The Miami Herald
October 29, 2011
Here Comes The Next Wave Of Condos
Developers are preparing to launch the next wave of condo towers in downtown Miami, targeting international pre-construction buyers who can pay in cash.
By Toluse Olorunnipa
The aftershocks of the last housing boom are still lingering, but developers are once again rushing to buy up land and erect new condo towers in downtown Miami’s burgeoning metropolis.
At least six new condo projects are slated to break ground in Miami in theng years, with developers promising to announce several additional projects soon.
For skeptical housing analysts and weary homeowners, the sudden flurry of developer excitement in the midst of double-digit unemployment and stagnant home prices brings back not-so-distant memories of the last housing boom, and its epic bust.
This time is different, say the developers, who profess to have learned their lesson and are adopting financial models with far less risk than the 20-percent-deposit pre-sales that were popular during the last building boom.
“It’s time to think of where we’re going to be rather than where we are,” said Harvey Hernandez, whose Newgard Development Group recently announced plans for a new condo tower called Brickell House at 1300 Brickell Bay Dr. “It could not be a better moment for us to launch a project.”
So why the sudden rush to build again?
In addition to downtown Miami’s growing population and reduced construction costs, it’s a function of supply and demand. Developers point to an inventory of new condos that has, at least on paper, shrunk quickly over the past two years as cash buyers have bought thousands of units at discounted prices. South Florida condo resales are up 65 percent this year, and only about 2,000 of the 23,000 downtown condos built during the boom remain unsold.
The demand is coming, almost exclusively, from outside Miami. Buyers based in Latin America, Canada, Europe and the northeast United States have spent more than $3.8 billion on South Florida real estate this year, helping boost sales. International buyers account for about 90 percent of new condo sales, according to the Miami Association of Realtors.
Builders believe the surging international demand is strong enough to support new condo towers.
They are also using a more cash-focused financing model this time, hedging risk by requiring buyers to pay as much as 80 percent of the full price of a condo before construction is completed. Under the arrangement, buyers pay 20 percent at pre-construction, 20 percent at ground-breaking, and another 30 to 40 percent as the tower is topped off and approved for occupancy.
“The beauty of this business model is it separates the men from the boys,” said Craig Studnicky, principal of RelatedISG, a new development and sales partnership with Jorge Perez’s Related Group. “There are no speculators. The contracts are not assignable. These are people that are planning to live there or invest and use them as rentals.”
Whether developers’ line of thinking will prove profitable remains to be seen, as the proposed financing model — popular in Latin America — has never been tested on a large-scale basis in the United States.
William Hardin, a professor of real estate and finance at Florida International University, said some of the developers are simply testing the market. They might make splashy announcements and host lavish launch parties, but if the cash-buyers don’t materialize, the projects will never be built.
“You have a lot of posturing going on,” he said. “Everyone’s talking, but not every one of those plans are going to stick.”
The Related Group is at the forefront of testing the cash-heavy, foreigner-reliant pre-sale model, having put many of the troubles of the real estate bust behind it. The firm’s grandest project, ICON Brickell, experienced the spectrum of ups and downs as the last cycle played out. Pre-construction buyers lined up to snag units when the three-tower project launched in 2006, and then walked away from their deposits en masse when the market tanked. Two of the towers eventually reverted back to lenders in a “friendly foreclosure,” but rapid sales this year helped Related and Fortune International Realty nearly sell out the project’s 1,800 units.
Now, Related is ready to build again. The firm has plans to begin constructing at least six new condo projects in the next year, and two of them have been officially announced.
One of those projects, called My Brickell, at 30 SE Sixth St., is set to break ground early next year, bringing 192 units to the market.
A little further to the south, the developer of long-postponed Sky Palace at Mary Brickell Village appears to be kickstarting plans to build the 35-story luxury tower above the Publix shopping plaza at 911 SW First Ave. Project spokesman Stylianos Vayanos said new announcements on the project could come within the next few months.
The Genting Group’s proposed Resorts World Miami, a $3 billion casino destination to be located at the site of The Miami Herald, would include two residential towers, with 1,000 condo units.
Other projects, including 23 Biscayne (601 NE 23rd St.) and Brickell CitiCentre (South Miami Avenue and SE Seventh Street) will add hundreds of new condo units to downtown. Outside of downtown, high-rises like Bellini Williams Island in Aventura (4100 Williams Island Blvd.) and Apogee Beach in Hollywood (4053 S. Surf Rd.) have already begun sales.
While international buyers have helped reduce the current inventory substantially, the supply of homes on paper could differ sharply from the true inventory. For example, many of the recently sold condos were purchased by bulk buyers and investors at deep discounts. When the market begins to rebound, those investors will likely put their properties back up for sale.
According to data from Miami Beach-based Condo Ratings Agency, only 19 percent of condo owners in downtown Miami claimed a homestead exemption last year, an indication that investors and second-home owners control the market. Banks also own thousands of foreclosure condos that are being held off the market as part of the region’s “shadow inventory.”
Recently relaunched projects like Vizcayne and Paramount Bay — the latter a 346-unit high-rise at 2020 N. Bayshore Dr. — do not show up as “developer inventory” because they were purchased in bulk out of distress. Still, those brand new units are being heavily marketed in the same Latin American cities where developers are pitching their new projects. As more developers announce new projects, competition for international buyers promises to be fierce.
That’s partially because the domestic market for new condos is basically non-existent. With less than 10 percent of downtown’s condo buyers based in Miami, the real estate market has never been quite as dependent on foreign buyers.
Recession-weary South Floridians have become a minority of the market and developers acknowledge that the 70 percent deposit financing model virtually shuts all locals out of the market.
“I want a buyer that can pay cash — no financing,” said Hernandez, “Our buyers here [in South Florida], nobody has 70 percent. Nobody can afford that.”
But relying on the Latin American and international markets is certainly not risk-free.
A cooling off of international demand or a downturn in the Latin American economies in the next three years could severely hamper the progress of the proposed projects. The Brazilian real, which has occasionally declined against the dollar in the past few weeks, offers an example of potential volatility in Latin American economies.
And recent data show that the appetite of international buyers may be beginning to wane. Sales of new condos fell 33 percent in the third quarter compared to last year, according to the Bal Harbor-based consultancy Condo Vultures.
Still, international interest in Miami real estate remains strong, said Eduardo Defortuna, president of Fortune International Realty. With condo prices in São Paolo up more than 30 percent in the past year, relatively low-priced Miami still looks attractive to well-heeled international buyers looking for second homes.
“A condo in São Paolo that was selling for $500 a foot in 2005 is now probably trading for $1,500,” said Studnicky. “A condo in downtown Miami that was selling for $1,000 is now selling for closer to $500 a foot. It’s completely flipped."