On a recent, gusty Monday in downtown Miami, developer Ryan Shear walked toward Echo Brickell, one of his three luxury condo projects in South Florida, when his phone rang.
He answered, but the wind stole his words, and he had trouble hearing the caller on the other end. So he ducked into the lobby of his building, apologized for the delay, and noted the oddness of the zephyr blowing through.
“Hopefully, we don’t have a hurricane coming,” he said.
And he wasn’t even talking about Miami’s condo market.
Pilloried as the hallmark of the 2008 financial collapse in the movie The Big Short, Miami and South Florida’s condo market has made a colossal comeback since 2011, begetting ever more opulent buildings and setting New York–style records for penthouses that have surpassed the $50 million mark. But with sales slowing since the end of last year, and an onslaught of new units slated to come to market through 2018, market observers near and far are wondering whether they’re about to see the same movie twice. Proponents of this cycle’s positive aspects—namely, a lack of leverage bolstered by big cash deposits from mostly foreign buyers—think they’ll see a happier ending this time and point to signs of a soft landing. Shear, and some others, aren’t so sure.
“I think for some people, it will end badly,” says Shear, a principal at Property Markets Group, which is co-developing the 180-unit Echo Brickell with JDS Development and the 68-unit Muse, in Sunny Isles Beach, with S2 Development, after completing 190-unit Echo Aventura last year. “It boggles my mind when I see announcements for brand-new condos coming out of the ground today. There’s so much product coming on line, why would you want to launch right now?”
Indeed, since 2011, more than 4,941 units have been built in South Florida, according to condo tracking website CraneSpotters.com, with another 14,808 units under construction. That number swells to 50,965 units when approved and proposed projects are taken into consideration.
In greater downtown Miami, the epicenter of the market where Echo Brickell is slated for completion in Q3 2017, 22,704 units have either been built, are under construction, are approved, or have been proposed. That pipeline surpasses the 22,200 units completed between 2003 and 2010, according to CraneSpotters.
Per-foot sales numbers have skyrocketed. Prices for new condos located east of I-95 in Miami–Dade County have jumped 233%, up from $320 per square foot in 2011 to $1,066 in 2016, according to International Sales Group.
To some eyes, those numbers seem back-end loaded, exactly at a moment when demand has become more muted. “In the last three to four years, we’ve had an ungodly amount of demand, and no immediate supply,” says consultant Jack McCabe of McCabe Research & Consulting. “But now, there’s a lot of concern because you have so many buildings under construction that are scheduled for completion in 2017 and 2018, and sales prices have flattened. We’re transitioning to a market that will become more competitive. Eventually, we’ll see declining prices.”
With stories of Miami’s current slowdown already making national news—The Wall Street Journal ran an article with the word “bloodbath” in the subtitle—market players are quick to accentuate the positives.
“Yes, it slowed down, but it has slowed down only in certain segments of the market,” says Michael Goldstein, president of sales for Miami-based Trump Group (no relation to the presidential candidate), which is developing the twin-tower, 265-unit Estates at Acqualina in Sunny Isles Beach, to appeal to ultra–high net worth individuals, with units starting at $3.7 million. Suites and penthouses are priced anywhere from $13 million to $45 million.
“There’s a big difference between people looking downtown and my market. I’m catering to the one-tenth of the 1%. People with money will still continue to buy.” Goldstein says he’s taken $540 million in reservations, and has already sold about 100 units, since launching last year.
Others emphasize the importance of referring to specific submarkets, rather than lumping all of South Florida into the general slowdown. “Miami is slowing down because it’s become a little overbuilt,” says Amy Ballon, co-founder of Hemisphere Sales Group, the exclusive sales organization for Sabbia Beach, a 68-unit project located north of Fort Lauderdale in Pompano Beach. “But up here in Pompano Beach, there’s no competition. There’s only one other project, and it’s not even competition, because it’s not on the beach. Ours is toes-in-the-sand.” Units start at $900,000 and go up to $6 million. Ballon says she’s averaging three to four sales a month.
Getting Here From There
Aside from submarket subtleties, how Miami got to this point is also much different from the last go-round. No longer the domain of taxi drivers and exotic dancers trying to flip units multiple times without ever closing on a contract, today’s condo crush has been propped up with real buyers, backed by stacks of cash.
The majority of those buyers have come from overseas; specifically, Latin America, where putting down a big nut for real estate is the norm. The first buyers started arriving in 2009, when South Florida’s last crash was in full swing, to scoop up deeply discounted condos left over from the previous cycle. At the time, South American economies were on the rise, and a beat-up dollar, coming out of the global financial crisis, was relatively weak. Suddenly, buyers from Brazil, Argentina, Venezuela, and Colombia were cruising past the neon signs on Ocean Drive, looking for a deal.
