Market Report: Sunshine State?

Market Report: Sunshine State?
Published: August 02, 2008

By Teresa O'Dea Hein, Managing Editor

While the Sunshine State continues to attract new residents and create some jobs, the multifamily market there is still dealing with the housing crisis fallout on a variety of fronts.

"Other than Las Vegas, Miami is the most overbuilt condominium market in the U.S.," says Lewis Goodkin, CRE, FRICS, MIRM, president and CEO of Goodkin Consulting, based in Miami. "I think we haven't yet seen the worst of this mess, with all the condominium units yet to close." In fact, Goodkin predicts that a number of units under construction won't close and notes that a major developer has created a fund to buy distressed properties and put them in a rental pool.

"Pricing is still high, so we know it has more to come down," he reports. "And the financial environment stinks—people really don't know if they're lending on an 80 percent or 110 percent basis, for example, because prices are a moving target."

On the for-rent side of the market, Miami has not been as pounded by the shadow market of unsold housing as some might expect, says Greg Willett, vice president of research & analysis for M/PF YieldStar. However, Willett and Goodkin believe there is potential for the shadow market to pose problems. The availability of condo-quality features and amenities could create a lot of shadow market competition for renters, though some of those units carry a high price tag. Goodkin notes that the fact that so much rental stock was converted and so little was built recently in the Miami area should mean that "the for-rent sector should hold up better than people think."

Even though the Miami-area for-rent market is no longer experiencing the 8 to 10 percent rent growth it'd gotten used to, Willett says it's still up a bit, at 0.5 percent. And at 95.5 percent, the mid-year occupancy rate is above the national average, but down from 96.6 percent in mid-2007.

"It could take a minimum of three years for the south Florida condo market to hit bottom, unless many bulk purchases take inventory off the market," adds Goodkin. "There's still so much stock out there. Buildings with great views and beautiful locations will come back sooner," he predicts. "The people I know who've made it work go after the market, even targeting certain overseas buyers, rather than waiting for the market to come to them."

Across the board, insurance costs are high and a substantial factor in common charges. Insurance carriers are also asking for huge increases in premiums, in anticipation of future hurricane damage.

"Speculators don't look carefully at issues like insurance costs and high common charges, because they thought they would flip the unit before even moving in," Goodkin points out. He expects the number of foreclosures will continue to grow.

While he notes that high-end buyers are still out there, "prices have softened from ridiculous to just crazy." The currency advantages enjoyed by offshore buyers is, Goodkin believes, what makes a lot of condo prices work anyway.

Observers agree that the Miami condominium market is overbuilt, particularly in the Brickell/Biscayne corridor and Edgewater Arts District areas, and some developers have put other projects on hold.

Yet, development in "The Magic City's" high-end condo market continues. Several projects are underway or in development where units carry price tags ranging from $2 million to over $13 million.

Paula Phillips, vice president of operations for The Congress Group, expects that "it'll take all of 2009 before you see any positive signs of development in Miami. We think it's a viable market, but we're just waiting to see." However, Phillips adds, barriers to entry are much greater in Miami Beach, where the company is developing a small project with big asking prices.

"Location, quality and amenities drive you in today's market," says Alberto J. Perez, vice president at the Mas Group, based in Coral Gables, Fla. "Even in today's market, buyers are out there, especially in the luxury market, between $2 million and $3 million," he says. At the same time, Perez notes that he's happy that the latest project from Mas Group, a joint venture with Sanchez Group Inc., will be going up in three phases, starting in February 2009.

"Have patience and let the market correct itself—real estate is cyclical," Perez points out. "We're going through a tough time right now, but I'm optimistic."

ORLANDO

Up in central Florida, the condo market has stalled and the rental market is also in the doldrums. While Orlando's unemployment rate has stayed at about 4.5 percent—up about 1 percent from 2007—and there is still some job growth of nearly 3,000 positions, occupancy has dropped.

"Orlando had a really tough first quarter, with occupancy sliding from 92.4 percent in March to 91.1 percent in June," Willett reports. This time last year, the Orlando occupancy rate averaged 94.2 percent.

Stephen St. Clair, an Orlando, Fla.-based vice president with Marcus & Millichap Real Estate Investment Services and a director of the firm's national multihousing group, says, "Vacancy rates as of March 2008 were the highest in nine years. And for the first time in about seven years," he adds, "rents have decreased. Plus, concessions are back, typically in the form of one to two months free on a 12-month lease." At least half of all Orlando area rental communities are currently offering concessions, St. Clair and Willett report.

Ongoing apartment construction is a substantial 5,100 units, scheduled to be delivered through June of next year, Willett notes. Current apartment construction levels are at a seven-year high, according to St. Clair. Developments are going up mostly in the area's southeast and southwest submarkets.

Newer communities offer the area's one bright spot, with average monthly rents for existing properties one to five years old actually up 2 percent, to $978, since last September, according to St. Clair. And brand new rental communities are commanding average rents of about $1,325, he adds. However, the vacancy rate for communities currently in lease-up (amounting to 2,522 units) is 51 percent.

Overall, three-bedroom units are most popular, St. Clair reports, so it would seem that families are leasing them or that people are doubling up. And the number of condos for rent is growing.

Furthermore, Florida has experienced one of the largest drops seen in renter quality in the second quarter of 2008 versus the second quarter of 2007, according to an analysis of First Advantage SafeRent's proprietary database of more than 6 million units. Six Florida markets—Miami-Fort Lauderdale, West Palm Beach, Orlando, Tampa-St. Pete, Daytona Beach and Jacksonville—experienced major declines in credit quality of incoming applicants, the company reports. And Orlando experienced the greatest increase in decline rates in the second quarter of 2008, compared to a year ago.

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