Amid South Florida’s recession-battered real estate market, there’s some pretty good news: We haven’t lost our allure and bargain hunters have moved in.
That’s the feedback from a panel of real estate experts gathered for the 10th Business Journal Critical Conversation for 2010. Previous installments of the news series have covered topics ranging from health care and manufacturing to cloud computing and the cruise industry.
Residential real estate shows considerable movement, with bargains spurring sales and some builders starting new single-family homes with little competition left, our experts said. Industrial space is tight in some areas, but office space is expected to lag in the recovery.
Hotels are seeing a rebound in occupancy rates, but there are more bad loans and foreclosures still to be worked out.
Condo bargain hunting
The conversation about condos has turned from the bust story of 2009 to the bargain hunting of 2010, said Hermen Rodriguez, managing director of Holliday Fenoglio Fowler in Coral Gables “I think the condo story, particularly for Miami, has been very strong. Yes, it was overpriced. Yes, it was too much supply. But, there are people who believe in Miami.”
Shari B. Olefson, a partner with the law firm of Fowler White Boggs in Fort Lauderdale and the author of “Foreclosure Nation,” said: “Every major morning show has covered what a great deal Miami is.”
The host of one national network show interviewed her and then turned around and bought a condo in Miami, she said.
“A lot of buyers are stepping in and buying at 50 cents on the dollar,” said Brad Hunter, chief economist for Metrostudy.
In some recent months, there have been 300 sales a month in downtown Miami.
“That’s not happening in Vegas,” Rodriguez said.
Pricing is very market specific, said Mark Pordes, president and CEO of Pordes Residential in Aventura. For example, he’s seen a big uptick on Miami Beach.
He’s involved with several projects, including Terra Beachside Villas on Collins Avenue at 60th Street, which was purchased out of foreclosure, he said. “The group that picked it up repositioned it the right way, and we have been able to raise prices. We are selling them.”
Neil Merin, chairman of NAI Merin Hunter Codman, said a lot of entrepreneurs are buying in Miami.
“If you are in Barcelona, Brazil and Budapest, you can buy a beautiful beachfront apartment,” he said. That is tremendous for Miami.”
There are also a lot of cash buyers from places like Venezuela and Brazil, some of whom rent their units and get cash flow, Pordes said.
Many condo buildings are now qualifying for Federal Housing Administration financing, which was not as widely available six or 12 months ago, Pordes said. Other units are selling after banks recognize that a developer has a good sales force and opts to take a haircut on the loan, rather than selling to a bulk buyer at a drastic discount.
That can go too far, though.
Some of our panelists were concerned that some bankers were going too easy on developers whom they hope to continue doing business with when the economy turns up.
Pordes cited an example of a well-done deal: 2700 North Ocean on Singer Island in Riviera Beach was acquired by a group that is rebranding it as Ritz-Carlton Residences.
“It’s going to sell well now,” he said. “You have fresh people in there and fresh blood going on.”
Even condo-hotel units, which received a black eye during the downturn, are showing signs of life, Pordes said. Would-be buyers can go to the front desk and find out just how well the units are being filled with guests.
By law, condo-hotel units aren’t supposed to be marketed as investments, but that didn’t prevent some buyers from falling into that trap during the boom – and later being sorely disappointed by a lack of cash flow.
One example of buyer interest: Pordes said he was involved with the purchase of 25 condo-hotel units built next to the original Fontainebleau hotel on Miami Beach. He only has 11 left to resell, with more deals pending.
Single-family rebound
It’s been a long, slow slide when it comes to single-family homes.
The residential market peaked in 2005, and the bottom for housing starts was reached last year, Hunter said. “We are slowly crawling our way off the bottom.”
While it is difficult to stop in mid-construction on a condo high-rise, it’s easier on a single-family home project.
“What happened is the builders were very quick to slash their prices in 2006 and blew out the inventory really fast,” Hunter said. “Existing home prices were a lot more sticky.”
By 2009, builders had pretty much gotten rid of their excess inventories, so now some are at the point where, every time they sell a house, they have to start building a new one.
Homes are selling fast in areas such as Doral and Jupiter’s Abacoa, and GL Homes has had success in Boynton Beach and Delray Beach, selling $300,000 to $500,000 residences, Hunter said.
Shane Soefker, senior managing director for Cushman & Wakefield in South Florida, noted that land speculators have started to acquire residential tracts with infrastructure to resell to single-family homebuilders as the market returns.
Hunter sees two drivers for what’s going on.
“Basically, in a lot of cases, the builders’ competitors went away – they went out of business or got out of the homebuilding business for a while,” he said. “Secondly, and very important, these projects all have something in common. They are in ‘A’ locations – close to jobs, recreation and shopping. They are where people want to live.”
Buyers prefer newly built homes over foreclosures, which may need fixing up, he said.
South Florida has chewed through a wave of foreclosures on lower-priced homes, which have probably reached bottom in pricing, Hunter said. Now, there are more foreclosures of nicer homes.
Demographics are another factor.
A lot of the homes built during the boom had five or six bedrooms for baby boomers and their families, but the kids are growing up and moving out. The result was an oversupply of oversized homes.
Generation X came to home-buying age at the peak of the market, and many owe more than their homes are worth or have lost them, Hunter said. “Then, we have Generation Yers, who are saying, ‘Now I’m going to be renting, and will be renting for several years.”
Institutional interest
Many commercial property deals these days are dependent on deep-pocketed institutional investors after financing dried up and cracks formed in the commercial mortgage-backed securities market.
