Miami’s condo boom redux
By Martha Brannigan
The Miami Herald
07/06/2014 7:34 PM
The grand opening of the pre-construction sales center for the SLS Lux Brickell condominium drew hundreds of real estate agents on a sultry June evening.
With the imposing bronze sculpture Male Torso by Fernando Botero looming above, Related Group chairman and CEO Jorge Pérez made the rounds as the crowd tipped stemmed glasses of bubbly and nibbled hors d’oeuvres.
Pérez was in high spirits. And why not?
SLS Lux Brickell already had reservations from buyers to purchase $200 million in units — half the project’s total sales — before the formal launch of the sales center June 11, according to Related, which is jointly developing the prime site with real estate baron W. Allen Morris, who owns
“Miami is the sweetheart of the world,” said Pérez, who is leading a new boom in condominium construction six years after the last one ended in a spectacular crash. Back then, thousands of buyers reneged on contracts for newly built Miami condos amid nosediving values. Now, he said, “Everyone wants a place here.”
Along with the reliable stream of investors from Brazil, Argentina, Venezuela and Mexico, Miami keeps attracting buyers from Russia, England, France and Canada, among other places. All eyes are on the Chinese to see if they will join the fray in any significant way.
Conspicuously absent from the buyers are South Floridians. Few local residents have the big cash deposits needed to participate in the pre-construction boom or the financial means to pay the lofty prices for units, even if mortgage financing were available.
With the revival gaining steam over the past two years, the looming questions are: How many new condos can the foreign-fueled market absorb? And how long can this party go on?
BY THE NUMBERS
In the eastern swath of Miami-Dade County where the boom is concentrated, 40 condo projects with 6,781 units are under construction, 56 others with 10,807 units are planned, with approvals to go forward, and 36 more projects with more than 8,300 units have been proposed at early stages, according to Peter Zalewski, a principal at Cranespotters.com, a Miami firm that closely tracks condominium construction in South Florida.
In the past two years, the costs of land and construction in Miami have soared, and so have the prices for units. A typical project in the downtown Brickell area that would have sold at $400 a square foot in 2012 is going for more than $600 a square foot today, according to Aventura-based International Sales Group, a pre-construction condo marketing firm. Exclusive projects in South Beach are fetching well over $2,000 a square foot.
This condo construction cycle in Miami is distinguished from the last in several ways. The biggest difference is the unit buyers are putting up big deposits, typically 50 percent of the purchase price, in stages during construction, funding most of the hard construction costs for developers. (Florida law allows developers to spend deposits for direct construction expenses, except for 10 percent, which must be placed in escrow unless a bond is posted.)
That level of commitment from buyers (which contrasts with the 20 percent down payments that were typical the last time) dramatically increases the likelihood that buyers will close on contracts when their buildings are complete, developers say.
Whatever triggers the end to this condo cycle, it won’t be a repeat of the last boom when buyers skipped out on their contracts — not as long as the big deposits are required — developers predict.
UPSCALE GOES HIGHER
Another change this time is the high-end condo units are far fancier, with much higher prices that reach eight figures (the penthouse at Faena House in Miami Beach was listed for $50 million), moving Miami into an elite circle of global cities where the super-rich come to play or perhaps to do business.
As developers wage an escalating battle to offer the best of the best, Miami has turned into a workshop for internationally famous architects like Richard Meier, Zaha Hadid and Bjarke Ingels, and prominent interior designers and landscape architects.
Exotic building materials, cutting-edge appliances and smart-house features are de rigueur.
“Everyone is doing buildings with amenities and toys that just blow away the buildings that went up last time,” said Gil Dezer, president of Dezer Development, which is in the midst of construction on the 60-story Porsche Design Tower in Sunny Isles Beach. The tower, which is selling to billionaires from around the world, will feature automated car lifts to deliver vehicles to a resident’s unit. Most balconies will include private plunge pools.
Artwork — from paintings and sculptures to murals and installations — distinguishes the new towers, a testament to Miami’s newfound affinity for art and culture. At Muse, a tower in the works in Sunny Isles Beach, Albanian artist Helidon Xhixha will create a sculpture for each unit owner.
Amid the boom, Miami has buttressed its role as a magnet for foreign wealth looking for a safe haven from political and economic instability in Latin America and elsewhere.
Many of the foreign investors buying the “affordable luxury” units in the downtown Brickell area will likely rent them, brokers say, while those buying the ultra high-end properties like Faena House, Porsche Design Tower, and Mansions at Acqualina will keep them for personal use, if only occasionally.
A WELCOME FEELING
Arguably the most international U.S. city, Miami is a place where foreigners are comfortable. “People [from other countries] feel welcome. They don’t feel like an oddity,” said Morris, the co-developer of SLS Lux Brickell and a Miami native.
