Article Courtesy of The Miami
Herald
By Douglas
Hanks
Published
November 6, 2013
The good times may be rolling again for South
Florida’s real estate industry, but survivors of the last bust warned
Tuesday that there may be too much exuberance over the latest boom.
Panelists gathered for a real estate forum at a luxury hotel ticked off
a series of cautionary notes that harkened back to the last time housing
prices soared too high: developers launching construction without the
reserves to handle a drop in sales; lending plans based on price
increases; and a stream of condo projects chasing cash not from local
buyers but from foreign investors.
“If we learned anything, we learned we didn’t learn much,” said Russell
Galbut, managing partner of Crescent Heights, a high-rise developer out
of Miami. “What I see in the Miami market is a lot of people coming
together at the same time to build. It think it could possibly bring
about the same things that we had in the past, which is an
overdevelopment of projects.”
Galbut addressed more than 200 people gathered at Miami’s Four Seasons
Hotel for a event by the Urban Land Institute titled: “Miami Condo
Market Symposium: Embracing Boom and Bust Cycles.” The warnings peppered
throughout the talks touched on a central fear behind the current spike
in property values and sales — namely, is the market getting ahead of
itself once again?
Bullish panelists pointed to reasons why this cycle should be different
than the last: lenders nearly ruined by the bust now insist on
significant cash deposits before backing projects; novice developers
being locked out of financing circles; and Miami’s emergence as a choice
destination for the wealthy throughout Europe and Latin America.
“Miami, up until a couple of years ago, was essentially the poster child
for distressed real estate in the U.S.,” said Jonathan Miller, president
of Miller Samuel, an appraisal firm that analyzes housing trends for
Miami and other markets. “Miami has successfully rebranded itself as a
luxury housing market and in a very short period of time.”
He said between 60 percent and 70 percent of local condo sales involve
all-cash deals — about the double the national rate. Miller and others
cited Miami’s growing appeal as a cosmopolitan city, thanks in part to
expanding retail and cultural options downtown.
“We have reinvented ourselves,” said Alicia Cervera, managing partner of
Cervera Real Estate. “One of the wonderful results of our building boom,
the last one, is we in fact built a tremendous city. We have new
neighborhoods, and concentrations of neighborhoods.”
Foreign investors helped swamp Miami’s real estate during the last boom,
as high-rise developers set up sales centers throughout Latin America
and pitched their projects as cheap ways into a red-hot housing market.
Buyers, both foreign and domestic, signed pre-construction contracts for
condo units with plans to sell them before the buildings even opened.
Developers and banks felt confident that the required 20 percent
deposits would be enough to force the original buyers to close even if
prices disappointed.
But when real estate values dropped sharply, buyers surrendered their
deposits rather than pay more for units than they could sell them for.
The resulting domino effect sent prices plunging throughout the market
as developers were suddenly left with no revenue to pay back
construction loans. Miami emerged as one of the most troubled housing
markets in the country.
While new home construction remains in the doldrums, the last two years
saw a rebound in prices on existing homes. The high-rise cranes also
returned to Miami as developers again found demand from foreign
investors for new pre-construction units. Condo Vultures, a brokerage
and analysis firm, estimates there are 22,000 condo units in the
development pipeline throughout South Florida and about 12,000 in
downtown Miami. During the boom, developers built almost 50,000 units,
and most of them are sold, according Condo Vultures founder Peter
Zalewski.
Meanwhile, luxury homes — like the 30,000-square-foot mansion in Indian
Creek Village bought by hedge-fund billionaire Eddie Lampert for $47
million last year — have been setting records in resale prices.
Data released Tuesday offer a reminder of the lasting damage of the
housing bust, and the relatively modest pace of recovery. Case-Shiller,
which tracks resale prices of houses, reported that South Florida values
remain 40 percent below peaks set in 2006. But prices have also been on
the rise since late 2011, with values up 13 percent from a year ago.
The index does not cover condo sales, and developers say that market has
its own fundamentals driving it. The local condo industry now points to
internal requirements for pre-construction deposits matching 50 percent
of the sales price, so developers see themselves in a far more secure
position than they were before the 2007-08 crash. With foreign investors
looking to place cash in assets for the long-term, projects see little
risk of their buyers fleeing should prices take a dip
“How many condo units are necessary in this town?” asked Carlo Melo,
whose family’s Melo Group is building condominiums in Miami’s Edgewater
district. “The answer is: unlimited. Because we are selling to the
world. It is not a city that is sustained by itself.”
But if developer over-confidence sunk the market last time, industry
veterans see this cycle as spawning its own breed of hubris. John
Sumberg, one of the city’s top lawyers for developers, said some
projects are starting construction with cash from their deposits even if
they don’t have a lender aboard pledging to put up the money to finish
the project.
“Many of the projects are using the deposits to start construction, and
then getting the financing later,” said Sumberg, a founding partner at
Bilzin Sumberg. “This works, until it doesn’t.”
Already, some lenders are backing off projects in Miami’s downtown out
of fear to too much supply, he said.
Stuart Miller, CEO of Lennar, a national home builder based in Miami,
noted that it’s easy to pencil out enough profit from a real estate
project when good times are forecast to continue.
“The more the good times roll, the more attenuated our memory becomes,”
he said. “It’s amazing what can start working on paper when you have big
price increases.”
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