Once existing inventory was depleted, developers wanted to build but were unable to get construction financing. So they borrowed from what they now call the “Latin American model” and required deposits as high as 80% from those newly arrived denizens before starting construction.
“At the beginning, it almost seemed like hubris, because we’d never done it before,” says Philip Spiegelman, principal of International Sales Group, a top-three purveyor of South Florida real estate. “But what we found, once we started presenting the opportunity, was that it wasn’t so crazy after all.”
Unlike in New York, Florida law allows deposits in excess of 10% to be used for construction. “Developers used those deposits to fund their projects,” says Barry Lapides, a partner at Florida law firm Berger Singerman. “In essence, it became part of the capital stack.”
Developers waited until they were 60% to 80% presold to deploy that capital stack and eventually lowered the original 80% deposit threshold to 50%. When they did, they found plenty of willing buyers ready to hand over their cash.
“The Brazilians single-handedly saved the market,” says Dora Puig, head of Luxe Living Realty and one of South Florida’s most prominent brokers. “Their economy was booming, they were trading with China and India, and the [Brazilian] real was 2-to-1. They came into Miami and just bought it up.”
But now, the currency-swap trends have flip-flopped. Since its peak in 2011, the Brazilian real had dropped more than 60% against a strong dollar before gaining back between 15% and 20% this year. Political and economic uncertainty in Brazil, Venezuela, and Argentina; declining oil prices; and the global hiccup that embroiled stock markets at the beginning of 2016 have all conspired to bring Miami’s second condo coming back down to earth.
“In January, you felt it contracting, and then in February, which should have been our high season, it came to a halt,” says Puig. But since then, Puig and others say, the market has regained some of its footing. By the end of May, Puig, who also focuses on the ultra high-end luxury market, had put five units into escrow in six weeks, one of them at $9.5 million. “It was an overinflated market, but now sellers are getting real. The difference between 2008 and now is that it’s flattened out, but there are still waves of sales. It’s been a very soft landing. In 2008, we fell off a cliff.”
Boots-on-the-ground observers say another difference is that today’s buyers actually move into the units they buy, or take title to them and rent them out after they close. In other words, with more cash at stake, these buyers are sticking around after deals have been inked.
“When you look at those buildings at night, the lights are on,” says Carlos Rosso, head of condominium development at Related Group, the biggest developer in the market, which has built 3,000 units in this cycle, compared with 20,000 in the last run-up. “The absence of leverage will be our salvation this time around.”
Indeed, both Rosso and Spiegelman claim they have yet to experience a single buyer default at any of their deals in this cycle. “Think about it,” says Peggy Fucci, president and CEO of OneWorld Properties, which is the exclusive broker for Paramount, a 58-story, 500-unit project in the heart of Miami Worldcenter, a $1 billion, downtown, master-planned, mixed-use development. “It’s going to be very difficult for any given person to walk away from a 50% deposit.”
And yet, there are signs that salvation won’t come cheap. McCabe points to Related’s recently completed, 300-unit IconBay building in the Biscayne Corridor. He says more than 30% of the units are listed for resale, with some owners offering to vacate at a 7% discount to what they paid.
Foreigner investors, McCabe says, can afford to do that because as their home currencies have gone south, the dollar they bought with has continued to climb. “They’re already ahead, without developers even raising prices,” McCabe says. “What’s going to cause a lot of pain for developers who have unsold inventory is that they’re going to end up competing against their investors.”
Rosso sees the swap differently. “On average, those sellers paid $485 per square foot two years ago, and now they want $630 per square foot,” Rosso says. “That’s an amazing day at the bank.”
Still, McCabe points to two other recently completed buildings rife with resales, including the 230-unit 400 Sunny Isles, finished last August by developer Key International. There, more than 40% of the new units were for sale at the beginning of June.
While many of Miami’s market movers put a positive spin on the slowdown, no one denies it’s happening. “Just to give you an idea, in one of the buildings we represent, we were selling 25 units per month last year,” says Fucci. “This year, we’re happy if we sell 10 units a month.”
Developers have responded to that slowing velocity by shrinking their deposit requirements to as low as 30% on units in completed buildings that have already met their payoff thresholds. Brokerage fees have gone up from 3.5% to 5% in the ultra high-end luxury market, and from 6% to as high as 10% in the downtown market, according to Puig. A handful of announced projects have also been canceled, or put on hold indefinitely, a trend Fucci sees as positive.
