Article Courtesy of Bloomberg.com
By Bob Ivry
Published July 21, 2007
In the middle of the biggest glut of condominiums in
more than 30 years, Miami developers keep on building.
The oversupply will force prices down as much as 30
percent, the worst decline since the 1970s, and help push Florida's
economy into recession as early as October, said Mark Zandi, chief
economist at West Chester, Pennsylvania-based Moody's Economy.com, who
owns a home in Vero Beach, Florida.
"Florida is the epicenter for all the problems
that exist in the housing industry,'' said Lewis Goodkin, president of
Goodkin Consulting Corp. and a property adviser in Miami for the past 30
years, who also foresees a recession. "The problems we have now are
unprecedented and a lot of people will get burnt.''
Thirty-seven new high-rise condos and 20,000 new
units are being built in Miami's 1,040-acre downtown, where sales fell
almost 50 percent in May, according to the Florida Association of
Realtors. The new units will join the 22,924 existing condos in Miami-Dade
County that were for sale in April, according to Jack McCabe, chief
executive officer of McCabe Research & Consulting LLC in Deerfield
Beach, Florida. That's the most unsold units since McCabe began tracking
sales in 2002.
"Have
you been to Miami lately?'' Florida Governor Charlie Crist
said at a homebuilders' conference last week in Orlando.
"It's like we have a new state bird: the building
crane.''
Construction Jobs
While
the housing industry is responsible for 10.6 percent of the
nation's jobs, in Florida it accounts for 20 percent, Zandi
said. Florida construction jobs fell 2.9 percent in May to
626,200 from the peak in June 2006, according to the U.S.
Bureau of Labor Statistics. |
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Construction
cranes dot the skyline of Miami
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The
national housing industry's weakness prompted Federal Reserve policy
makers this week to cut their forecasts for U.S. economic growth for the
next two years.
The economy will grow by 2.25 percent to
2.5 percent in the fourth quarter of 2007 from a year before, compared
with a range of 2.5 percent to 3 percent the Fed predicted in February,
the board said in a report to Congress.
Florida's robust economy of 2001 to 2005
was driven by the thousands of well-paying jobs related to the real estate
market and homeowners who used home-equity loans to pay for items such as
boats and big-screen TVs, McCabe said.
"All those jobs are going away now,
and we're seeing the trickle-down effect in declining sales in big-box
retailers and home-furnishing manufacturers,'' McCabe said. "Florida
is headed to a recession.''
Influx of Retirees
A Florida recession could be averted and
the state housing industry's "serious problems'' solved by an influx
of American retirees and foreign buyers, said David Denslow, a University
of Florida economist in Gainesville.
"The wave of baby boomer retirees is
gathering momentum, and the weaker dollar makes Florida seem like a
bargain to Europeans,'' Denslow said. "With any luck at all that will
sustain us.''
Downtown Miami developers already are
offering incentives for brokers who connect them to buyers. John Rosser,
president of the Key Biscayne, Florida-based John Paul Rosser &
Associates Inc. estate brokerage, said he is usually paid a commission of
as much as 5 percent when a sale is completed. For the Capital at Brickell,
a block off Miami's Brickell Avenue, he was offered what he called
"an unheard of'' deal to steer buyers to one of the 832 units
proposed. A salesman said Rosser would be paid 5 percent -- payable when
buyers put down a deposit. The project has just broken ground and won't
open until 2011.
Puig Bankruptcy
Puig Development Group, a closely held company that
converted rental apartments to condos, filed for Chapter 11 bankruptcy
protection on May 29. The Hialeah, Florida-based Puig and its subsidiaries
controlled 2,900 units in Florida, including 980 condos, worth about $210
million, said Ronald Glass of Atlanta-based GlassRatner Advisory &
Capital Group LLC, chief restructuring officer for the Puig properties.
"Puig got a little overzealous and a little
overly optimistic, and was caught when the market slowed,'' Glass said.
Florida banks have already quit making loans to
Miami condo developers, said Kenneth H. Thomas, a Miami bank consultant
and a lecturer at the Wharton School at the University of Pennsylvania in
Philadelphia.
"South Florida lenders were the first to put
money into the condo market, they were the first to see the oversupply and
they were the first to get out,'' Thomas said.
