The Financial Crisis Anniversary: How Miami’s Condo Market Survived
- Nov 17, 2017
The year 2007 marked the beginning of a credit crisis that caused Lehman Brothers’ collapse in 2008 and ushered the whole world in the Great Recession. Images of abandoned luxury properties and broke businessmen could be seen everywhere, but somehow some firms found the methods to not only survive, but thrive.
Alexander Wertheim has been involved with real estate and condo owner relationships for the majority of his professional life. He founded SPACiO Design Build at the peak of the recession and grew his business from $9 million to $20 million in just a few years. He talked with MultiHousing News about how the Miami condo market is performing today compared to the first years of financial crisis.
You started your general contracting firm at the height of the recession converting unsold condo units into apartment rentals and then into condo units again when the market recovered. How did you know that this was the right way to avoid problems?
Alexander Wertheim: I followed the market. It is fair to say I was paying attention and I looked for the opportunity to get into converting condos. My business started small, but it grew fast as more developers adopted this strategy. After a couple of years, we started seeing a big demand for condos as foreign buyers were coming to Miami with cash ready to close deals. That led developers to start putting their rental units back on the market as condos. Once all those condos were sold, developers began building new condo projects and we were there to help finish the units that were being sold ‘decorator ready’ to foreign buyers. We often set up our own design center in the same buildings where we were working to make it more convenient for the buyers in addition to our own design headquarters. It was an amazing experience to see how fast the condo market turned around and how well it recovered in less than 10 years.
During the dark days, when new buildings were sitting vacant in the heart of downtown Miami, we were sure it was going to take 10 years before we would see the sun shine again. I never expected my company to grow as it did during a recession because, for the most part, general contractors were going out of business. We were able to grow our business from a $9 million operation to a $20 million operation in just a few years.
How has Miami’s real estate market evolved since the end of the last recession?
Wertheim: It evolved in a way we didn’t expect. In this current real estate cycle, Miami has become a true global destination for real estate developers, architects, buyers and interior designers. We began to see brands such as Armani, Porsche and Aston Martin enter the real estate market and bring a level of luxury we’ve never seen before with their remarkable designs. We also saw world-class architects design some of Miami’s most luxurious projects. Some of them include the late Zaha Hadid, Rem Koolhaas, Rafael Viñoly, Renzo Piano, Herzog & De Meuron, Foster + Partners and so on. We also saw a lot of high-end restaurants and famous chefs come to town and open shops. We also saw the introduction of new amenities to high-end projects to help create an environment where condo owners don’t need to leave their buildings to eat great food, play sports and more.
What are the main characteristics of a project in order to ensure long-term success and protection in the event of a new recession?
Wertheim: Unlike in past cycles, this time around, developers have been asking buyers for a 50 percent deposit to purchase a condo. Those funds have helped developers pour more equity into their projects, which meant they didn’t have to borrow a lot of money from banks. As a result, their leverage is a lot less than in the past cycle. Back then, projects were overleveraged and developers had no room for sales prices to drop because they needed every dollar to pay back the construction loans. Also, back then, developers only required a 20 percent down payment, so it was easier for buyers to walk away from the closing table when the market turned. Now, buyers are motivated to close because they already paid 50 percent of the purchase price.
How much has hurricane Irma impacted the residential market in Miami and what will the consequences be in the next few years?
Wertheim: The hurricane didn’t affect the residential market as much as we feared. The building code has been improved significantly since Hurricane Andrew in 1992. The issues here are flooding and storm surge, a concern that city officials are taking seriously. The City of Miami just got voters’ approval to invest $192 million on storm drain upgrades, flood pumps and sea walls to mitigate flooding. This is a step in a long journey to fund nearly $1 billion in projects needed to prepare Miami to deal with rising sea level.
Yardi Matrix’s latest report pointed out that one of the market’s biggest challenges is the substantial amount of new supply. Taking into consideration that the real estate cycle is coming to an end, what do you expect to happen with all this new supply and how should real estate players react in order to shelter their businesses?
Wertheim: Most likely prices are going to decrease and condos will sell for a little less. As soon as prices come down, we see new buyers come into the market. Because developers are not over-leveraged with construction loans, they can afford to lower prices to meet the market demand. That wasn’t the case in the last cycle, when the banks had total control of sales prices and would not let developers lower prices to meet the market demand. In this cycle, developers assumed a lot less risk and that will help us deal with an oversupply of inventory in a more organized way and with a lot less distress. The correction will be a soft landing compared to the last drastic collapse of the housing and lending market.
Image courtesy of SPACiO Design Build