Miami Herald - Posted on Mon, Jul. 26, 2004

Condo market: Will it burst or keep on rising?

By Douglas Hanks III

In the midst of a historic boom for condominium sales in South Florida, there's a question that, oddly, keeps coming up:

Are the buyers really there?

For sure, thousands of sales contracts for future high-rise projects are being signed. Developers are reporting sellouts just weeks after opening their sales centers.

But the great unknown remains whether the early buyers fueling the wave of condominium projects actually plan to live in their apartments or are simply hoping to sell the units quickly at a profit.

''Are we building too much?'' said Michael Cannon, managing director of Integra Realty Resources and a leading analyst of the region's housing market. ``I've been told I'm the guru, and I don't know.''

Cannon's uncertainty underscores the great divide in South Florida real estate, with some market watchers warning of a coming glut and others insisting that the region's voracious demand for housing will gobble up what's being built.

This is a crucial question. An oversupply of condominiums can cause property values to flatten out or even drop, dragging down other sectors of the market, but if developers have judged the market correctly, their projects will create communities and nightlife districts in the heart of some long-neglected areas, particularly in downtown Miami.

''Real estate development lures people; people lure everything else,'' said Edie Laquer, the commercial broker who helped bring in a group of Israeli and New York investors planning more than $1 billion worth of projects for downtown Miami.

The land assemblage comes as developers have started construction on or announced plans for 16,000 residential units in and around downtown -- four times what has been built there since 1995, according to the Downtown Development Authority.

Laquer has brokered sales of parking lots and vacant land up and down Biscayne Boulevard in areas that developers wouldn't have touched five years ago. Now they're planning high-rise towers there, with apartments selling into the millions of dollars.

And, they say, there's no shortage of buyers.

''The demand's still there,'' said Pedro Martin, who plans a 516-condominium tower on Biscayne Boulevard in Miami to be called 900 Biscayne Bay. ``We've sold probably about 400 of those units already, and we haven't advertised yet or opened the sales center.''

But analysts and other developers say a large number of those signing preconstruction sales contracts are speculators planning to sell their high-rise condominiums as quickly as possible. The big question is: How many of these early buyers actually plan to live in their units?

''If you talk to the salespeople, if they tell you the truth, the majority of [buyers], meaning 50 percent, are investors,'' said Jack Winston, a real estate analyst with Goodkin Consulting. ``The problem is the market is going to be flooded with all of these resale units.''

Some high-rise projects have sold 70 percent or more of their units to investors planning to resell or rent them, according to industry analysts and developers. Others have virtually no investors.

In general, the Miami-Dade market has drawn more speculators than has the Broward market, mainly because there's less to buy in Broward, analysts and developers say.

''If you had as many units in the market in Broward County as you do in Miami-Dade County, you'd have the same amount of speculators,'' said Rosalia Picot, whose company is marketing the Q Club Resort and Residences in Fort Lauderdale Beach.

Miami-Dade also has stronger ties to Central and South America, where Florida condominiums are popular investments.

Still, Andy Weiser, a Coldwell Banker broker specializing in Broward condominiums, says that, in his experience with Fort Lauderdale condominium projects, about half of the units bought before or during construction are sold again within a year of the building's opening.

Investors rattle the development industry because too many of them can flood a market with unsold units. People signing preconstruction contracts may hope to sell, or flip, their units before the building opens or shortly thereafter.

Flipping has proved lucrative for those savvy enough to buy early into a project that later becomes popular with buyers willing to pay far more than the discounted preconstruction prices.

The danger for the wouldbe flipper is that he might later discover that he'd misjudged the market and can't find a buyer. That could force flippers to slash prices and lower the going rates for apartments in their buildings. They could try to rent them for the monthly cost of their mortgages, but if too many other buyers are in the same situation, the competition for tenants would be stiff.

Then there's the worst-case scenario for developers: Speculators who'd counted on selling their contracts even before the buildings opened but were unable to do so could face the grim prospect of abandoning their 20 percent down payments to avoid having to close on condominiums they couldn't afford in the first place.


''How many people have the ability to close on these units and carry them? That's the question we're asking,'' said Alicia Cervera, the real estate broker who heads up sales for Related Group of Florida projects, including the landmark, 800-unit One Miami downtown.

Related, Cervera said, has enough safeguards against speculators -- including extensive financial screening for anyone wanting to buy more than one unit in any project -- that there's little risk for the company.

Others, however, note that Related's strategy of pricing units for rapid sellouts have drawn a huge number of investors.

Related's executive vice president, Roberto Rocha, denied pursuing investors but agreed that they make up a significant portion of Related's sales. For the company's last two projects, including Miami's 1,000-unit Plaza on Brickell, only about half of the buyers actually plan on living there, Rocha estimates.

Still, he stressed, that's only a guess.

''We don't know who's an investor and who isn't,'' he said.

''That's the $64 million question,'' agreed Martin, the 900 Biscayne developer.


Jack McCabe, head of McCabe Research and Consulting in Deerfield Beach, believes about 40 percent of the buyers in the condominium market to be investors, though he said that might be a conservative number.

McCabe's surveys show 25,000 condominium units either under construction or planned in Broward, Miami-Dade and Palm Beach counties within the next 18 months. Typically, people only buy about 4,000 or 4,500 condominiums a year in the region.

''Do the math,'' he said. ``I think we're looking at a 3- or 3 ?-year supply coming onto the market in 18 months.''

Cannon, the Integra analyst who is also a real estate columnist for The Herald, said the current buying and building boom could end as badly as one did in the 1980s. Back then, speculators -- including many from Latin America -- helped fuel high-rise construction along Miami's Brickell Avenue.


''In 1986, we had over 15,600 unsold units,'' Cannon said. ``We were able to predict in 1984 that that was going to occur, and I was beat up for about a year.''

This time, Cannon takes more comfort from lenders' insistence on more equity from developers and more scrutiny of buyers before approving construction loans.

And banks, he said, are insisting on contract language that would make it harder for buyers to flip their units before closing.

Still, Cannon said, he can't make the kind of prediction he made in '84. He doesn't have the answers to enough questions, particularly the most vexing one: How many of the buyers are actually investors?

''No one knows because it's the best-kept secret by every developer,'' he said. ``I don't think they even know who's who.

``Bottom line: 2005 and 2006 are going to be interesting years."