During the recent construction boom, nowhere was the trend of converting older properties into new condominiums more prevalent than in Miami. As prices for multi-family properties skyrocketed in 2004 and 2005, developers rushed in and snatched up old class-B and class-C office buildings to convert into sparkling new condominiums fetching up to $400,000 per unit.

During a 12-month span from September 2005 to September 2006, 6,600 new condo units were delivered to the market — nearly matching the total number of condos that opened in Miami during the previous 10 years combined.

But that was just the beginning. As of October 2006, another 22,254 units were under construction, according to the city's planning department. Currently, developers have plans to build 60,232 multi-family units — mostly condos — with roughly 25,000 of those slated to come online in the next 15 months, according to Housing Predictor, a market research firm.

And all of it could't be happening at a worse time.

The flood of new projects is coming in as prices for housing in the Miami area are crashing. The glut of new space, in fact, is just exacerbating the problem, drowning the market in new supply that it does't need (and spreading speculation that some of that supply will be scrapped before becoming a reality). It is because of this that Housing Predictor ranks Miami as the worst housing market in the entire country. It anticipates that the wash of new supply will send prices down 12.7 percent this year alone. (Currently, the median housing price in Miami is $348,000.)

Meanwhile, Forbes magazine named Miami the riskiest real estate market in the country. Most ominously, in late July, Mark Zandi, chief economist at West Chester, Pa.-based Moody's Economy.com, predicted that the rash of condos — the largest supply to hit the city in 30 years — will send prices down as much as 30 percent. Zandi predicts the impact could be so widespread as to send the entire state of Florida into recession as early as October.

The retail sector would not be spared in the potential bloodbath.

Already projections call for retail sales growth in the city to fall to 4.7 percent in 2007, down from 8 percent in 2006, according to a report from Marcus & Millichap Real Estate Investment Services. That is a direct consequence of the housing fallout, according to Kirk Olsen, a member of the national retail group with the firm.

“You drive around here and you'll see a lot of high-rises that haven't been finished yet and a lot of those still haven't sold their units,” he says. “It's hard to know right now what the end result will be.”

However, there are reasons to believe the impact on retail real estate will be muted. For one, Miami remains a popular tourist destination, both for domestic and international travelers, many of whom come to shop the city's collection of luxury retailers. On that front, the city is still drawing new chains. In just the past few months, Danish furniture store Bo Concept and Brazilian Artefacto, as well as Spanish apparel chain Custo Barcelona and French Lollipops have secured storefronts in and around Miami.

“The amount of retail space per capita is much lower here than in other parts of Florida, so with tourism, you get a recipe for healthy retail,“ says Rod L. Castan, vice president with Courtelis Co., a Miami-based developer with a 2.5-million-square-foot retail portfolio.

Moreover, the wave of overbuilding sweeping the multi-family sector is not being replicated on the retail side. Developers will add 1.7 million square feet of retail space to the market this year, which is a bit less than the 2 million square feet of space that was delivered in 2006. Because of this, Marcus & Millichap predicts retail rents will actually increase this year by 5.6 percent to $22.48 per square foot (though this year to date, rents have risen only 1.1 percent). Meanwhile, vacancies are expected to rise a modest 20 basis points to 4.8 percent.

On the investment sales side, however, activity has slowed a bit. The price per square foot on retail properties has fallen to $232 this year, a 5-percent decrease from $245 per square foot in 2006, reports Real Capital Analytics. Anecdotally, Olsen says that while in 2006 every property Marcus & Millichap marketed would get six to eight offers, this year they are only getting two or three.

Getting off on the ground floor

Making matters worse is the fact that many of the high rises being erected include ground-floor retail. But because a lot of those spaces feature the wrong configurations and ceiling heights for retail uses, owners will be challenged in finding tenants eager to take them, according to Paco Diaz, senior vice president of retail properties with CB Richard Ellis Group, Inc. “They'll get leased, everything gets leased with time, but it will take a little longer [than usual],” he says.

But brokers in the market do think that retail real estate will be buffered somewhat by the fact, that unlike the multi-family sector, it is not being overbuilt, in part because large sites are hard to come by in Miami. The lack of developable land means that new construction is expensive. It encourages vertical development. That, in effect, limits how much new retail can be built, because only the first three floors of a tall project would ever be considered for retail uses.

“There are not a lot of [sites] for new development and the entitlement [process] is challenging, so what you do is redevelopment given the density in the area,” says Paul Maxwell, vice president of investments with Regency Centers.

An example is the Shops at Midtown Miami, a 633,001-square-foot property being built by Beachwood, Ohio-based Developers Diversified Realty Corp. on North Miami Avenue. The project is integral to the redevelopment of the 55-acre Buena Vista Rail Yard site near the city's downtown and will be surrounded by performing arts venues and office buildings. The redevelopment does, however, also include construction of 3,000 new condo units.

Another mega-project currently in the works is Metropolitan Miami, a $1 billion mixed-use property downtown being developed by Miami-based MDM Development Group. Metropolitan Miami will boast a 120,000-square-foot Met Square lifestyle center, 120,000 square feet of additional retail, 750,000 square feet of class-A office space and a 386-room luxury hotel, as well as 1,144 condominium units. It is scheduled for completion in the third quarter of 2009.

Meanwhile, Regency Centers is undergoing the entitlement process for a traditional 400,000-square-foot shopping center in West Miami that will include big-box retailers, smaller shops, banks and restaurants. The development is set to come online in 2010.

Cuts both ways

In a bit of good news, 2007 has brought a respite from hurricane-related insurance rate increases and the labor shortages that have plagued the Sunshine State over the past few years. In the wake of Hurricanes Rita and Wilma, insurance rates in Florida skyrocketed by as much as 600 percent. However, in the last month, brokers including Diaz have noticed a 10-percent decline. Rod Castan notes the rates have flatlined.

With the housing market cooling off, industry observers note at least one positive. It's been easier for developers to find qualified construction professionals, a task that had been a challenge during the white-hot construction boom of 2006.

Building in Miami, however, is still not cheap. Overall, construction costs have gone up 8.9 percent between January 2006 and January 2007, according to Reed Construction Data. The city currently ranks as number 35 on Reed's list of the most expensive markets to build in, behind New York, Las Vegas and Washington, but ahead of Orlando and Atlanta. Last year, Miami ranked as number 41.

“We've seen labor costs ease a little bit, but steel and concrete prices remain pretty high,” says Castan. “The good news is that there is more availability of contractors, so you can get more competitive bidding on your projects, but there hasn't been a huge change in [overall construction] costs.”

FLORIDA

POPULATION TRENDS

Population in 2000: 5,007,564

Population in 2007: 5,503,911

Percent Change 2000-2007: 9.9%

UNEMPLOYMENT RATE (MAY 2007)

Miami Metropolitan Area: 3.1%

Florida: 3.4% U.S.: 4.5%

MEDIAN HOUSEHOLD INCOME 2007

Broward County $44,680

Miami-Dade County $41,983

Palm Beach County $47,665

Source: Pitney Bowes MapInfo, July 2007.