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Weekly UpdatesSince 2003, DEVELOPERS HAVE BEGUN CONSTRUCTION ON 22,000 condos in downtown Miami, which is more than double the number built over the last four decades. "For sale" condominium inventory has doubled. Residential vacancies have doubled in the past year. Prices have slipped downward dramatically.
As lenders have tightened restrictions on mortgages for condos, the closing rate on downtown condo sales has dropped from 18 per day in 3Q 2008 to five per day in 4Q 2008. Everglades on the Bay, for instance, an 848-unit condominium facing Bayfront Park and Biscayne Bay started closings in November. By December 31st, it had closed 18 units. Another project of more than 700 units in the Brickell market closed 106 units and stalled. In that project, one of the penthouse units currently is being rented for $2,000 a month, or just $1 per foot per month. (1)
BACKGROUND
In 2008, nearly 2.7 million square feet of condominiums, townhouses and single-family homes in coastal South Florida sold at an average discount of 43 percent. According to the Vultures Database[TM] (CondoVultures.com) that tracks residences where the price has dropped by at least 10 percent or $100,000, a total of 1,717 properties east of Interstate-95 in Miami-Dade, Broward and Palm Beach counties traded last year for a combined price of $775 million, down from a historical high of $1.33 billion. The overall price drop equates to a combined discount of more than $550 million off the historical high asking price for the properties. In each of the 12 months in 2008, an average of 143 residential properties in the Vultures Database sold at 57 cents on the dollar. For comparison, in 2007, there were 1,272 properties in the Vultures Database that sold at an average discount of 29 percent.
On Dec. 31, 2008, the Vultures Database was comprised of 4,301 condo units, townhouses and single-family houses in South Florida that had dropped in price by an average of 39 percent. Condos and townhouses, which account for 69.6 percent of the total, are down an average of 38.5 percent. Single-family houses, which represent the remaining 30.4 percent of the inventory, are down an average of 40.0 percent. According to the Vultures Database, the average price drop for condos in Greater Downtown Miami has been 41.8 percent, while across the causeway in Miami Beach, the average discount has been 34.3 percent.
DOWNTOWN MIAMI
This article focuses on one submarket, downtown Miami, to show specific actions on the part of planners, city officials, developers, lenders and speculators that have led to overextension and overbuilding to the detriment of the market and the general public. In Miami, for instance, rental vacancy more than doubled from 2.6-5.8 percent from November 2007 to November 2008. For perspective, vacancy rate was 3 percent county wide in 2001 for buildings 18 months or older. (2)
We have seen the enemy. And the enemy is us.
The table and graph below indicate land prices from 2000 through the end of 2008. (3)
The land prices drop for high-density sites as the market becomes aware of the CMBS problems and financing availability diminishes. The new highest and best use for vacant sites today would include hotel, office and rental apartments, as well as retail. The big change will be a much smaller building envelope and lower FAR, all of which reduces the land value in a land residual model. This puts downward pressure on price points and elongates the recovery time frame. The two most recent sales are reflective of the 2002 prices prior to the run-up in values.
ON THE WATER, CIVIC OVERSIGHT IS FOGGY
In every urban area that has access to a large body of water, whether it be a lake, river, ocean or back bay, there almost always comes an initiative for commercial real estate development, on what are likely the most pristine of waterfront locations. Often these locations are those that the general public should enjoy and that government should actively protect for future generations. But when markets overheat, the development community seems to be unable to resist the opportunity to get at these locations. In the case of South Florida and, particularly Miami, there has always been a struggle between preservationists and developers. In the case of Miami-Dade County, the ebb and flow of the public-private struggle for saving or developing pristine waterfront parcels is emblematic of each real estate cycle, whether it be a frenzied run of overbuilding or the aftermath of a complete market collapse.
One longstanding example is the development of the Bayside Marketplace in the center of the City of Miami's downtown waterfront known as Bayside Park. The struggle for this 230,000-square-foot development with its accompanying 1,200 space parking garage went on for years. By the time the development commenced, the real estate cycle which prompted the fervor to create Bayside Marketplace had long passed, and most could not even remember how the idea had even been conceived. At one point, the developer negotiated the land lease (which had the City participating in net income) without defining the expenses, resulting in the elimination of any financial return to the City.