Because of the lag time between making construction
loans and closing sales on completed condos, loan problems showed up for
Florida lenders in first-quarter bank statistics from the Federal Deposit
Insurance Corp. in Washington, Thomas said.
Overdue Bills
Florida banks posted a 43 percent jump in
the first quarter in loans no longer paying interest compared with the
last three months of 2006, while the number for banks nationwide rose 13
percent, according to the FDIC.
Loan payments that were one to three months overdue
to Florida banks increased 30 percent in the first three months of 2007
from the fourth quarter of last year. The same number for banks nationwide
fell 1.8 percent, the FDIC said.
Angel Medina Jr., who runs the Southeast Florida
operations of Regions Bank, a division of Birmingham, Alabama-based
Regions Financial Corp., said Regions has financed projects by two of
Miami's biggest condo developers: Related Group of Florida, headed by
billionaire Jorge Perez, and Ugo Colombo's CMC Group.
The bank hasn't financed any Miami condos in the
past 18 months because development is "too aggressive,'' Medina said.
Chicago Lender
That leaves the business to lenders such as Corus
Bank, a division of Chicago-based Corus Bankshares Inc. Corus has lent a
total of $1.07 billion to eight condo developments in downtown Miami,
according to the company's Web site.
Corus's net income in the first three months of 2007
was $26.4 million, a 39 percent drop from a year earlier, according to a
company regulatory filing.
"It would not surprise us to see an even
greater impact on earnings over the next several quarters, or even years,
depending on when'' the national housing market improves, Chief Executive
Officer Robert Glickman said in a statement.
Miami condo sales fell to 599 in May, a drop of 46
percent from a year earlier, according to the state realtors association.
Condo sales in Orlando, home of Walt Disney World, have plummeted 80
percent, said Zandi of Moody's Economy.com.
"The statistics are scary,'' said Michael Wohl,
a partner in the Pinnacle Housing Group, a Miami developer that has stayed
out of the condo market. "There's going to be a lot of blood in the
water in the next 18 months.''
Hedge Funds
With prices falling, international investors, hedge
funds, private equity firms and Wall Street banks are beginning to shop
for deals, said Peter Zalewski of Condo Vultures Realty LLC, a consulting
firm in Bal Harbour, Florida. Miami lags only New York in the number of
foreign visitors to U.S. cities, attracting 5.3 million in 2006 from
Europe, Canada and Latin America, according to the Greater Miami
Convention & Visitors Bureau.
"Bigger and bigger funds are coming to me
wanting to buy,'' Zalewski said. "Prices have yet to hit bottom
because the bulk of Miami properties won't come on the market for another
six months.''
Cement dust swirls at 10 high-rise condo
construction sites on Biscayne Boulevard, with its prime locations
overlooking the waterfront; at six sites on Brickell Avenue, home to the
glass and steel offices of Banco De La Nacion Argentina, Banco Industrial
De Venezuela and Banco Santander Brazil International; and at eight
locations on the Miami River, which splits the city into north and south.
That's according to data collected by the Miami Downtown Development
Authority.
Covering Costs
Since it can take up to four years for a condo
project to travel from conception to completion, many of the towers rising
from the coral rock of Miami were planned and financed during the Florida
housing boom, which lasted from 2001 to 2005.
Lenders typically require enough advance sales to
cover the cost of a construction loan. Customers' deposits, however, don't
always mean the sales will close, said Ian Bruce Eichner, a developer
whose latest Miami Beach condo tower is scheduled to open in November.
"The market is as close to a depression as
Miami has seen in 30 years,'' Eichner said. "There's a gargantuan
supply of homes and the overwhelming preponderance were built for
speculators, not for people who are living there.''
As much as half of those putting down deposits for
Miami condos are speculators looking to flip units, or sell them quickly
for a profit without living in them, said McCabe of McCabe Research.
Buyers Walking Away
With sale prices falling, McCabe said he expects up
to 50 percent of them to walk away from their deposits in the next 18
months rather than complete the sales.
"What's going to happen to all those units?''
Eichner asked. "God only knows. You couldn't give me a piece of
property in Miami for nothing. I like sleeping at night.''
Condo developers encouraged short-term investors,
whose deposits helped them secure funding, Goodkin said.
"The developers didn't get to start building
until they had a certain number of contracts signed, so anyone putting
down money was good for them,'' Goodkin said.
