Various Elements Converge to Create Frenzied Market For Condo Conversions

FL RE Journal Dec. 16-31, 2003

The multifamily housing markets in South Florida—across all prices and in all submarkets—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 multifamily project in South Florida is in great demand.
    So, I fondly recall an article I wrote in the Feb. 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.
    In 2001, I observed that 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 lad in the western suburbs was rapidly being utilized, leaving only difficult sites in the urban core. As the new urban residential projects were announced, new urban retail projects were announced, new urban retail projects were also being started to support these 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 a South Florida market that seems to have an insatiable demand for residential units. What I did not foresee two years ago was the historically low interest rates and stock market devaluation that have caused an unheard-of rush toward income ownership and investor demand for real estate.
    In the past, demand for housing in South Florida was satisfied by both single- and multi—family product. However, as the number of developable acres in South Florida diminishes rapidly, high-density multifamily housing is satisfying an increasing portion of the housing demand.
    A visitor to South Florida that has not been here for three years or so would not recognize the urban portions 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 in retail to urban cores that were desolate just a few years ago.
    Areas such as downtown Hollywood have become revitalized by community redevelopment efforts. These community redevelopment efforts create new residential projects in these long=ignored areas. These newly created sites are then aggressively pursued by developers.
    The premise that South Florida is surrounded and the only direction we can go is north is more evident every day. The area’s ocean, bay and riverfronts are being built out as numerous high-rise towers are 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”.
    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 U.S.-based developers is overwhelming.” Laquer sees a shift from investors being “land brokers” 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 driving entrepreneurs to convert for-rent projects to condominiums at record rates. Larry Stockton, a broker with the Coral Gables-based Abood Wood-Fay Real Estate Group, 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) multifamily deals in today’s ultra-competitive market,” Stockton said. According to Stockton, at least in the South Florida marketplace, there are no more (for-rent) multifamily 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 previously 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 million of such sales over the last few months. He points out another characteristic of the area’s white-hot conversion market. 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.” Stein goes on to point out that, “There are over 40 condo conversions currently under way from Palm Beach to Miami-Dade County.”
    David Lukes, a regional director with GE Capital Real Estate, a lender on condo conversions across the country, seems to agree with 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.”
    Lukes 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 surprising stable. According to McCabe Research and Counseling, 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.