Hungarian-born Anita Funtek, president of the Miami New Construction Show, an exhibition for new luxury condominium projects scheduled Aug. 29-31 at the Miami Beach Convention Center, said she is at ease speaking English in Miami, because “nobody minds if you don’t speak perfectly.”
It’s not just luxury apartment buyers who are flocking to Miami from all over the globe but also developers. Veteran Miami developer Ugo Colombo is joining with Russian billionaire Vladislav Doronin of the Capital Group — sometimes called the Donald Trump of Russia — to develop the Brickell Flatiron condo tower in the Brickell area.
Prominent Argentinian developers include Eduardo Costantini of Consultatio, which is putting final touches on its ultra-fancy Oceana Key Biscayne and is pursuing an equally high-end project, Oceana Bal Harbour; and the family-run Melo Group, which is doing several projects in Miami’s Edgewater neighborhood.
Stephan Gietl and Fernando Levy-Hara, who formed the mckafka Development Group, which is developing the Crimson condominium in the rapidly gentrifying neighborhood of Edgewater, hail from Austria and Argentina, respectively.
The most high profile of all Miami’s projects, Brickell City Centre, a mixed-use development that is expected to transform downtown into a live, work, and play center, is being developed by Hong Kong-based Swire Properties, which has deep roots in Miami and previously built Brickell Key.
In a show of confidence, many banks that recoiled from condominium construction lending during the real estate meltdown have returned to the market. Over the past 18 months, they have becoming increasingly willing to lend on condo projects in South Florida.
“I would classify the financing market for condos as highly active and rather liquid,” said Scott Wadler, senior real estate analyst at HFF, a commercial real estate capital markets firm.
Lenders typically look for two things from a developer, Wadler said: a proven track record and a substantial level of qualified pre-construction sales.
With developers collecting large deposits from buyers, the loan-to-cost ratios are much more conservative than in the past. Related’s projects, for instance, typically borrow about 30 percent of the cost from a lender, with developer equity and buyers’ deposits providing the rest, according to Carlos Rosso, president of its condominium development division. Other developers are borrowing more from banks.
How long this gilded age of luxury condo construction will continue is anyone’s guess. Predicting the trajectory of condominium construction is about as dicey as forecasting the stock market, maybe trickier.
“I wish I knew where in the cycle we are,” said Miami condo kingpin Pérez. Demand for condos will ebb and flow over time, and prices will rise and fall, he predicted, but with Miami’s emergence as a magnet for foreign wealth, the long-term outlook for the condo market is bullish. “How long does demand last? I think a very, very long time.”
The burgeoning condo market should avoid major problems if the players — from the buyers to the developers to lenders — are disciplined. But that’s a big if.
If lenders loosen their underwriting standards or developers lower their deposit requirements, that could signal trouble ahead.
Keeping buyer deposits high (typically 50 percent of the purchase price is required in various stages before construction is complete) deters speculators, who in the last boom put up a little cash in hope of flipping pre-construction units at a quick profit. Those speculators walked away from contracts when unit prices plunged, leaving developers scrambling for cash to pay back loans on projects.
“When people say ‘bubble,’ we kind of say ‘rubbish,’ because the buyer-deposit model taps down speculation,” said Craig Studnicky, principal and co-founder of International Sales Group, an Aventura-based firm that markets pre-construction condominiums for developers.
“No one has a crystal ball,” Alicia Cervera Lamadrid, managing director of Miami-based Cervera Real Estate, a major marketer of pre-construction projects, said of the current construction cycle. “I think the market is sustainable as long as the deposit structure holds, and when it doesn’t hold, projects will get introduced that will not get built.”
A common fear is that a developer will pursue an underfunded or ill-conceived project and stumble, undermining confidence in the broader market.
A prudent developer won’t break ground until a project has enough money to finish — typically through a combination of buyers’ deposits, a bank loan or other financing, and developer equity.
“There are a lot of people probably doing it on a shoestring,” said Kevin Maloney, founder and principal of New York-based Property Markets Group, which is building Echo Aventura, Echo Brickell and Muse in Sunny Isles Beach. “If there is a danger, that’s where the danger is.”
Other Miami developers echo such concern.
“One concern is an inexperienced developer not being able to deliver his product and shaking the market,” said Neil Fairman, president of the Plaza Group, which is developing Marina Palms Yacht Club & Residences in North Miami Beach in partnership with DevStar Group.
“As long as developers follow the rule of not building until they have enough money to finish, then even if the music stops, it shouldn’t be a major problem,” said Edgardo Defortuna, president of Miami-based Fortune International, which both develops condominiums, such as Jade Signature in Sunny Isles Beach, and markets new condo projects for other developers.