Another example is the Brickell Point Apartments which rested for many years in a decaying state on a river- and bay-front site of 99,000 square feet. A developer acquired the existing apartments, tore them down and commenced a luxury high rise development. In the process of excavating for the foundation, however, Indian artifacts were discovered, causing a delay. The developer then persuaded the City and State of Florida to pay a whopping $26,900,000, or $280 per square foot of land, to turn the site into a park that is now known as the Miami Circle site. (4) Later, the City allowed another developer to increase density for an adjacent project. The result was a very dense 1,700-unit project called ICON, constructed on 216,646 square feet of land, equating to 342 units per acre. The purchase price was $94 million, or $434 per square foot of land. The water and sewer infrastructure capacity for this massive development was greater than any previously built in the urban core. Despite the additional density granted by the city, no school or park contributions were made.
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What is the possible nexus between the discussion of public-private land use on waterfront sites, and the recent cycle of overbuilding in the Miami-Dade County condominium market? A case in point is a 2.496 acre waterfront site in the prestigious Brickell Avenue submarket of downtown Miami, known as the Villa Magna site. This site received a Master Use Special Permit from the City of Miami in 2004 for a development that would contain 780 condominium units in a 45-story tower, equating to 313 units per acre. Subsequently, as the marketplace began to change and fears of overbuilding in the luxury condominium market grew, the plan for the site was altered to include hotel and condo-hotel use combined with office space. As of 1Q 2009, the same site is being leased to the City of Miami by the developer for $1.00 per year for use as a park since, due to the saturated condominium and office space markets, there is no other viable use for the site.
Now rented for just $1 per year, the Villa Magna site sold in 2001 for $15.5 million, or $142 per square foot of land. In 2004, the site was offered for sale for $87.0 million, or $806 per square foot, equating to $111,000 per unit--roughly double the per unit price of the ICON site. Today, the real estate tax assessed value is $38,054,100, or $350 per square foot, and the real estate taxes are $852,782. (5) Thus, in handing the site to the City for public purposes, the developer saves that amount each year, and the City looses that amount in tax revenue. The death walk has begun, and the unintended consequence of this change in land use is the first barrier to recovery of the marketplace.
How could this change in land use and "greening of the neighborhood" be a barrier to the recovery of the luxury condominium market? Tax assessments throughout the City in new condominium and existing projects are trending downward. Consequently, the City will be forced to contract for services in a market that needs such services as an amenity to facilitate recovery. It is reminiscent of an earlier decade when the City of Miami did not pay attention to the collapse of the office market. Values and tax collections retreated, and the City's bonds were put on watch, so much so that the State of Florida installed oversight on City financial activities.
The current inventory of new condominium units in this sub-market exceeds 22,000. (6) In the current marketplace in Miami-Dade County, using fundamental demand, and without making adjustments for the bulk sale of unsold condominium units, it is reasonable to assume that a 10-year supply of condominium units exists. Sales at prices less than the hard cost of construction would likely mean that the value of the land, the developers' initiative, design fees, soft costs, legal fees, marketing costs and interest expenses are burned to the ground and lost forever. This would be a scorched earth outcome.
RESET PRICING: ANOTHER STEP DOWN THE DEATH WALK
What does reset pricing mean for existing condominium housing stock where "mortgages are at prices that are higher than bulk sale prices of new inventory? The reset pricing of formerly mature and stable projects is creating a disconnect throughout the urban condominium asset class in Miami. One project finished in 2003, known as Jade, was sold out prior to Certificate of Occupancy; 70 percent of its units were sold by October 2002. (7) There were 300 reservations within two weeks of releasing the first 30 units in August 2002. (8) Jade now has a significant number of its 340 units in foreclosure. There are now three mature buildings in the Brickell submarket with disproportionate numbers of foreclosures pending. (9) In 2008, The Vue at Brickell had 49 foreclosure actions pending, and The Club at Brickell had 54. (10) Combined, these three buildings in the same submarket (Jade, the Vu, and the Club) exceeded $100 million in mortgage foreclosures (11), which puts unforeseen financial pressure on the condominium associations, and would cause a good faith purchaser to take pause at any price because of the uncertainties with respect to the viability of the condominium association and its ability to maintain the asset. It is important to note that when lenders foreclose on condo units, they are not required to pay the monthly fees that accrue during the foreclosure process; those costs are borne by the association. Lenders often delay foreclosure sales to avoid paying association fees. Financial pressure on condominium associations is a second barrier to recovery of the luxury condominium market in Miami.
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