Miami - Weeds, not potential buyers, climb the steps of the sales office for Onyx 2 On the Bay, a planned 50-story luxury condo located at Biscayne Bay and 28th Street, just north of downtown. Condos were to sell for between $500,000 and $2 million.
Now the land, plans, and permits are up for sale. Three blocks from Onyx 2, another condo project, Ice, apparently has been iced. A realtor’s Web site says: “This project has been canceled and will not be built.” Fifteen condo developments, representing nearly 1,900 units, have officially been removed from the market in Miami.
“This is the first time where you have had residential developers outbidding commercial developers. That land is going back to the bank,” said Lewis Goodkin, president of Goodkin Consulting, a real estate research firm in Miami. “You had 80 percent of condo sales made by speculators, which is astounding, and [the condos] are so overpriced, it’s ridiculous.”
As a result of prices doubling or tripling in a few years, the city’s speculator-driven condo market has finally cooled. Sales of existing condos in Florida fell 31 percent in October 2006 from a year earlier, according to the Florida Association of Realtors.
What does all of this mean for apartment owners and developers? The condo-conversion craze that pushed Miami’s vacancy rate low enough to make it among the tightest markets in the country is easing. Rents, which soared in 2006, will grow at a more moderate pace this year. A softening job market will restrain demand, and more condo owners will be looking for renters, even as some unsuccessful condo projects get converted to apartments, giving apartment developers and owners more competition and boosting the use of concessions.
Asking and effective rent growth accelerated tremendously in 2006, to 6.9 percent and 7.2 percent respectively, according to research from Reis, Inc., a New York-based real estate market research firm.
“If [those numbers] end up playing out for the end of 2006, it will have been the best year for Miami since the early ’90s,” said Sam Chandan, chief economist and senior vice president for Reis, Inc.
He said asking and effective rent growth should slow to between 4 percent and 4.5 percent in 2007. These numbers still reflect a robust rental climate, according to some analysts.
Condo conversions have reduced rental supply by more than 20,000 units since 2002, according to a recent market forecast report by Marcus & Millichap. A lack of developable land means that many units will not be replaced for a while. Analysts expect developers to deliver 1,000 rental units in 2007. Removals for conversion to condos will slow in line with a softer for-sale housing market. Meanwhile, local employers are expected to create 13,000 jobs in 2007, a 1.2 percent increase year-over-year. In 2006, 32,000 positions were added.
“The nation as a whole has seen employment growth slow down somewhat,” said Greg Willett, vice president of research and analysis for Carrollton, Texas-based MP/F YieldStar. “South Florida saw one of the steepest slowdowns in 2006 because so much of its economy was based on the real estate sector.”
Chandan said more units should come online in 2008, but not enough to dampen demand.
“There were more than 2,000 units delivered in 2003, and 2,800 units delivered in 2000,” said Chandan. “We don’t think we’ll see near those numbers for a while. Given how tight the market is, the vacancy rate is very low. In third quarter 2006, Miami is the tightest market is the country, in terms of the vacancy rate. With a vacancy rate this low, we would normally expect there to be significantly more multifamily development. But the construction and completion numbers are not yet at a level that will allow vacancies to rise significantly.”
The vacancy rate was 3.3 percent in third quarter 2006, unchanged from a year earlier. Reis, Inc., forecasts that number will fall only 0.1 percent in 2007 to 3.2 percent, and remain steady in 2008.
As of September 2006, the region’s apartment occupancy was 97.4 percent, down 0.8 percent from the year before. Willett said traditional apartment communities are beginning to lose some residents to investor-owned condos offered for lease. He anticipates that the shadow market of rentals in for-sale properties will become even more prominent in 2007, stealing some of the demand that otherwise would have gone to apartment communities. With the condo sales slump, Willett said it would not be surprising to see some of the many condos still under construction come online as apartments.
Supply reductions and high demand for rental housing kept concessions to “virtually zero,” said Willett. But he indicated that concessions are starting “to creep back into the marketplace.”
“In Dade County, concessions were offered for about 6 percent of the product that we surveyed,” said Willett. “That’s not very much, one of the lowest in the country. But it is up from a 2 percent share at the beginning of 2006.”
Surrounding markets witnessed more concessions. In Fort Lauderdale, 12 percent of the product had concessions, up from a low of 1 percent at the end of 2005. West Palm Beach saw concessions at about 15 percent of the product, an increase from 1 percent in 2005, said Willett.
Class B and Class C properties may attract greater attention from investors this year. With low single-family housing affordability in the metropolitan area, renters of these properties are not likely to move into for-sale housing even if home prices decline, according to Marcus & Millichap.