Many "flippers'' closed on their units and now
can't sell them, said Michael Cannon of Integra Realty Resources-Miami
Inc., leaving completed condo towers with floors of dark windows and empty
balconies.
The Jade Residences at Brickell is an example,
Cannon said. The 338-unit, 48-story waterfront tower, a block from the
Brickell Avenue financial district, opened in August 2004 with buyers
willing to pay as much as $5 million snapping up all the units. Now, the
new owners have listed 112 condos for sale and 17 units totaling $15
million are in foreclosure.
Trade Center
Jade Residences developer Edgardo Defortuna,
president of Fortune International Realty, didn't return calls seeking
comment.
The desire to strengthen Miami's position as a
center of international trade is spurring the growth, said Dana
Nottingham, executive director of the Miami Downtown Development
Authority.
"We want to be a premiere urban center, not
just nationally but globally, and downtown residential development is part
of the formula for a great city,'' Nottingham said.
Mayor Manny Diaz said he's happy about what he calls
"the unprecedented flurry'' of residential development because it
reduces sprawl and brings more people and money into Miami.
"We will continue to build because I see more
and more interest from foreign investors coming into Miami,'' Diaz said in
an interview. "I don't think we're done.''
Island Skyscrapers
For Rosser, a former Air Force and airline pilot
who's been working in the South Florida real estate industry for 19 years,
a puzzling transformation is taking place on Brickell Key, a 44- acre
island made of dredged bay sand connected to the rest of Miami by a
1,000-foot four-lane bridge.
On Brickell Key, 10 high-rises loom over the
island's two tree-lined streets. The development is the product of a
"building frenzy,'' Rosser said.
The island's master builder is Swire Properties
Inc., a Hong Kong-based developer that's a subsidiary of Swire Pacific
Ltd. Swire is building a $140 million tower on Brickell Key called Asia,
which is slated to open in December, according to Stephen Owens, president
of Swire Properties Inc.
"Anyone who says they're not concerned about
the oversupply of condos is practicing the ostrich theory,'' said Owens,
who lives and works on Brickell Key.
All of Asia's 123 units are sold, with the average
size of the units, 2,800 square feet, and the top sale price of $6 million
discouraging speculators, Owens said.
Prices Fell
In the 1970s, when condos were a new product,
Florida developers built 500,000 units and prices fell 50 percent, said
Brad Hunter of MetroStudy, a research firm in West Palm Beach.
"The difference is, back then they were
two-story condo buildings that had $50,000 units,'' Hunter said.
"Nowadays they are $700,000 units in 20-story buildings. Instead of
building too much stuff that people could afford like we did then, this
time we built too much stuff that people can't afford.''
A lot of the inventory 30 years ago was sold off and
converted to rental apartments, Goodkin said. That solution won't work now
because prices have soared and properties coming on the market will
compete with existing condos whose prices have plummeted, he said.
Goodkin said opportunistic investors will buy
construction loans from banks at a discount of 30 percent or more.
"The vultures are in the trees,'' Goodkin said.
"Reality has become the new pessimism.''
Holocaust Survivor
Developer Tibor Hollo, for one, isn't worried about
Miami's condo glut. Hollo, 80, was born in Hungary and spent his teenage
years in two World War II-era Nazi extermination camps, Auschwitz and
Matthausen.
Hollo started building in Miami in 1956 and now his
Florida East Coast Realty Inc. has two high-rises under construction, the
$603 million, 787-unit Villa Magna, and the $120 million, 635-unit Opera
Tower.
"Residential buildings, if they are
well-located and top of the line, they will sell,'' Hollo said in an
interview in his Biscayne Boulevard office, where the east-facing windows
offer a vista of about a dozen new condo constructions.
Well-to-do Central and South Americans like Miami
because of its Hispanic culture, while the dollar's weakness against the
euro has made Miami attractive to Europeans who seek second homes in the
Florida sunshine, Hollo said.
"We sold 38 units of the Opera Tower's 635
units to Russians,'' Hollo said, his eyes widening. "I would never
have dreamed it. I would understand 38 Venezuelans, not 38 Russians.''
The skyline of Miami is visible from Key Biscayne,
the barrier island where John Rosser lives. Some nights the real estate
broker scans the new buildings and sees more dark windows than lighted.
"This is dumbfounding to me,'' Rosser said.
"It's a building boom in the middle of a housing bust.''
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