While the South Florida single family home market has recovered nicely in South Florida, the same cannot be said for the condo market, with one stunning exception. Let’s examine inventory and absorption levels to see where the market is hot, and where it’s not.
Metrostudy’s South Florida region is comprised of six counties along the southeast Florida coast. The northernmost counties of Indian River, St. Lucie, and Martin counties are known collectively as the Treasure Coast, while Palm Beach, Broward, and Miami-Dade counties represent the Gold Coast.
The Treasure Coast is decidedly where the condo market is not hot. From a peak of over 2,700 annual condo starts in 2005, the market has plummeted. There have been no condo starts since 2008, as the market has slowly absorbed the finished, vacant inventory. Condo housing inventory has declined to just 30 available units, so it is possible that there will be a renaissance of sorts, especially near the coast. However, given that the Treasure Coast housing market is almost exclusively modestly priced single family detached product, a resurging condo market is likely to be an event in the distant future.
The Palm Beach and Broward condo markets are not faring much better than the Treasure Coast. In Palm Beach County, the annual condo starts pace peaked at 8,025 in early 2006, then crashed to zero for several quarters in 2010 and 2011. There were 150 condo starts in 2014, with 82 of them occurring in the fourth quarter. Water Club North Palm Beach marks the first high rise condominium to break ground in several years. There’s still an overhang of over 400 finished, vacant condos from the previous boom, representing about 16 months’ supply at current absorption rates, well above the three months’ supply deemed normal. Broward County’s condo market has followed a similar trajectory to Palm Beach, with the annual starts pace peaking at over 16,500 in the fourth quarter of 2005, then dropping to zero starts by 2011. There are 245 finished, vacant condo units in Broward, a 20 month supply. The current starts pace is muted; only 145 condo starts were noted in 2014. A 338 unit high rise building along the Intracoastal Waterway began construction in late 2013, and it is the only new high rise building under construction in Broward County.
The Miami-Dade condo market, by contrast, is on fire. Let’s first examine the market as a whole, then focus on the high rise condo market located in downtown Miami, its nearby intracoastal neighborhoods, and Miami Beach.
Miami-Dade’s single family market is primarily found in the western suburbs, from Doral south to Homestead. It is a mix of detached and attached product, with townhomes and twin villas making up 50% of starts. The annual starts pace in 2014 was 2,715, and, at 1,732 units, housing inventory is slightly below equilibrium, at eight months’ supply.
Miami-Dade’s condo market experienced the same boom-bust cycle as the other five South Florida counties, but its recovery was much swifter and robust. Peaking at an annual starts pace of 28,897 in the third quarter of 2005, the starts rate declined by 99.7% to an annual pace of only 93 starts by the fourth quarter of 2009. However, during the downturn in starts, closings remained strong, with 1,432 closings recorded in the first quarter of 2010 as an example. The net effect of this was that the peak of 21,000 condo units in finished inventory in early 2008 was rapidly absorbed so that, by the second quarter of 2012, only 4,121 units were remaining.
Exhibit 1 shows how the absorption of completed inventory occurred during 2008-2012, while Exhibit 2 indicates how finished inventory has been replaced by new construction.
Exhibit 1: Miami-Dade Annual Starts and Closings Rates
Exhibit 2: Relation of Finished, Vacant Inventory to Under Construction Inventory
Note that starts have recovered, with almost 6,000 units started in the third and fourth quarters of 2014. Why have sales been so strong, even during the Great Recession period of 2009-2011? The answer can be found in the buyer demographics of this market.
Before we delve into demographics, it’s worth a look to note what type of condo is selling in Miami-Dade. High rise condos, also known as towers, represent 9,968 of the 11,085 total condo housing inventory as of the fourth quarter 2014. That’s 90% of total inventory, and quite unique to the rest of South Florida, where we’ve previously noted that only two high-rise buildings are under construction. The price range of these units range from about $300,000 to over $5,000,000, with most closings occurring in the $400,000 to $700,000 price range. The units are typically just over 1,000 square feet, which computes to a price per square foot range of $450 to $650 per square foot. This is two to three times that of Miami-Dade’s single family homes, which average about $170 per square foot. So, to summarize, the product is small, expensive, near the water, vertical, and includes maintenance fees and property taxes that are a significant annual expense.
Given the product characteristics, it is not surprising that the buyer demographics are unlike that of South Florida single family home purchasers. The high rise market is largely international in scope, with the majority of buyers from Latin America, although Europe and China contribute to the market as well. These buyers are well-heeled, and place large deposits on the property they are buying, averaging over 50%. It is in many instances a case of capital flight from their native country, as inflation and currency devaluation issues compel buyers to move as much money as possible to the U.S. to invest. This also provides the developers of these high rise towers with a significant source of cash to construct the buildings, and, with the hefty deposits, cancellation rates are likely to be low.
The investment opportunity would be of little significance if the international buyer didn’t like the area, but these buyers love Miami. The lifestyle and local culture offered is hugely attractive to Latin Americans in particular, who view Miami as clean and safe as well as sophisticated and exotic.
So, we now have over 11,000 high-rise units in inventory, with most of these under construction. As we look ahead, what are the risks and rewards of this market?
Looking at the risks, we note that there is virtually no domestic buyer in this market, and most of the buyers are from Latin America, making this somewhat of a one-dimensional market. Social or economic distress in just one country, such as Venezuela or Brazil, would have an impact on demand. Also noteworthy is the construction cycle time of these buildings. The architectural designs are phenomenal in many cases, which require skilled workers, currently in short supply. So the typical two year cycle time for tower construction may extend a year or two beyond that, increasing the risk of closing the building. Moreover, there’s not much transparency as to how deep this market actually is. We know the population of the buyer’s countries, but detailed demographic information is either sketchy or non-existent. Like any other market, the upward trend will not continue forever, but predicting a downturn is going to be challenging, and not likely to be noticed until it happens.
Nevertheless, there are rewards for those with the expertise to participate in this market. The 50-70% deposits, with balance-to-close funds secure in the U.S. should mean that the overwhelming percentage of purchasers will follow through and close on their unit. The large deposit schedule provides financing for the developer, unheard of in the rest of the housing market. The buyers view Miami as the place to be, as evidenced by the screeching halt of this market at the Miami-Dade/Broward county line. And finally, today’s market is still less than half the size of the market peak in 2005.
The wildcard for the high rise condo market in 2015 is the price of oil. Since Venezuelans account for a notable share of this market, disruption in their native country could cause problems in the market here. Already, we’ve seen the black market exchange rate for Bolivars mushroom from 80 Bolivars to 1 U.S. dollar in August 2014, to over 189 to 1 today. Since oil makes up over 90% of Venezuela’s federal revenue, a 50% haircut is going to be hard felt in a country that can’t provide basic necessities as it stands now. It is certainly going to be more difficult, and expensive, to move Bolivars offshore. Will this tremor cause an earthquake, and shake this market’s foundation to the core? We’re only in the top of the first inning, so it is too early to tell. Stay tuned.