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“Hot” does not adequately describe Miami’s current residential real estate climate. Back from the brink of extinction in late 2009, the residential condominium market in Miami is currently booming. The apartment market is booming as well, but did not take it on the chin like the condominium market did.
From 2009 to 2010, Greater Downtown Miami was considered one of the most overbuilt markets in the country. Developers delivered approximately 34,000 condos in the market in a six-year period, more than double what was delivered in the prior 40 years. The majority of those units came on line during the crash, which left Miami with an unsold inventory or more than 20,000 units in early 2010. Forecasters expected it would take 10 or more years for that inventory to be absorbed.
Today that inventory of developer-owned units is down to less than 900, according to Condo Vultures, Miami’s condo watchdog.
One can almost say that Brazil and Argentina brought back Miami’s high-rise condominium market. Brazilians and Argentineans in particular, but not exclusively, have experienced hyperinflation — to the point of scheduling the purchase of groceries on payday — like few others. They therefore have an acute understanding of the need to hold hard assets. These investors have been flocking to Miami to buy condos for cash, due to the added protection and stability of buying real estate in the U.S. and the weakened dollar.
In Brazil and Argentina, like many other South and Central American countries, bank financing is not the funding mechanism by which residential developers build. Instead, developers use buyer’s deposits to fund construction. Having been left with little or no other alternative — due to construction lending drying up for condominium construction — the local development community in Miami has adopted this Latin model to get their residential projects out of the ground.
So far, developers like Newgard Development Group, Related Group and Fortune have successfully financed the construction of projects with this model. And with these successes, other developers are following suit.
The way it works typically is that developers will require a 20 percent deposit upon contact execution, an additional 20 percent at groundbreaking and then additional deposits at different stages of the construction cycle thereafter. Only 10 percent of the unit price must be held in escrow by the developer, and the rest can be used to fund construction. A condo buyer will ultimately have 50 percent to 80 percent of their unit paid for by the time it is delivered. This financing style is not quite as simple as it sounds; there is typically a gap that must be covered by the developer with its own equity, a line or borrowed, but the majority of the project is funded with buyer deposits.
As well as the condo market is doing in Miami, the market-rate rental housing sector may be faring even better. Miami has always been a constrained market in terms of developable land. Southeastern Florida is essentially a peninsula between the Everglades and the Atlantic Ocean, and with condo developers and rental developers targeting many of the same sites, there is not enough land to go around. Additionally, 75,000 rental units were taken off the market by condominium converters from 2003 to 2009 in Dade and Broward counties, with very little, if any, new product developed during that time. These factors, combined with the historically low interest rate environment, create the perfect storm for market-rate rental housing in Miami.
Institutional equity is pushing the rental developers toward Miami’s CBD. However, the competition from the condo developers is so fierce, that very few sites are going to the rental developers. Alliance Residential is one of the few companies that successfully secured a site in Miami’s downtown market. Alliance’s 400-unit site was not only tied up early, but the upward rent trend has allowed them to make their numbers for rentals. Rents in the downtown market, which averaged $2 per square foot nine months ago, are projected to be $2.40 per square foot in 24 months.
As one may suspect, the cap rates for all classes of multifamily product in Miami are very low. The high-water mark for closed sales likely occurred last year when TIAA-CREF purchased the 120-unit Residences at Merrick Park (Coral Gables) for $52.5 million, or $350,000 per unit (pulling out the retail component from the deal) and a 4.25 percent cap rate (technically they assumed a ground lease as the units were developed on leased land).
In general, Miami is on fire. It boasts one of the largest current construction projects in the country, Brickell CityCentre. Hong Kong-based Swire Properties is developing the $1 billion project, which will span nine acres on the southern bank of the Miami River. Once complete, it will total more than 5 million square feet of mixed-use space. Swire recently announced a very exclusive retail component and will partner with the Whitman family on the development. The Whitmans are best known for their development and ownership of Bal Harbour Shops where some of the highest retail rents in the country are achieved.
Developers are scrambling for sites close to this game-changing project, such as Newgard Group, which recently sold out its 374-unit BrickellHouse project. The company has now secured a riverfront site directly opposite of Brickell CityCentre, where it plans to develop an ultra-luxury, 375-unit residential tower named SkyHouse on the River.
Other notable additions to the Miami skyline, which are still in the planning stages, will be Genting Group’s Resorts World Miami, a project that may or may not include gambling. Genting has already acquired $500 million worth of property on Biscayne Bay in Miami’s CBD. Additionally, Falcone Group and Centurion Partners plan to develop a 20-acre mixed-use project called Miami Worldcenter.
— Larry Stockton, senior vice president of the Miami office for Colliers International