“Developers are being very, very careful about what they release, and when,” Fucci says. “There have been projects that we know have been approved, but the developers have been holding off because they know how difficult it is right now. At 10 units a month, if you’re developing a 200-unit building, you have to sell at least 100 before you can start. At this point, that would take a year.”
Or, as Shear puts it, “You just don’t want to swim upstream. Selling condos right now is much harder than it was a year ago, and I think selling a year from now will be much easier. So why not wait?”
It’s that kind of restraint in the market that leads Rosso to conclude that a boom-and-bust sequel a la The Big Short 2 isn’t in the works. “I call it the Viagra cycle,” Rosso says. “We’re taking a breather now, and then we’ll come back again.”
More Than Just the Weather
From that viewpoint, the distinct aspects of this market go beyond the demographics of the buyers, or the cash they bring. Observers say the product in South Florida, as well as Miami itself, has changed.
No longer a sleepy haven for Northeastern winter refugees and Canadians, Miami has gained a much larger international cache in the intervening decade. Art Basel, which debuted its Miami Beach show in 2002, has become an annual cornerstone of the city’s cultural scene, attracting thousands of collectors from around the globe. The New York Times anointed it as “one of the most sought-after events … on the American art world calendar.”
The renaissance in Miami’s Design District, north of downtown, has spurred more than 70 high-end retailers to open shops there, including Louis Vuitton, Hermes, Cartier, and Dior. And the city’s tech sector has also mushroomed, with the Kaufmann Index ranking Miami second in the nation for tech start-up activity—behind only Austin, Texas, and ahead of Silicon Valley.
In 2015, the influential Knight Frank Report ranked Miami the sixth-most-important city in the world for ultra–high net worth individuals, with its real estate prices offering relative value compared with other global destinations such as New York, London, Hong Kong, and Los Angeles. (Alas, Miami slipped from the report’s top 10 in 2016.) Still, combined with the fact that Florida doesn’t levy a state income tax, market participants say more and more people are going there based on financial, cultural, and business factors.
“For maybe the first time, people are coming to Miami and South Florida for more than just the weather,” says Duff Rubin, regional senior vice president of Coldwell Banker’s Southeast Florida division, who manages 1,800 agents in his market. “People are coming here to set up full time.”
The condos themselves have evolved too, with more opulent features, finishes, and five-star hotel–style services than ever before. Take the 132-unit Porsche Design Tower in Sunny Isles, built by car-obsessed developer Gil Dezer. Slated for completion this year, the project will enable owners to drive their cars into the patented “Dezervator” elevator and be lifted up to their unit without ever getting out of the driver’s seat. Prices start at around $6 million, and if you have $32.5 million for the penthouse, you can house 11 of your cars on-site.
At the Ritz-Carlton Residences in Miami Beach, residents can soak in the private plunge pools on their patios, and at the 192-unit Jade Signature in Sunny Isles Beach, slated for completion in 2017, those plunge pools are inside the giant living rooms of the condos themselves.
At Echo Brickell, Shear had hoped to put sharks in the massive, 12,000-gallon fish tank in the lobby but settled on jellyfish instead. At Goldstein’s Estates at Acqualina, a Rolls Royce Ghost, complete with chauffeur, stands by to shuttle owners to shopping, restaurants, or entertainment within a 10-mile radius of the property.
“This time around, it’s more strongly oriented toward branded residences,” says Jon Cardello, an architect and senior principal at architectural firm Stantec, the architect of record at Ritz-Carlton Residences, on which it worked with Italian architect and designer Piero Lissoni. “The quality of service being offered is absolutely high-end. Personal chefs will come to your unit and cook for you.”
On their exteriors, these buildings have set themselves apart from the previous cycle too. Just look at Shear’s Muse, a 50-story, 68-unit, glass-and-steel enclosed spire rising from the sand with a sensual twist that’s reminiscent of a flamenco dancer. Designed by world-renowned architect Carlos Ott, the building oozes sensuality. “It’s very nice stuff. You can’t see a shade of stucco anywhere; it’s literally all glass,” Shear says.
Cardello says it’s that kind of design flair that distinguishes today’s product in South Florida from that of the past. “It’s more focused on high design today,” Cardello says. “You have signature designers coming in and pairing up with teams on an international basis.”
