Washington, D.C. -- Short-term speculators flooding the condo market in Southeast Florida have created a tidal wave of investor enthusiasm that will most assuredly lead to oversupply and downward pressure on pricing within the next few years, predicts Jack McCabe, CEO of McCabe Research and Consulting.
“Is panic selling a real possibility in South Florida?” McCabe asked rhetorically during a panel discussion at the Hilton Washington Embassy Row on Saturday morning. “It’s kind of hard to believe at this point because everything has been going great guns. Publicly you won’t find a developer or a lender who tells you that they’re concerned about the market at this point. Privately, they will all tell you that they are concerned,” emphasized McCabe, whose comments were delivered to more than 100 editors and reporters gathered for the annual convention of the National Association of Real Estate Editors (NAREE).
So great is the concern in the financial community about the overheated market that one lender, Bank Atlantic, has decided that it will at least temporarily stop funding of new condo construction in South Florida, according to McCabe. Meanwhile, developers are beginning to include clauses in contracts that prevent condo buyers from flipping the units for resale before projects are completely sold out.
Such bold moves are in direct response to the wave of new construction and condo conversions taking place. Palm Beach County currently has over 10,000 new condo units scheduled for delivery between now and 2007. Broward County has 13,000 units slated. Meanwhile, a whopping 25,000 new condo units are expected to come on line in Miami-Dade during that same period. Another 64,000 condo units have been announced or are in early planning stages for development throughout the region.
Those figures don’t take into account the large number of condo conversions of commercial-grade apartments -- communities with 100 units or more. Over the past 18 months, total apartment conversions have reached 31,000 units, more than double the three years prior.
Significant price appreciation and cheap debt are helping to fuel the condo craze. In Southeast Florida, homes have appreciated 20% to 37% over the last three years, according to McCabe. Condo units today sell anywhere from $300 to $1,200 per sq. ft.
Conversion units are selling at the lowest price points in the region. “That’s why the American dream is no longer a single-family home in South Florida. It’s a condo conversion because that’s what the majority of people can afford.”
The condo developers are gobbling up any developable land. They are paying 20% to 35% premiums over and above what the long-term rental operators can afford, according to McCabe. “The converters also are swallowing up all the apartment complexes that are existing. They are paying premiums far and above what a long-term operator can justify to pay and make a profit on.”
The condo craze is not unique to Southeast Florida, however. For example, Transwestern Commercial Services reports that of $2.07 billion worth of Class-A multifamily transactions in the Washington, D.C. metro area. in 2004, just over half (51%) of the investors were condo converters.
The sale of Archstone Old Town, a property built in 1941 in Old Town Alexandria, Virginia, illustrates the frothiness of the market. Archstone-Smith sold the 158-unit apartment community to Miles Properties for condo conversion last December at a price of $29 million, or $272 per sq. ft. Currently marketed as “The Bearings,” condo sales began in May at an average retail price of $480 per sq. ft. A reservation list generated more than 5,000 names for only 158 units, according to Transwestern.
The high demand for condos appears to have no limits in Southeast Florida. In at least one instance, the owner of the condo complex raised prices hourly in response to buyer demand, according to McCabe.
Apartment sector welcomes deal heat
The condo development and conversion craze in Southeast Florida over the past few years also has given the apartment market a much-needed lift. Following three years of negligible rental rate growth, owner concessions and tenant perks that included everything from massages to wine and cheese parties, apartment investors have their own reason to celebrate. In 2004, rents rose 4.2% and are expected to spike between 6% and 8% this year, according to McCabe. That’s a dramatic improvement from 2001 through 2003, when apartment rents in Southeast Florida rose less than 1% annually.
“There are no longer any concessions. If you ask for free rent, they [leasing agents] just laugh at you now,” says McCabe. That growth in rental rates is directly tied to demand. In Palm Beach County, for example, the occupancy rate has risen from 86.6% in 2002 to 92% and is still climbing.
And with several thousand more apartment units slated for condo conversion in the near term, McCabe is convinced that the apartment inventory will continue to shrink. “We expect that’s going to be a trend for several years to come.”