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AFT Market Profile: Southeast
A tropical heat wave
Miami's condo conversion market heats up
By Bennett Voyles
Miami – For any developer contemplating the Miami market right now, Torto-Wheaton economist Gleb Nechayev has two words of advice: “Don’t build.”
With 15,000 new units of all types of housing being brought to market in 2004, about 5,000 more than in even the strongest years of the 1990s, Nechayev argues that the market can’t keep absorbing at the same rate. Although Miami is a “pretty good market,” he said, there’s little room for tremendous growth in the near future. “If development is able to stay at the level that we expect this year, which is about 4,500-5,000 [multifamily] units of supply … the market will do okay,” he said.
That may be a big if. Local real estate pros seem unsure about whether things are going to slow down any time soon in the luxury condo construction and conversion markets. Michael Stein, managing director of the Aztec Group, said that he’s seen estimates ranging from 15,000 to 25,000 for both new and converted units in the pipeline. “[B]ased on the amount of cranes we see in the sky, and based on the amount of advertising dollars at pre-sale openings and lavish parties that we’re seeing for openings of luxury condos, we think that this is going to continue at least for another year or two,” he added.
Condominium conversions in particular are occurring at a feverish pace now. The number of apartment buildings valued at $5 million or more bought for conversion in Miami/Dade grew from four in 2002 to 11 in 2003 and nine through mid-June 2004, according to Real Capital Analytics in New York. Real Capital estimates that the dollar value of the deals has also grown from $151 million in 2002 to $664 million through mid-June 2004. The percentage of overall building sales earmarked for conversion has grown as well, from approximately a third of the market in 2003 (11 of 38) to nearly half through mid-June 2004 (9 of 19 deals). But by dollar value, conversions already constitute over two-thirds of 2004 transactions: $664 million of the $901 million total.
Conversion projects are being driven by the wide gap between rental and condominium values, said Jay H. Massirman, executive vice president of CB Richard Ellis in Miami. At press time, an apartment building worth about $75,000 a unit to an apartment owner could be converted to condos and sold for $100,000 a unit, he added. There’s even pressure now in Class B and Class C properties, he said, as developers scramble to buy, renovate and sell before mortgage rates go up.
Stein said he had been personally involved in 10 condominium conversions in the past 24 months. Now, he said, 75% of his firm’s business is in conversions, up from about 10% four or five years ago.
The buyers for most suburban units in areas like Kendall are first-time homeowners attracted by low mortgage rates, Stein said. The urban ocean-view high-rise units are much more popular with investors, who now buy about half of the offerings.
Some analysts speculate that rising interest rates will slow conversions down eventually – just not yet. “There’s definitely a lot more risk involved in doing a condo conversion now than maybe six months ago … but the risk/reward proposition is pretty good for those who know what they’re doing,” says Robert M. White Jr., president of Real Capital Analytics.
Conversions may already be having an impact on the rental market by restraining the available supply of rental apartments, but vacancy rates don’t show it. Nechayev said that vacancy rates tend to be fairly low in Miami, generally not more than 5% – a rate he expects the market to maintain over the next five years.
Of the 5,000 new units of multi-housing being developed this year, perhaps 4,000 are being built for rental, the rest for sale, according to a Torto-Wheaton survey. “There’s a plethora of projects of every different ilk,” said Massirman: garden, loft, high-rise, and 10- to 300-unit deals are all being built now. Perhaps the only thing the varied projects have in common is the fact that because few large tracts of land are available now, most new units are infill, added Massirman.
As a result, a premium location is an increasingly important factor, according to Mark Troy, vice president of development and acquisitions for BAP Development, a major local development firm.
BAP has followed its own advice with Onyx on the Bay, a 28-story waterfront luxury condominium in the performing arts district whose 118 units are now 75% pre-sold at prices ranging from $300,000 to $1.8 million, and Onyx 2, a 48-story condo project that will be built next door. The two buildings are planned for the last two waterfront parcels zoned for high-density use anywhere in Miami, according to Troy.
Developers of new properties are facing some increasingly daunting hurdles. Although enthusiasm for new condos remains high – pre-sales are still reportedly running strong on a number of new properties – some developers are finding themselves in a race to build before rising costs eat their margin. Builders are being faced with rising costs for skilled labor and huge run-ups of 20% to 35% in steel and concrete prices, according to Massirman. “As a result of all that, some people have actually had to buy the contracts back on projects because the numbers didn’t work,” he said. As a result, lenders are asking sponsors to show more strength and put more equity into a project before they put in their financing.
One unique support for Miami’s hot condo market is the strong interest of Latin American investors in the city’s pricier condominiums. Stein estimates that Latin Americans may make up more than half of all high-rise condominium purchasers. They are drawn in through the extensive South American sales networks of some Miami-based real estate brokers.
M/PF has forecast nothing but blue skies for landlords in Miami’s historically balmy apartment market in the coming year. Its analysts predict that occupancy will still hold at 97.7% in the first quarter of 2005. But the firm cautioned that because many of the sales have reportedly been to investors rather than owner-occupants, many units could end up in the rental pool. “If this product ends up in the rental pool, Miami could already be on the way to overbuilding,” wrote M/PF.
At the moment, vacancy rates seem reasonable. In its latest survey, for February 2004, Reinhold P. Wolff Economic Research, Inc., of Pompano Beach, Fla., reported an overall vacancy rate of 5.1% in the Dade County-Miami metro area. The tightest submarket was Hialeah, with 1.8% vacancy. Trendy South Beach tied with Homestead, with a 6.9% vacancy rate. Average two-bedroom rents stood at $1,109 a month countywide. Bayshore ranked at the top of the high end with $2,516, and SW Dade/Homestead was at the low end with $782.
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