In addition to Lissoni’s work on the Ritz-Carlton and Ott’s on Muse, there’s also One Thousand Museum, designed by the late, Pritzker Prize–winning Zaha Hadid. Each of the 83 units in the tower, Hadid’s first in the Western Hemisphere, will be unique, hung on the structure’s steel exoskeleton. The building’s construction, kicked off in February, broke a Miami–Dade County record when workers drilled 160 feet down to pour the foundation. And The Real Deal recently ran an article highlighting several international architects working on South Florida’s condos, including Renzo Piano, Thomas Juul-Hansen, Ricardo Bofill, Isay Weinfeld, and Brandon Haw, as well as Lissoni.
“Today in Miami, you have 20 of the top architects in the world building buildings at the same time,” says Rosso. “It’s a very unique situation.”
But while the arrival of some of the world’s best designers in Miami has produced some stunning buildings this time around, it’s also come at a price. McCabe estimates that hard development costs have risen from $200 to $500 per square foot in 2011 to $350 to $800 at the top end today. Much of those costs can be attributed to land, labor, and material inflation, but some can also be pegged to Miami’s high-design aesthetic and its almost myopic focus on luxury and ultra-luxury product.
“If I wasn’t in the market, I would say go ahead, make my city beautiful,” says Shear. “But the problem is, every new design element adds to your cost. It drives your efficiency to a bad place. There is a practical reality to it all, and it still has to make sense. You can’t build deals to lose money, the floor plans still have to make sense, and supply still has to meet demand in some way.”
At the same time, Miami’s condo comeback, and the subsequent per-square-foot price increase, has allowed those kinds of buildings to get built and sell for prices high enough to pay for the beauty.
Even McCabe sees value in that. “The unique buildings will set themselves apart, like One Thousand Museum,” McCabe says. “Zaha Hadid had this global reputation, and her design was so unique, I think that building might be like a piece of artwork where it actually keeps going up in value since she passed away.”
For others, though, there might be more of a market reckoning. Unless the dollar weakens and foreign buyers return, that nearly exclusive focus on beauty and luxury may turn ugly for the people who paid for it most. “Almost all of the new construction is in the upper tier,” says McCabe. “Probably only 10% of the local population could afford these new condos. Developers have built them for foreigners, and now there’s an oversaturation in those price points. But my point is, how many millionaires are there? And how many haven’t already either bought a unit or put down money on a unit in Miami?”
With thousands more luxury units proposed, it will only be when Miami’s condo market answers that question that we’ll know whether we’ve all seen this movie before.
A Soft (Water) Landing
While claims by Miami’s developers that its condo market will come in for a soft landing may seem self-serving, they also hold water.
Take Marina Palms Yacht Club & Residences, a twin-tower, 486-unit condo and marina project on North Miami Beach’s Maule Lake that sports 112 boat slips and offers club boats for day use.
Co-developed by North Miami Beach–based DevStar Group, iStar, and the Plaza Group, the project launched in late 2012 and enjoyed a sales pace of around 20 units per month in 2013, according to DevStar principal George Helmstetter. That pace slowed to eight to 10 units a month in 2015. Then, “toward the end of last year, project velocity really started to slow down everywhere,” Helmstetter says. “Now, we’re probably at about half of that.”
Yet, with just 30 units left to sell in the project’s south tower, which topped off in May, at that pace, the development also only needs six more months to sell out. Current sales are coming at an average price of $550 per square foot, Helmstetter says, or $100 more than those that sold in the project’s north tower, completed in 2015. There, 233 of 234 units have sold; a single penthouse is still available, asking price $3.9 million.
Indeed, for many market players, what South Florida’s condo market needs most right now is just a little more time. “Buyers have so much skin in the game this time, I don’t think these condos are going to be defaulting,” says Puig. “The dollar won’t stay strong forever, and we’ll get more clarity after the election. I think 2016 is going to be soft the whole year—this summer could be a great time to buy—and then I think, in 2017, we’ll see a three-point turn.”
Helmstetter, also, isn’t worried. “You constantly hear about all this new supply in Miami and all these new announcements,” he says. “But for the most part, they’re just announcements. They haven’t broken ground, and they’re not committed to doing so. The projects that are under construction at this point will get finished, though, because they’re all already 50% to 60% sold.”
At the same time, with more than 50,000 units in the South Florida pipeline, he’s not looking forward to taking the next step after Marina Palms. “I wouldn’t want to be buying a piece of land and trying to sell condos right now from the very beginning,” he says. “As land prices and construction costs continue to rise, it makes future development more difficult down here. But that also means there’s another barrier to entry for new supply, which could be a good thing.”
Sounds like it might be time to take out one of Marina Palms’ club boats.