Q&A: Condos Still a Stormy Sector in South Florida Public Relations
- Sep 22, 2008
South Florida may have dodged some of the recent hurricanes, but it is still experiencing turbulence, especially in the condo market. Has it hit bottom yet? CPN associate editor Amanda Marsh spoke with Peter Fitzgerald, COO of the The RADCO Cos., about what in the sector’s forecast.
CPN: Where does South Florida’s condominium market stand right now? Have you seen any recovery, or is it still very volatile?
Fitzgerald: The South Florida condominium market remains in a state of flux with values continuing to fall and a demand/supply imbalance that will take years to correct. Miami, obviously, has the biggest exposure with respect to declining values now and going forward with something like 20,000-25,000 additional units scheduled to go on line in the next year or so. This is on top of the 23,000 condo units currently listed for sale. These figures do not include the owners who want to sell but cannot. A lot of the recent product and product coming on line was intended to be sold at very high price points. This was caused by speculation, very high land and construction costs and a difficult entitlement process. In the South Beach zip code, there are over 1,000 units listed for sale in excess of $1 million. There are 10 high-rise condo developments on Biscayne Boulevard, six sites on Brickell Avenue and eight on the Miami River. There is simply too much inventory and the State of Florida is being re-priced.
CPN: What are some of the new trends you have been seeing?
Fitzgerald: We have seen the creation of numerous distressed real estate equity funds created over the last year and a half with something like $70 billion raised to date. The funds that were created in 2006 and 2007 have had a very difficult time finding willing sellers at the returns required by the equity. Basically, first mortgage financing is unavailable and the equity is requiring mid-20 percent unlevered IRRs. Banks cannot sell at this level and developers who have not run out of interest reserve in their loans surely will not. Banks that have foreclosed are not willing to reduce condo prices to “market” or they would have to write off more of the first mortgage loan. My sense is that they are looking for time. Although banks have taken massive write-offs, they clearly have not been written down to the point that would spur meaningful transaction activity. They cannot afford the write-downs because than equity will have to be raised to meet regulatory capital levels. Until this happens, the transaction market will be non-existent.
CPN: It seems that certain condo developers haven’t had problems selling their product. What makes a successful developer in today’s market, and who are the buyers?
Fitzgerald: The developers that are selling today are the ones who planned to sell units at a price that correlates to local income levels. Sure, there still is foreign interest in U.S. residential real estate, especially with the U.S. dollar falling until very recently, but the foreign market is on the margin and does not reflect what makes up the broader market. These developers are also likely very good at creating a community and not just a condo development. There are very few developers that can claim this. It should be noted that even if developers are selling in today’s market, they are likely doing so at break even numbers at best.
CPN: What are developers doing with their troubled developments? Have there been any conversions to apartments?
Fitzgerald: There are many developers who are trying to take the property to rental. This is more plausible if the condominium declaration has not been established and no units have been conveyed and they have adequate interest reserve (time) to effectuate the changed plan. In most cases, however, the rents necessary for a developer to get out of a deal are unachievable. In most cases, some of the units have been sold as condos, which precludes a lot of apartment buyers who do not want to deal with an HOA, condo taxes and the cap rate impact they would receive when they try to exit from a fractured condo. The “shadow” rental market of leasing condo units has impacted the apartment market. In Tampa for example, certain condo management companies are no longer taking requests to lease condo units because they cannot lease them. You will see high face rents quoted in most markets but when two to three months of concessions are necessary to induce residents to rent, the effective rents precludes an apartment exit. Further, cap rates continue to rise, vacancy is up due to job losses, especially from construction, and the municipalities are reluctant to reduce assessed values for real estate as their budgets were created on the premise of continued high tax revenue fueled by condos.
CPN: What is your market outlook for the next six months?
Fitzgerald: We believe there will continue to be a stalemate between buyers and sellers with a large spread between the buy/ask price. We foresee that pressure will continue to build on financial institutions to rid their balance sheets of these mortgages, but until there is capitulation on pricing, the market will continue to flounder. No one can sense where the bottom is so everyone is very reluctant to buy.