The success in dealing with the overbuilt condo situation is a positive signal to institutional investors in general, Pordes said. “Where one lives translates into where one works.”
Rodriguez said: “To institutional investors in New York and Chicago, this seems like a very orderly disposition of real estate.”
Many investors have bicoastal strategies for the U.S. and consider South Florida a tier-one location, Rodriguez said. “We are on the East Coast, so it’s New York, Boston and Washington. Then they bypass Atlanta and come to South Florida.”
Merin said investors thought South Florida was a bulletproof market when the area hit about 5 million in population and started accepting low initial rates of return with the expectations of a payoff as prices rose.
“So, they are coming back now and realizing Florida is still a cyclical market,” Merin said.
Miami is recognized as a global gateway city, but buyers start drilling down into markets further north, he said. “Do I want to be in Plantation? Do I want to be in downtown Fort Lauderdale?”
Hunter said some institutional investors are looking for distressed properties, such as stalled townhouse projects and half-built subdivisions.
A lot of funds have raised $1 billion or $2 billion, and are itching to get the right yields and deploy their capital, Merin said.
Rodriguez said more commercial property owners are willing to sell – telling themselves they avoided selling at the worst of the market and it’s time to make new investments.
Banks with foreclosed commercial properties are also taking a strong look at exit strategies, especially if cash flow isn’t so great and repairs are needed, he said.
Some bargain hunters are deceiving themselves if they think a property held by a troubled bank will be easier to get when the bank fails, Olefson said. The best window is usually the two- or three-month period when a bank is still trying to raise capital.
“It’s the exact opposite as to what people think,” she said.
Obstacles for office
Office space represents a challenge with the high unemployment rate and retrenchment by many employers.
“We didn’t overbuild, but we had a jobs recession,” Merin said.
Firms such as ADT Security Services, which just signed a deal to relocate its Boca Raton operation, have been able to lease space 40 percent cheaper than they did before.
Some markets, such as Plantation, have available space vacated by firms that downsized or went out of business.
The economy is not adding jobs at a steady pace and it will be a while before increased employment will boost the office market, Cushman & Wakefield’s Soefker said. Downtowns are doing better than suburban areas, but it will generally be a long, steady recovery when it comes to leasing rates.
Future development will be contingent on leasing and rental rates that enable builders to get financing for projects, Soefker said. He doesn’t expect to see that until 2012.
Rodriguez said office space would be the last to sector to rebound.
In the meantime, the market would favor owners, which are also strong operators, Merin said.
Improvements in industrial
The rebound has been quicker for industrial and warehouse space.
“Corporations and users in general have gone from a destocking mode to a restocking mode,” Soefker said. “A lot of it is consumer driven and import/export driven. You can’t look at any port that hasn’t had an increase in container volume from an industrial standpoint.”
Many economists believe that manufacturers and retailers anticipated a worse recession than actually happened, Merin said. “So, in warehouse and manufacturing, you are seeing a quicker restocking because there was an overreaction to the news in 2009.”
Industrial projects are much easier to cycle through than office towers or shopping centers, which require longer development time frames, Merin said.
Soefker said: “You can turn the spigot off on the deliverables and control it much easier.”
There are not a lot of raw sites left for industrial projects in Miami-Dade and Broward counties, Soefker said. Many of the locations in Miami-Dade are controlled by a couple of entities.
Institutional buyers are paying record-low capitalization rates (the first-year return based on income in relation to sales price), Soefker said.
Merin termed this “chasing yields.”
Soefker cited a recent 800,000-square-foot industrial sale with a 5.9 percent cap rate. The buyer said it liked the site because the purchase price was less than what it would cost to build a similar project.
Turnaround for hotels
Hotels are dealing with two key cycles, and there has been a fundamental shift in recent months, said Guy Trusty, president of Lodging & Hospitality Realty in Coral Gables.
The revenue cycle is turning up in the form of higher room rates, so that’s starting to help the other cycle of real estate prices.
About six months ago, investors only wanted to buy notes on properties, and lenders “would go there with a lawyer and a hammer and foreclose on the note,” he said.
Now, with the rising room rates, good operators are finding new slack.
“It boils down to whether the bank has confidence in the operator and works with the owner or forecloses on the note,” Trusty said.
He is dealing with real estate investment trusts and other investors “who have a pile of cash and want to invest it in a hotel,” he said.
Transactions involving the Royal Palm Hotel and Seville Hotel in Miami Beach show some long-running issues are being resolved, he said.
Sometimes, Trusty said his strategy is to initiate separate talks with the bank and the owner. “Sometimes they don’t like to hear that.”
Olefson says she is seeing recovery in some urban areas like Miami Beach, but problems linger in areas where there might be a cluster of suburban hotels.
Merin said some buyers see an opportunity roll out new concepts and brands, but he’s also had his hands full with the former DoubleTree in Boca Raton, where he is acting as a receiver.
“The property is going to waste,” he said. “We have to shut down the hotel and fire all the people,” he said.
Merin is worried that South Florida’s humidity could create damage that could necessitate leveling the structure if the power is turned off.
The foreclosure situation in general is creating a lot of uncertainty and delays, Olefson said. Some banks don’t think they have the authority on pricing the notes on properties and aren’t sure how they will be reimbursed under FDIC loss-sharing agreements.
She said: “A lot of workouts will start hitting the foreclosure dockets – lots of hotels, a lot of multifamily foreclosures.”
Source: http://www.bizjournals.com/southflorida/print-edition/2010/11/05/real-estate-market-improves-as.html
South Florida Business Journal - by Kevin Gale
