Miami Beach, Fla. — In February, buyers at one of the biggest condominium conversion projects in Florida started to get their deposits back.

Converters made a $625 million deal to purchase the 1,688 multifamily units at the Flamingo back in 2005. The deal was broken into three phases. A partnership between MCZ Development Corp. and Centrum Properties paid $163.5 million to AIMCO, a Denver-based real estate investment trust, for the 562 apartments in the Flamingo’s south tower. The price works out to nearly $400,000 per unit. The converters also paid AIMCO $5 million for an option to purchase the other two towers at the Flamingo.

MCZ/Centrum has since sold almost all of the condos in the south tower. Sales have lagged, however, in the 614-unit north tower, and the converters have put off both its conversion and the conversion of the Flamingo’s central tower indefinitely. They’re now returning buyers’ deposits and planning to operate more than 1,100 units in the two towers as rental apartments.

Many experts thought projects in prime locations like the Flamingo’s perch overlooking Biscayne Bay would be spared from the worst of the condominium crash.

However, rising foreclosure rates and falling prices for single-family homes are putting new pressure on these projects—as if the oversupply of condominiums coming onto the market weren’t already enough.

In 2005, multifamily consultant Jack McCabe predicted condominium prices in some submarkets would drop by as much as 30 percent over the next two years. McCabe, CEO of McCabe Research and Consulting, LLC, in Deerfield Beach, Fla., wasn’t far off.

The median price of a condominium in Florida fell to $176,600 in March, down 20 percent from $221,200 the year before, according to the Florida Association of Realtors. Most of the condos sold were existing units. Over the next year, that balance is expected to change as a wave of new luxury condominiums hits the state. At the same time, the coming glut will likely force prices down at both new and existing condo developments.

McCabe expects prices to drop as much as 20 percent for existing condominiums and by at least 20 percent on average for new condominiums in 2009.

Even more optimistic experts than McCabe expect a difficult year ahead. Michael Cannon refuses to call the downturn in the Florida condo market a crash. “We are seeing a rollback in prices,” said Cannon, managing director for real estate valuation and counseling firm Integra Realty Resources. “It’s like an unrealizable gain in the stock market.” He expects that after all the dust has settled, condo prices will have fallen 25 percent from their peak in 2006. Prices will likely bottom out next year, he said.

Falling prices have made many projects that had planned to convert rental apartments to condominiums unprofitable, especially at the high prices paid by many converters who bought apartments at capitalization rates as low as 2 percent. A cap rate represents the operating income from a property as a percentage of the sales price.

In the three counties of southeast Florida, McCabe counts 62,904 rental apartments at 248 large communities that were purchased for condo conversion. Of those, more than one in eight, or 8,500 units at 32 complexes, have reverted back to rental apartments, said McCabe.

Fundamental problems

Part of the problem with South Florida’s condominium market is simply an oversupply of units for sale. There are now 25,000 condominiums listed for sale in Miami-Dade County on the local multiple listing service. “That’s a 61-month supply,” McCabe said.

The condominiums now for sale will be joined by 19,000 more later this year and another 6,000 in 2009. To make matters worse, some of the economic fundamentals that supported the condominium boom have begun to erode.

Prices of single-family homes in South Florida have been falling for two years, according to the Case Shiller Index for the Miami metropolitan statistical area. The index measures changes in home prices compared to January 2000, which is represented with a score of 100. In Miami, the index was at 219 in February 2008, down from a high of 251 in 2006. Experts fear that adjustable-rate mortgages that reset this year will force more homeowners into foreclosure, pushing home prices down even further.

The rate of Florida’s population growth is also slowing. The state is expected to add an average of only about 209,000 residents a year between 2007 and 2010, compared with annual increases of about 418,000 people between 2002 and 2006, according to projections from the University of Florida’s Bureau of Economic and Business Research. “The state has not experienced a decline of this magnitude since the mid-’70s,” said Stan Smith, director of the bureau.

Florida’s economy will eventually support strong population growth again, said Smith. The Census Bureau projects that Florida will add more than 12 million people between 2000 and 2030. Unemployment is still low, ranging between 3.9 percent and 4.2 percent in Florida.

In the meantime, the population growth slowdown, combined with the supply glut and downward price pressure from the single-family home market, are keeping the condo market from stabilizing. It may take until 2015 for condos to regain their lost value, McCabe said.

McCabe had hoped to close deals to invest in condominiums at rockbottom prices as early as late 2006. Two years later, McCabe and his investors are still waiting.

“People are staying on the sidelines, at least the smart ones are,” said McCabe.