"We Foresaw the Market Bust Coming in South Florida"

Richard Swerdlow, CEO, founded Condo.com (formerly US Condo Exchange) in 2005 and is responsible for the company’s strategic direction and operations. Previously, he founded Everything Wireless, the first consumer cataloger and Internet retailer, which provided national distribution of wireless phones and accessories. The company grew to $100 million in revenues. Richard has an extensive background in real estate development, has been personally involved in selling over 10,000 condo units and exited his real estate projects prior to the real estate bubble bursting in South Florida.He talks to Anuradha Kher, online news editor at MHN, about the Florida condo market, the economic downturn and the real  estate hotspots to invest in. MHN: You exited the Florida condo market before the bubble burst? How did you know what was coming?Swerdlow: It was apparent for many months before we exited the space that the number of units being delivered over the next two to three years could not possibly be absorbed by end-users or investors that had fueled the market through the purchase of units during the pre-sales phase. The swelling of the glossy magazines with condo ads, the billboards up and down the highways and the excessive spending on project launch parties and other marketing schemes were telltale signs. It felt like late 1999 again in the tech bubble and you knew there was a problem coming.MHN: How do you expect the condo market in Florida to repair itself?Swerdlow: Florida is very resilient. As the gateway to Latin America and a state of net migration, it always recovers quickly from real estate down cycles. The condo market will repair itself based on a variety of factors. First, there is still flight capital coming out of South and Central America looking for more financially and politically stable regimes. Most of the flight capital ends up in Miami due to the large Spanish-speaking population and proximity. Secondly, the continued strength of foreign currencies, specifically the Euro enable foreign buyers to purchase units at relative discounts to other countries. Next, the aging population of baby boomers is leading to a significant number of empty-nesters migrating south to Florida. In the next decade, it is projected that over 1.2 million 65+ people will relocate to Florida. Lastly, the pricing on units will have to be reset in the next 12-18 months. As developers give projects back to the banks, there will be the ability to wipe out equity and mezzanine debt, allowing for the resetting of prices on many units around the state.MHN: What are your thoughts on the rate cuts that have taken place in recent months and how they will they affect multifamily financing?Swerdlow: The current rate cuts have fueled consumer mortgage applications in Q2 2008 amid declining homes prices as consumers seek to take advantage of an abundance of ‘deals’ in what is considered an increasingly buyer-friendly residential real estate market. Lenders however have enacted stricter guidelines for residential lending. The multifamily financing sector will likely bear the brunt of the increasingly stricter residential lending guidelines. Several top lenders have placed several of the MSA’s and states on a restricted lending list and will not loan to consumers in these areas, as the loans cannot be sold in secondary finance markets. Due to the fact that a substantial majority of multifamily housing is located within these restricted MSA’s, there will be a steep decline in the financing available to consumers looking to finance multifamily homes.MHN: With the dollar dropping, and the economic downturn, where does real estate in the US stand?Swerdlow: With the dollar dropping, strong foreign currencies have continued to encourage foreign investment in the domestic real estate market. We believe that real estate in the U.S. remains a strong and stable long-term investment and these foreign direct investments in domestic real estate investments are consistent with this fact. Prices may fluctuate and in some sectors re-set themselves as the economy weathers the storm in the wake of the sub-prime credit market collapse for the next 12-18 months. However the fundamentals of real estate in the U.S. as an asset class remain strong over the long term.MHN: What are the hottest places to invest in real estate in the U.S. and why?The “Green” movement probably represents one of the hottest sectors to invest in today’s market.  The focus on decreasing carbon production and the creation of environmentally sustainable technologies represents a win-win situation for consumers as well as investors. Real estate developers are likewise following this trend with the creation of “green” projects that appeal to this consumer-driven environmentally friendly and responsible movement. The Assisting Living Facility (ALF) sector is also hot. With the aging population of baby boomers, we are seeing high-end ALF’s being developed in major markets around the U.S. Units in these facilities are being rented and sold as condos.In terms of locations, there is continued migration into Florida and the Carolinas. Both North and South Carolina have been consistently good real estate markets and have not been experiencing the same downturn that we have seen in other markets. Seattle and other markets with job creation continue to be strong as well. In several markets, the creation of “Green Collar” jobs, or jobs associated with renewable energy, organic living and conservation are helping local economies.Do you think we are headed into a recession? I think that the residential real estate and finance sectors of the economy are experiencing a correction and have been experiencing the correction since the end of 2005. We may technically be in a recession now, but the U.S. economy as a whole remains strong and there is significant investment dollars inside the U.S. and abroad that are looking for opportunities, which will re-energize the economy.