during the last real estate implosion.