Miami — At the top of any roller coaster comes a moment when the ride almost seems to stop. After the relentless climb, slowly the horizon tilts and a new vista opens below: the ride down.

Jack McCabe thinks that moment has finally come to South Florida’s condominium market. McCabe is CEO of McCabe Research and Consulting, LLC, in Deerfield Beach, Fla.

Where hopeful buyers once lined up for days, developers now offer concessions such as free closing costs as units take longer to sell and more units clog the markets.

The price of an average South Florida condominium has more than doubled over the last two years. But experts like McCabe think that many high-end units here will lose 25% to 30% of their value in 2006. (For more information on what characteristics make a condominium market vulnerable to falling prices, see Apartment Finance Today, November/December 2005, page 50.)

But a few experts are looking forward to the drop in prices. McCabe himself plans to acquire properties, probably in the second and third quarters of 2006. He has gathered a small group of 25 knowledgeable investors to create a $50 million fund.

He’s not alone. Lewis Goodkin, founder of Goodkin Consulting, based in Miami, is also advising investors on where to find opportunities when prices fall. He is active in several large condominium markets, including Las Vegas; Boston; Washington, D.C.; and, of course, Florida. He has advised as many of his clients as would listen to stay away from inflated prices and to wait for deals that make sense. “Be on the sidelines – ready to respond,” he said.

These experts believe that beneath the froth and inflated values of the condominium bubble lie essentially strong markets – and good investments.

“The state of Florida has the strongest real estate fundamentals of any state in the nation,” McCabe said. He points out the state’s strong population and job growth. “We’ve got millions and millions of people that have targeted Florida for relocation or a second residence,” he said.

Even in the heart of the condo gold rush, in Miami’s South Beach neighborhood, experts make a strong case that multifamily housing has intrinsic value. Once amateur speculators are driven out of the market by falling prices, the value that condominium units provide to homeowners here should only grow as the neighborhood gains new amenities and attracts new residents.

“There are a lot of things happening to bolster the permanence of South Beach,” said Jay Massirman, an executive vice president for CB Richard Ellis. He points out that even a condominium in Miami that now costs $400 a square foot is still relatively inexpensive compared to other major East Coast cities, especially if the unit has a view of the water.

There are also very few places left in the state, especially around Miami, to develop single-family homes, which will push larger numbers of Floridians toward multifamily housing. “There are strong barriers to future development,” McCabe said. “Some of our population centers are already built out.”

Unfortunately, there is still a lot of room for competing high-rise development. Developers are now working on 25,888 new condominiums for South Florida, according to information from Torto Wheaton Research/Dodge Pipeline (Pipeline). But experts like Goodkin and McCabe believe that as little as 15% of those will ever be finished.

A chance to build rental apartments

The rental apartment markets are strong in many places where condominium conversions were hot. For example, the percentage of vacant apartments in Miami was expected to fall to 4% by the end of 2005 with strong rent growth, as about 2,600 rentals were converted to condominiums, according to an October report by Marcus & Millichap.

“The opportunities are going to be on the land side for people that can come in and build new rental,” Goodkin said. As condominium deals fall apart, some condominium developers will be forced to sell developable land at a steep discount. “You have people sitting with a big piece of land with no income, but they have lots of money out,” he said.

The price of existing rental buildings should also drop in 2006. At press time, condominium converters were still buying apartment properties at high prices, with cap rates as low as 3% and 4%. A capitalization rate represents the net operating income of a property as a percentage of the sale price. At a cap rate of less than 5%, a property is difficult to operate as a rental property, even with strong equity investment.

But when the condominium boom sours, cap rates could rise as high as 5.5% or 6% in once-hot condominium neighborhoods, according to Massirman.

Goodkin and his clients won’t be the only buyers on the lookout for these opportunities. “The REITs [real estate investment trusts] will be back again to buy that kind of product,” Goodkin said. “There are going to be a lot of people looking out for that kind of opportunity.”

In addition to buying developable land and whole buildings, some multifamily investors are planning to purchase individual condominiums. In a typical deal for McCabe’s group, the fund might buy a condominium unit that now sells for $750,000 for as little as $525,000. McCabe believes that if he holds this condominium long enough, the value to a homeowner will rise back up to the $750,000 it was worth before the crash.

“We’re projecting five to seven years,” McCabe said. “It could take 10.”

McCabe is even going into the condominium conversion business, provided his fund and its partners can purchase buildings cheaply enough.

That’s because in some markets, rental apartments that are converted to condominiums are still the cheapest kind of for-sale housing. In many parts of South Florida, a unit at a condo conversion project can still sell for between $150,000 and $300,000. That’s much less than the $368,000 median price of a single-family home, McCabe said. “I think conversions are going to be a force in the market for years to come.”