Downtown Miami condo market set for a fall [10-16-15]

Article Courtesy of Market Watch

By Sep Niakan

Published October 16, 2015

Inventory of available units has swelled and new construction is adding even more

The greater downtown Miami condo market is showing clear signs that demand may not be enough to prop up prices.

Sales price momentum of condos has finally come to a halt in the greater downtown Miami area, with September median price per-square-foot sales of condos going down from $387 to $383 and average sale prices per square foot edging up slightly to $405 from $398 based on data from the Miami Realtors MLS.

We are officially in a buyer’s market, with 19 months of condo resale inventory available. A balanced market typically has between 6 and 12 months of inventory.

In addition to the current resale inventory there are also thousands of new-construction condo units being delivered in the greater downtown Miami area in next few years, with a bulk of them being delivered in 2016 and 2017.

There is much chatter on where the condo market will take us from here in the next year or two, and most are predicting the market in general to go sideways or downward. With high inventory levels, annual rental returns at a low 2%-4%, the strong U.S. dollar turning away some would-be foreign investors from South America and around the world, and shaky global economies, where will our Miami real estate market head from here? Below are a few key factors that will combine to determine the greater downtown Miami market’s fate.

Steady demand with realistic prices.

However ominous the excess condo inventory appears, many — if not a majority — of the currently listed condos in the greater downtown Miami market are grossly overpriced as compared to today’s market values. A typical condo in the area sells for about 5% below the asking price. But the median current list price per square foot is 19.8% above today’s median sale price per square foot ($459 vs. $383).

One can infer that there is a large segment of property owners who are not motivated to sell at today’s prices, and if they were willing to sell at market value or simply pull their properties off the market, the inventory levels could drop significantly back to a more balanced market.

That said, sales of Miami condos have gone down 21% since last year, with 190 MLS sales in September 2014 and only 151 in 2015. The question is whether this is attributed to overpricing or a market set for a correction.

Global panic and flight to safety.

The global markets are shaky, and many international buyers bought properties cash and/or put contracts on preconstruction properties with 50% deposits. If a significant percentage of those overseas buyers will need their money and will pull out at break even or at a loss of their original investment, there could be a correction in market prices. On the other hand, the U.S. is famous for the financial “flight to safety” when the world is in turmoil, and Miami is South Americans’ No. 1 destination for their money during crises. So there could be a positive effect where the “flight to safety” investors double-up on their condo investments in Miami.

Sales follow rentals.

A very basic rule of thumb for the link between rental and sale prices is that sale prices move at twice the rate of rental prices. So if rental prices move 5%, sale prices move 10%.

In the greater downtown Miami market, rental prices also appear to be reaching their peak. With newer, more luxurious rental inventory coming on the market as new construction properties are delivered, average rental prices will certainly increase, but the year-over-year price changes of existing rental properties is the key number to watch. It is likely that for the middle-luxury portion of the market, there will be a lot of competition due to new construction inventory coming on market, and there will be some downward pressure on those rents. That could have a domino effect on the rest of the condo rental market. If rents go down, sale prices could follow.

It still makes sense to buy in Miami.

Notwithstanding all this information that points to a weaker condo market, demand is still strong, especially from those who know Miami well and know all the positive developments taking place that will change Miami’s face for the future: Brickell City Centre, Miami Worldcenter, Port of Miami expansion, new Viacom studio, I-395 Signature Bridge, Microsoft Innovation Center, Design District development, Wynwood Art District rezoning, Art Basel and much more.

Knowledgeable buyers are investing in the long-term future of Miami. While the next 2-3 years could bring some bumps and bruises, Miami is improving on many fronts and will come out of this possible inventory glut more brilliant and beautiful than ever.

In addition, Miami continues to climb up the rankings of many major publications and research outfits as one of the world’s most important cities for real estate, millionaires and growth in overall commerce.

And due to Miami’s continued appeal, weather and improved quality of life (except for traffic), the greater downtown Miami condo market has a bright future ahead.