LEARNING CURVE

APARTMENT FINANCE TODAY • APRIL 2008

Miami Story

Multifamily financing is trickier than ever in the current economic climate. In Miami, it may even be more difficult, as lenders know that the local market expects 20,000 condo units to come online in 2008.

By Dana Enfinger

APARTMENT FINANCE TODAY talked to Peter Dewes, vice president in the Miami office of Northmarq Capital, Inc., a real estate investment bank based in Minneapolis. He discussed how tightening lending standards combined with the shadow market caused by the condo glut is affecting the multifamily market in the Miami area.

Q: Would you outline the problems the market is facing with the glut of condos?

A: As everyone knows, we’ve had a huge [construction boom] of highend condos in Miami-Dade. Approximately 20,000 condo units are coming online here this year, and then you have a number of condo conversions that have also taken place. Investors from Europe and Latin America purchased a lot of these condos. We now have investors walking away from 20 percent nonrefundable deposits, or [the developers] are trying to lease these buildings.

Lenders are still lending down here, but they are more cognizant that there are 20,000 condo units coming online that could compete with rental properties. Lenders are being more cautious, as they are everywhere else, but here, particularly so. They are picking and choosing the deals they want to do now. These are balance-sheet lenders, not Wall Street—and we all know that conduit lending is dead right now. These are banks that have to live with the loan now.

Q: Since the U.S. dollar has weakened, are investors still attracted to apartment investments in Miami? Or are they interested in putting their money in other property types?

A: Apartments are still attractive in Miami. Foreign investors are not shying away. Since the cheap money is gone—that is, that Wall Street money is gone—investors need more equity to put into deals. They are still very much interested in multifamily in Miami. We have a large renter population. We have many immigrants, who historically rent apartments when they live here.

Q: What is the sales volume like in Miami now?

A: We are starting to see an increase in cap rates. From 2006 to 2007, sales of apartment properties dropped in Miami-Dade by 80 percent. That’s a year-over-year figure. There are a number of reasons for that. In 2006, a lot of conversions were taking place. Owners were selling to condo converters at a high price. They thought, ‘It’s the time to sell it. I’m not going to get a better price anytime soon.’ Some owners thought their exit strategy was not going to be until 2010 or 2011, but they sped their exit strategy up because of these high prices. We haven’t been experiencing normal sales volume for a while. And now there is a disconnect between buyers and sellers. Sellers haven’t accepted that they aren’t going to get the prices that units were going for here in 2005 and 2006.

It’s going to be five years before all the existing condos that are coming online this year will get absorbed. The sales of rental properties should be getting back to some sense of normalcy in the next 12 to 18 months. Mostly because those renters that were able to get the cheap money to then go out and buy that condo are not able to do that anymore. Everyone in Miami is concerned about the condo market here because one does affect the other.

Q: What assets are receiving loans right now?

A: A lot of lenders won’t look at a property below a 6.5 percent cap rate. They wouldn’t consider it for their underwriting. It’s going to be a minimum of 6.5 percent, probably more like a 7 percent and 7.5 percent cap rate, if lenders are going to make a loan on it. The refinancing is taking place because the loans are coming due. It’s not because they are voluntarily just doing a refi because they want to pull more equity out of the deal. There’s not a lot of pulling equity out of deals if they were already highly leveraged. Owners are happy to refinance, get into a reasonable fixed-rate loan, lock it, and live with it.

Q: Is there any good news now for multifamily investors in Miami?

A: Jorge Perez, CEO of The Related Group, a big condo builder here, is creating a $1 billion investor fund to buy up troubled mortgages and distressed property in South Florida. [Editor’s note: Perez will look at properties built by other developers as well as by his own Miami-based firm. Perez has not disclosed the name of the Wall Street firm that he is partnering with to create what he is calling an “opportunity” fund. At an Urban Land Institute conference earlier this year, Perez claimed that when the next upswing in the market occurs, the scarcity of land will lead to much higher acquisition prices, prices that will make the current value of condo properties seem cheap in comparison. Perez said that middle-of-the-road luxury condos have been hit particularly hard in Miami. He said his fund would help keep condo associations funded during a very difficult middle of 2008 as units come online. The fund may also target mortgages in other Southeastern markets.]