Bilzin Sumberg’s Jon Chassen on Miami’s Sunny Condo Market
- Nov 10, 2011
Miami—Nationally, while the apartment sector continues to lead the commercial real estate recovery with a mushrooming demand that outpaces all other sectors, the condominium sector remains in the shadows—except in Miami. It’s not 2007 again, but the Miami condo market is quickly regaining its heat, and Jon Chassen, a partner in the Real Estate and Distressed Property Group of law firm Bilzin Sumberg, knows a comeback when he sees one. Chassen, having cultivated an expert knowledge of the ins and outs of Miami real estate over three decades, talks to MHN about the factors igniting a new boom in the city’s condo market.
MHN: When the for-sale housing market took a nosedive, just how bad did things get in the condominium sector in Miami?
Chassen: Two years ago, there was certainly a huge glut of unsold inventory. Developers had overbuilt; lenders had over-lent. There was a lot of stuff that was on the drawing board in 2004 and ’05 and ’06 that came online in ’07, ’08 and ‘09, and there was no one there to buy it and anyone who did want to buy it had trouble borrowing money to close.
MHN: What happened? How did things go so wrong, so fast?
Chassen: Among other things, there were Fannie Mae and Freddie Mac rules, which essentially prevented a lot of banks from making condo loans on a lot of condominiums. And so it became, in some ways, a self-fulfilling prophecy that these units would go unsold. You had a lot of people who thought that the road to riches was basically flipping condo units, where they would buy one or two or even more units pre-construction and they’d say, “I’ll put down my 10 percent deposit, and I’ll just hold for a bit. The prices will go up, and then I’ll flip the contract.” And it’s kind of like a game of musical chairs. Unfortunately, at some point the music stopped, and there were a bunch of people standing with no chairs to sit in, no buyers to take their units. They had a bunch of 10 percent deposits out and they couldn’t close even if they wanted to because they couldn’t get the financing. And basically the developers completed their construction and had, if I recall the number correctly, somewhere in the area of about 20,000 unsold units a couple of years ago. The conventional wisdom was that it would take many years—four, five, six years, maybe even longer—for that inventory to get absorbed, but in fact, that’s not what happened.
MHN: Nationally, the condo sector continues to struggle, so how did Miami emerge from the downturn so far ahead of the game?
Chassen: You had a number of people with deep pockets who picked up big chunks of inventory at very low prices, either from the banks that took over from the developers or from the developers themselves if they had sold out some of their inventory but not the rest. And then there are a lot of people who are trying to take money from South America and a lot of European buyers who—between the strength of foreign currencies against the dollar, instability at home and everything else—figured, “Hey, America’s on sale; Miami’s the place I want to be.” And they’ve been picking up the inventory in record numbers, very surprisingly. I don’t know that there are too many people who called this dramatic of a turn.
MHN: Why isn’t the national condo market benefiting from foreign investment to the same extent as Miami?
Chassen: Miami is different things to different people. If you are in South America, A: it’s very close; B: people speak your language, whether its Spanish or Portuguese, if you’re from Brazil. There are very significant Latin populations, so if someone from Latin America is looking for a place, this is a place to be. There are already people here from your country, whether it’s Venezuela, Brazil, Colombia or Mexico. You can find enclaves of your neighbors right here in Miami. The flip side is the European buyers are looking for sunshine. If you were in Europe, you could be thinking that America’s on sale and want to buy a place in a distressed condo market like Las Vegas. But that person may say, “I may like to gamble, but I want to go to a place where I’m going to the beach for a couple of weeks in the wintertime.” So Miami is a natural place for Europeans as well.
MHN: Demand for condos in the city is apparently growing stronger so developers are making plans for new projects, but is it wise to get back in the game at this time?
Chassen: Obviously, there are developers who are starting to make bets. If you’re one of the early guys, an early mover, you may end up hitting a home run because you are one of the first to market, but you are the one who is taking the biggest risk. People who are starting to get on the drawing boards now are looking out three to four years in the future before they’re actually going to be closing on their sales. So they are betting that all of the inventory is going to get snapped up. They are betting that they are going to be able to have a project that’s out of the ground that’s ready to sell when the demand is there. They’re betting that they can get the development money now while money is relatively cheap, and they are betting that they’re going to be able to convince lenders to give them construction loans.
MHN: Many developers had bet high on the continuing strength of the market back in 2007, and most of them lost big. How do you think developers will approach the game now, given that lenders are not handing out loans to homebuyers like candy, as they did before the credit crunch?
Chassen: The big difference that people keep talking about is the following. The typical mid-2000s condominium development was financed the following way. You’d get your construction loan ready to go. The construction lender would say, “I need 50 percent pre-sales before I’m going to fund,” or some number along those lines. So you’d start your pre-sales before you incur any significant costs. Maybe you get a little bit of equity money; maybe you get a little bit of secondary financing subordinate to your construction loan, and you say to homebuyers, “I need a 10 percent deposit.” And a lot of people can put down that 10 percent. The big difference today is that developers are saying to buyers, “We don’t want 10 percent; we don’t want 20; we want 50 percent.” Now think about that. I would say that here in the U.S., there are very few people who buy real property by putting down 50 percent in cash and only finance 50 percent. So you’re talking about, for the most part, wealthy people, wealthy people from out of the country for whom that would be a more typical way to acquire real estate, who say, “OK, I’ll write the check.” At that point in time, if a developer knows he’s got 50 percent deposits on 50 or 60 or 70 percent of his units, he’s a lot more bankable. Banks are more willing to make that loan, and there’s a lot less of a chance of people walking away at the end. And if there are enough people who are putting down 50 percent, chances are those values hold up okay. It’s a new paradigm, no question about it.
MHN: Do you believe this sea change in financing—a change that leaves the wealthy as the primary target market for Miami condo developers—will indirectly impact the types of condos that will be built?
Chassen: I think there is likely going to be a difference. If the target market is the person that can put down a 50 percent deposit, the developers, I think, are going to be smart enough that they are going to design their product for that buyer and not necessarily the typical condo market that you’d see in Atlanta, in Washington, or in any other city in the U.S.
MHN: The drastic improvement in Miami’s condo market is definitely pulling developers off the sidelines. Do you think lessons have been learned since the last time that high demand prompted a slew of new projects?
Chassen: Because things always go in cycles, there will come a time after the smart guys have made a lot of money, where other people with money will say, “Hey, things are different now; how can I lose?” And there will be overbuilding, but is it 10 years from now? Is it 12 years from now? Fifteen? Who knows? It’s going to happen, but I think that the next bubble is far on the horizon.