Future of the Residential Market - fall 2003
Over the past year and a half our firm has arrange high leverage, non-recourse financing for condo conversions in Palm Beach County, put together site assemblages for high-rise for rent housing in Miami-Dade County and brokered acquisition and development financing for condominiums in Ft. Lauderdale’s urban core. So, I fondly recall an article I wrote in the February 1-15, 2001 edition of the Florida Real Estate Journal discussing the “Manhattanization” of South Florida. The conditions I saw beginning to take shape just a couple of years ago, have exploded across our markets.
The multifamily housing markets in South Florida across all prices and in all sub markets are ON FIRE. Be it land for new development, existing projects of all qualities, newly completed units for rent or for sale projects in various stages of development any multi-family project in Osuth Flroida is in great demand. It does not matter if the project is located in North Palm Beach County or south Miami-Dade’s Florida City there is no let up in demand. When I was asked to write this article my first draft contained over 2,000 words and I barely scratched the surface. When the editors thanked me, but asked me to keep it to 1,000 words, I was lost. While there is no way to tell the entire story in 1,000 words, I will attempt to give you a taste of what is happening in one of the hottest and strongest real estate markets in the United Stated-the South Florida multi-family housing market.
In my 2001 article I observed the area’s traffic was worsening and I believed more people would want to live near their work to reduce their commutes. I noted that easy to develop land in the western suburbs was rapidly being developed, leaving only difficult to develop sites in the urban core. As the new urban residential projects were announced, new urban retail projects were also being started to support these new downtown residents. Today, the redevelopment of South Florida’s urban cores continues to astound observers as massive mixed-use projects and small niche projects are delivered to and accepted by a South Florida market that seems to have an insatiable demand for residential units. What I did not foresee in early 2001 was the historically low interest rates and stock market devaluation that have caused an unheard of rush toward home ownership and investor demand for real estate as people seek to get in the historic run up in values or look to replace their stock market investments.
In the past, demand for housing in South Florida was satisfied by both single and multifamily product. However, as the number of developable acres in South Florida diminishes rapidly, high-density multifamily housing is satisfying and increasing portion of the housing demand.
A visitor to South Florida that has not been here for three years would not recognize the urban areas of the tri-county area. Projects like West Palm Beach’s City Place and Miami’s Mid-Town Miami have or will deliver thousands of new units and hundreds of thousands of square feet o retail to urban cores that were desolate just a few years ago.
Areas such as downtown Hollywood have become revitalize by community redevelopment efforts. These community redevelopment efforts create new residential development sites in these long ignored areas. These newly created sites are then aggresivly pursued by developers.
The premise that South Florida is surrounded and the only direction we can go is up is more evident every day. The area’s ocean, bay and riverfronts are being built out as numerous high-rise towers are now being completed. Projects that will be the area’s last for the waterfront are now on the drawing boards. As the waterfront sites disappear developers are beginning to sell “city views” instead of water front locations. According to Edie Laquer a Miami-Dade broker specializing in urban locations “we are in the middle of a land rush” and she sees “no let up in sight.” She sees that demand for “land primarily zoned for high rise development from US based developers is overwhelming”. Ms. Laquer sees a shift from investors being “land bankers” to developers seeking “ready-to-go sites.”
Even while tens of thousands of units are under construction or in the pipeline in South Florida low interest rates are dirving entrepreneurs to convert for rent projects to condominums at record rates. Larry Stockton a broker with the Coral Gables based Abood Wood-Fay Real Estate Group is broker that specializes in marketing existing apartment projects to non-institutional investors. He sees the market as continuing to be hot. “Individual investors are using very aggressive tactics to win (the contest to buy for rent) multi-family deals in today's ultra-competitive market. According to Mr. Stockton, at least in the South Florida marketplace, there are no more (for rent) multi-family deals, only condo conversions and potential condo conversions.” He sees buyers paying large prepayment penalties and writing contracts with due diligence and closing occurring in a peviously unheard-of 30-45 days.
Mike Stein, Managing Director of The Aztec Group also specializes in sales to condo converters. He has closed over $150,000,000 of such sales over the last few months. He points out another characteristic of the area’s white-hot conversion market. Mr. Stein observes that “conversions of past years have only included waterfront Class A real estate, now we are seeing conversions on Class A, B and C apartments in all three counties. Mr. Stein goes on to point out that “there are over 40 condo conversions currently underway from Palm Beach to Miami-Dade County.”
David Lukes a Region Director with GE Real Estate, a lender on condo conversions across the country seems to agree with Mr. Stein when he says that his firm sees the South Florida conversion market as “strong over the next 12 months given the favorable interest rate environment.” He believes “momentum should be particularly strong in the $200,000 to $400,000 range”. While most observers agree that the strongest demand is in the “mid-market’ many brokers are beginning to believe that the mid-to upper end (dormant for much of 2003) is also showing more activity and that will lead to increasing sales velocity at the upper end.
As the converters take units out of the rental pool and renters turn into buyers the rental market has remained surprisingly stable. According to McCabe Research and Consulting- a Deerfield Beach firm that tracks multifamily statistics for all of South Florida- occupancy and rental rates have held firm. This is in sharp contrast to many areas across the country. As a result, developers, investors and lenders continue to focus on new developments, conversions and investments in the tri-county area.
With the ever shrinking supply of developable sites, the increasing amount of capital targeting South Florida’s multifamily markets, the area’s strong prospects for continuing population growth, the seemingly insatiable demand from condominium unit buyers and what now appears to be an increasingly strong economic expansion, South Florida’s multifamily market should continue to be one of the healthiest in the United States for some time to come.