In Miami, some tenants are fleeing investor-owned rental units and returning to traditional apartments.
Condo associations are calling for help in Miami, where a wave of foreclosures and abandoned units has left a number of towers awash in vacancies. Unpaid condo fees are leading to budget shortfalls, maintenance issues and heavy cost burdens for the remaining occupants.
Over the past three years, speculators and other investors bought thousands of units in the preconstruction phase at the height of the city's building boom. Now many buyers are unable or unwilling to close on their purchases and are simply leaving deposits of as much as $100,000 on the table and walking away.
In Southeast Florida, including Miami-Dade, Broward and Palm Beach counties, 60,000 new condos have spilled onto the market since 2002, along with 63,000 rental units that were converted to condos, says Jack McCabe, CEO of McCabe Research and Consulting, a real estate services firm based in Deerfield Beach, Fla.
“We call them ghost towers in the sky,” he says, referring to projects built over the past 18 months. Many speculators used 100% financing to buy, McCabe notes. “We are now seeing an incredibly high percentage of foreclosures.”
Nearly 23,000 units have been built in the city of Miami since 2002. That's more than twice the amount built during a 13-year period stretching from 1988 to 2001, says McCabe. An unrelated study of 73 condo buildings and seven apartment structures built in downtown Miami since 2003 shows that 62% of their units are occupied, but that means 38% are vacant.
Meanwhile, the Florida Association of Realtors reports that the median price of a condo in Miami-Dade County has dropped 50% since May 2008. Sales volume has risen, but most of the activity comes from foreclosures and other distress sales.
Defaults by condo developers and buyers have spurred a flurry of lawsuits, says Ken Rosen, president of Kendar Realty, based in Coral Gables, Fla. “Everybody thought they'd keep selling and selling and selling. Well one day it all stopped. So we have all these high-rise buildings in downtown Miami, and no lights on in the evening.”
A risk pays off
While other developers were creating condo towers as fast as they could obtain permits, and investors as far away as Argentina and Peru clamored to get in on the Florida condo action, Alan Ojeda was marching to a different beat. Instead of building a condo tower, the president and CEO of Miami-based developer Rilea Group erected One Broadway, a 371-unit apartment high-rise in the trendy Brickell district. The development was completed in 2006.
He watched as tenants abandoned traditional apartments for swanky investor-owned units in new condo towers over the past two years. But now a number of renters are fleeing the condos for strictly rental buildings like One Broadway, which has an occupancy rate of 87%, says Ojeda.
An unfurnished one-bedroom apartment rents for $1,700 to $2,000 per month, depending on the view, and a furnished one-bedroom runs $3,000 per month.
“You see a trend of people coming back to us because we pamper them,” says Ojeda. Some returning tenants tell horror stories about life in the “ghost towers” with skeletal maintenance crews. Defaulting landlords are being chased by foreclosure agents while utility companies threaten to shut off power or water because of unpaid bills.
The renters wouldn't put up with the aggravation of owners' legal, financial and maintenance issues, particularly when they were paying high rents and expected concierge-level service. Some renters were evicted when banks foreclosed on condos.
Many investors didn't buy units to occupy them, says Ojeda. “Most of them were flippers.” But the flippers got caught in the credit crunch and were unable to resell their units. Some tried to flip contracts before the closing date as an earlier wave of purchasers had done, but it was too late. The market had already plunged.
Condo associations report that many cash-strapped buyers who rented out their units have failed to pay condo fees amounting to $800 or even $2,000 per month, depending on a unit's size and location.
That has left many associations in dire straits, so short on funds that pools have been shut down and other occupants have been required to make up shortfalls in association budgets.
“We are in uncharted waters,” says Ojeda. The law allows associations to place liens on properties when owners do not pay their fees. “But when you have 50% of the building not paying the fees, what do you do?”
Are banks culprits?
In a survey of 1,589 Florida condo owners and association representatives conducted early in 2009 by the Community Association Leadership Lobby, 70% of respondents from Southeast Florida said foreclosures are causing a revenue shortfall in their associations' funds. More than half of respondents, 53%, reported higher vacancy rates than 12 months earlier because of foreclosures.
Associations say mortgage lenders holding title to foreclosed units are failing to pay monthly condo fees and other charges for the property, and 90% of respondents want the Florida legislature to take action to ease the financial burden of delinquencies on associations.
Some banks refuse to proceed with foreclosures because of the costs they would incur, while others drag out the process as long as two years, leaving a trail of debts for the associations.
Some respondents made plaintive appeals for help, warning that the associations will fail, leaving staggering debts for owners. “Please help us! We are drowning,” said a Southeast Florida board member.
More than 42% of respondents from the Miami-Broward area said they have been forced to postpone major repairs or capital investments because of the foreclosure crisis.
The condo glut has led to a new, “fractured condo” market, says Rosendo Caveiro, senior director of apartment brokerage services with Cushman & Wakefield of South Florida. For example, when only 50 units of a 200-unit condo project are sold, the other 150 units will typically be offered for rent to generate cash flow for the owners. Condos also are being bundled for bulk sales in today's market.
The myriad vacancies can create an eerie situation for the small number of owners occupying a building, who may not see another human except the maintenance man or doorman in a week, says Rosendo. As prices sink, many buyers are losing their shirts on condo deals, as are developers and lenders.
If a lender issued a $300,000 loan on a condo valued at $500,000 two years ago, but the unit today is worth just $300,000, everybody loses, says Rosendo. Many owners are appealing high tax assessments that were based on sale prices at the peak of the market rather than current value, but a bottleneck of thousands of cases awaiting review by tax officials makes the process difficult.
Deal or no deal?
Are today's bargain-priced condos really a good deal? Not necessarily, says Rosen of Kendar Realty.
“If a unit was $1 million and they'll sell it now for $500,000, that doesn't mean it's a good buy.” If developers are failing to make their payments and banks are foreclosing, that could mean hidden costs and aggravating legal issues down the road for buyers.
If a developer fails to sell at least 50% of the condo units, he could lose prearranged financing and decide that he has no other option than to default. In turn, prospective buyers who made substantial deposits could walk away from the sales, forfeiting the deposits but reasoning that their losses might be even greater if they proceeded with the purchase.
In a number of cases, buyers who put down deposits but don't want to close are filing class-action suits against developers to get out of their contracts and recover deposits, says Rosen. Some buyers believe that if they can free themselves from transactions undertaken at the height of the market, they can later purchase similar condo units for half the price.
Developers take initiative
The way out of the impasse likely will not come from traditional lenders, since they are reluctant to make loans on condo buildings, says Richard Swerdlow, CEO of Miami-based Condo.com, which lists more than 800,000 condos for sale or rent valued at more than $200 billion.
“What's going to happen is that increasingly the developers are making their own loans to end users.”
Swerdlow is optimistic. Although there's still plenty of inventory in Miami, absorption rates have picked up, particularly downtown, he says. “Prices seem to be approaching bottom.” The number of sales has risen, he points out. “Hopefully the end is near as far as the oversupply in the Miami market.”