“There’s a big difference between, ‘Here’s your deposit back,’ and ‘I’m sorry, your deposit is in this structure I can’t complete,’ ” Defortuna said.
“If people start building speculatively — without presales — that’s when I worry,” said Morris, the co-developer of SLS Lux Brickell.
If a project is struggling to muster sufficient sales, the right move is to return the deposits to buyers, rather than break ground on a prayer that it will attract more buyers, developers agree.
Some think the current condo boom could end without calamity — gradually petering out as the rising costs of construction and land drive up prices to the point that projects are shelved as would-be buyers balk.
“Construction numbers are increasing a lot more than sales prices,” said Related’s Rosso. “That’s going to be a natural filter [to the number of projects that get built].”
Miami’s condo boom already is showing signs of stretching.
Defortuna, Fortune’s president, said the pre-construction condo market is logging more total sales than a year ago, but per-project sales and absorption is lower.
“Overall demand is stronger today, but there is a lot more to choose from,” Defortuna said.
One key question is what will happen in the market when a growing supply of new condos is complete. The many investors purchasing pre-construction units will eventually want to cash out of their holdings — possibly sooner rather than later. Almost half the 192 units delivered to buyers at MyBrickell were listed for sale or rent shortly after the building was completed in January, according to Zalewski of Cranespotters.
In recent months, competition among developers for the pool of wealthy foreign buyers has driven up brokers’ commissions sharply, according to Zalewski.
Some developers are offering 7 percent commissions on projects to entice real estate brokers to push their projects. That compares with commissions of 4 percent or 5 percent that were more common in the past.
Since the buyers are from abroad, the brokers play a particularly important role in steering them to a project. “It’s a brokers’ market,” said Related’s Rosso. “You need to incentivize brokers so they focus on your project.”
Developers depend on armies of brokers in Miami and their counterparts in Latin America and Europe to bring in buyers.
“It’s a go-to market, not a come-to market,” said Lewis M. Goodkin, president of Goodkin Consulting and a veteran analyst of South Florida real estate. “They are really doing a lot of selling overseas and paying brokers overseas.”
Miami-based brokers often end up sharing commissions with their contacts abroad. Sometimes, “brokers use their commissions to offer buyers a discount,” Rosso said.
Handsome commissions are warranted because of the pivotal role the brokers play, said Philip J. Spiegelman, a principal and co-founder of International Sales Group or ISG, the pre-construction marketing firm. “To be real blunt, brokers are the ones going out, unit by unit, and making the business. Money motivates the broker community,” Spiegelman said. “It’s a highly competitive environment.”
Paying commissions sooner is another way developers are stepping up competition for sales.
New York-based Property Markets Group is paying a full commission of 7 percent to brokers when construction begins — rather than staggering payments over the course of construction as most developers do.
“Brokers have to wait three years to get paid [in some projects],” said Maloney of PMG, which also is a major developer in Manhattan. “When we break ground, we pay the whole commission.”
Related has unveiled a promotion at its Paraiso Bayviews project in Edgewater, offering brokers an 8 percent commission on their sixth and subsequent sales, rather than the 7 percent commission otherwise provided.
FINDING FOREIGN BUYERS
The big marketing firms, Fortune International, Cervera and ISG, continue to step up efforts to expand their international network.
Cervera said the firm has relationships with more than 400 international agents. “We’re in constant contact with Peru, Argentina, Brazil, Venezuela,” said Cervera, who returned from Mexico last Tuesday. Italy, France and other European countries are also key markets, she added. “There is ongoing effort to broaden out the base.’’
ISG recently hired a Chinese-speaking marketing specialist who translated some of the firm’s marketing information into Mandarin and traveled to Beijing in a bid to tap Chinese buyers. Since then, ISG has hosted several Chinese visitors in Miami. Introducing Chinese buyers to Miami “is kind of a process,” ISG’s Studnicky said. “It’s in its early stages.’’
With the swell of new condos in the pipeline, sales of existing, or previously owned, condominiums in Miami-Dade are feeling the brunt. In May, sales of existing condominiums in Miami-Dade plunged 11 percent from a year earlier even as the inventory of existing condos for sale expanded 36 percent to total 10,941 units, according to the Miami Association of Realtors.
Buyers opting for pre-construction units are paying a substantial premium over the price of an existing condo of comparable size — sometimes several hundred dollars per square foot more. But for many wealthy foreign buyers who want the latest, that doesn’t seem to matter.
“What’s happening with the resale market is the pre-construction market is really competing with it hugely,” Cervera said. “Since there’s such great choices in pre-construction, it sort of begs the question: ‘Do I wait a few more months and get a brand new unit?’ ”
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