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Condo developers to pull back after years of sky-high appreciation
By Francisco Alvarado, The Real Deal
As the pool of deep-pocketed foreign investors continued to recede over the past year, developers, brokers and sellers in South Florida’s luxury condo sector have been forced to adjust their pricing, wait longer for units to move and scour the globe for new buyers.
But for the folks doing business by moving condos listed at $600,000 or below, as well as single-family homes in every price range, signs are pointing up for 2018.
Given that the supply of luxury condos on the market currently exceeds two years and sales remain slow, expect more cancelled projects on the horizon, as well as the possibility that some development sites will change hands at discounted prices, according to prominent Miami real estate players who spoke to The Real Deal about what to expect next year.
However, they are bullish about the market for residential homes geared to middle-class working buyers, which is mostly focused on single-family homes and older condos in Miami-Dade’s suburbs and some coastal cities.
Condo glut at recession levels
“At the end of November 2017, we have five years worth of condo inventory over $1 million in the market,” said Ron Shuffield, CEO of EWM Realty International. “This is the highest total in one month since the recession in 2008.”
That figure includes condos currently under construction and condos that have hit the resale market, Shuffield explained. This has forced sellers to recalculate their listings, dropping prices by double-digit percentages. “The average price reduction is around 19 percent,” he said. “Some are 35 percent off the initial asking price.”
Meanwhile, new condo development is going to take a hit, Shuffield added. “We won’t see a number of new projects starting that we were anticipating a year ago for 2018,” he said. “Many developers have pulled back new product because presales have been weak.”
Mike Pappas, president of the Keyes Company, said the double-digit appreciation new condos experienced between 2013 and 2015 created a false perception about what those same units could sell for in 2016 and 2017. “Over the last two years, we have seen that greater appreciation coming back to down to reality,” he said. “In the luxury market, they set prices too high.”
Today, with so much inventory built up, Keyes brokers are seeing a drop in prices to the tune of 20 percent between the listing and closing dates, Pappas explained. “Currently, we see a 45-month supply of condos,” he said. “If you do the math, you need the right pricing to sell units and turn it around.”
Yet, for anyone selling to first-time and mid-market buyers, business is very robust, Pappas said. “At the entry level and lower markets, 2017 was very intense,” he said. “I expect it will continue in 2018.”
Camille Douglas, senior managing director for the LeFrak Organization, said market conditions heading into 2018 play a role in what is getting developed first at SoLē Mia, a massive mixed-use project the company is developing in North Miami in a joint venture with Turnberry Associates. The first residential component under construction is an apartment building, and the pre-sale period for the first condo tower won’t likely begin until 2019.
“That’s when we think the market will be at an equilibrium,” Douglas said. “We should be able to offer condos a couple of years later at a price that will attract buyers.”
Dan Kodsi, developer of the Paramount Residence Fort Lauderdale and Paramount Miami Worldcenter, said luxury condo projects that have not broken ground by now can’t generate the velocity of sales to justify construction. “These projects won’t get the amount of presales to obtain bank financing,” he said. “The majority of developers in South Florida are extremely experienced. No one is really out there launching new projects in the current market.”
Still, he expects sales at both his projects to continue at a brisk pace in 2018. “Both buildings are 70 to 80 percent sold out,” Kodsi said. “Our advantage in a market slowdown is the new projects that never launched. In downtown Miami, we are the only new building. We really have no competition.”
‘New housing boom’
The overall market for single-family homes is more promising, with only 27 months of supply as of the end of November, EWM’s Shuffield said. “We closed three properties worth a combined $35 million in one week out of our Miami Beach office,” he said. “We have more pent-up demand for luxury single-family homes in South Florida than we have ever had.”
Keyes Company’s Pappas noted that tract builders such as Lennar and D.R. Horton are getting back in the game with new developments in Homestead, Doral, Hialeah and Miramar. “We are seeing a new housing boom,” he explained. “There is more single-family development going on and coming online than we have seen in a decade. Lennar alone has 40 new projects in Florida.”
Slowdown silver lining
With more condo projects being sidelined, some builders and institutional investors are gearing up to buy up development sites in 2018.
Noah Breakstone, managing partner of Fort Lauderdale based BTI Partners, said his company is creating a fund to scoop up land slated for new condo projects that may not come to fruition. “We do believe that a number of sites in Miami-Dade and Broward that came to an abrupt stop in terms of sales pose opportunities for us,” he said. “We are looking at those sites that won’t be developed until the next cycle.”
Breakstone said he has already been approached by developers of a few canceled projects, but he declined to name them. “I don’t believe we are quite there,” he said. “But probably in the third to fourth quarter of 2018, you will see us making deals.”