There's an old joke about the man who moves to Miami. When his friends him ask why, he replies, “Because it is so close to the United States.”
More than 50% of the population in Miami-Dade County is Hispanic — a segment that includes immigrants and children of immigrants. But there is another group, much of which is also Hispanic, which influences the investment climate in the county: non-resident aliens. They don't live in Miami-Dade, but they invest their money there, especially in real estate.
Approximately half of the county's commercial properties selling for less than $1 million are purchased by locals, not always U.S. citizens, according to Miami-based real estate broker and appraiser Thomas Dixon. The remaining 50% buying product under $1 million include foreign investors.
So it should come as no surprise that amid a condominium construction boom taking place in Miami, a large proportion of these condominiums are being sold to foreigners.
“Money is not parked in commercial real estate in Miami. It is parked in high-end residential, such as condominiums,” says Miami-based banking consultant Kenneth Thomas. “Just having foreign dollars in the Miami economy is good.” Condominium construction helps not only the construction industry, but also retailing and service industries as well.
Condos Are King
Since 1987, about 10,500 residential units, mostly condos, have been built in the city's Brickell Avenue corridor just south of downtown. About 2,000 currently are under construction on Brickell, in downtown and in the areas just to the north.
Incredibly low interest rates over the past 12 to 18 months have allowed an increasing number of renters to become condo owners. Consequently, Miami's apartment market has suffered both in the suburbs and downtown, says Evan Kristol, senior investment associate and senior director based in Marcus & Millichap's Fort Lauderdale office.
In 2002, 1,909 apartment units were completed, but there was a negative absorption of 1,164 units, reports New York-based research firm Reis Inc. In the first quarter of 2003, another 368 new units were completed, but the lack of demand continued. The result was a negative net absorption of 1,085 units.
And the future looks dim for Miami's multifamily sector. The rental vacancy rate for Miami-Dade's apartment market was 6.6% in the first quarter of 2003, according to Reis. With the addition of 1,610 new units expected before the end of the year, the vacancy rate may top 7.6% by year's end.
As a result, some apartment owners are choosing to exit the apartment business because condominium conversion is so profitable. Low interest rates have caused condo prices to climb, so converters are paying ever-higher prices for existing apartment buildings, Kristol explains.
“Condo conversions are good for the apartment market,” says Kristol. The smaller number of rentals counteracts rent concessions. “If there were no condo conversions, we'd have a serious problem with rentals,” he notes.
The Related Group of Florida, for example, had planned to build a combination of upscale apartments and condominiums at One Miami, a 3.04-acre site in the heart of downtown where the Miami River meets Biscayne Bay, according to Michael Gentry, assistant project director for the development.
But the company decided to build all condominiums instead when it realized the heavy demand for the units in the project's two towers. “The velocity of condominium sales was so incredible that we realized we could sell units in both towers,” Gentry explains. The project's 896 units, which constitute the first new residential construction in downtown in decades, are priced between $150,000 and $750,000.
By comparison, condominiums on Brickell, south of downtown, are much more expensive than units in downtown Miami. At the Four Seasons Hotel and Tower, which includes 186 conventional condominiums and 84 condo/hotel rooms, units range from $695,000 to $5.6 million. The 70-story project — the tallest tower south of Atlanta — is scheduled to open in October.
Not all new residential development in Miami is aimed at the affluent tenant. There is a movement afoot to redevelop the Overtown area, a once-vital, African-American neighborhood just west of downtown. Detroit-based developer Crosswinds Communities is working on plans for a mixed-use development in Overtown.
The project includes 1,200 to 1,500 residential units, mostly for-sale housing, and about 100,000 sq. ft. of commercial space, according to Rod Petrey, president of the Miami-based nonprofit organization Collins Center for Public Policy.
There is a great demand for new housing in Overtown, says Bernice Butler, director of real estate development and finance at the Collins Center. “There has been no new housing built there for 15 years,” she says. Although it is too soon to tell what prices these units will sell for, she notes that the assessed value of residential real estate in the area has tripled in the last several years.
Just north of Overtown, another renaissance is taking place. A $370 million performing arts center is under construction in the Omni area. While the center has been plagued by delays and cost overruns, new housing, including upscale rentals and condominiums, is following in its wake, including condominiums in the so-called “affordable luxury” category of about $300,000.
Retail Market Thriving
One bright spot in the Miami market is the retail sector. Miami-Dade's retail occupancy rate is hovering around 93%, according to David Dabby, president of Coral Gables-based real estate research firm Dabby Group. Retail rents are holding steady at about $19.13 per sq. ft., according to the Terranova Corp.
At the same time, investors are paying premium prices for retail centers today, according to Dabby. The median price for a retail property in Miami-Dade from 1997 through 2000 ranged from $93 to $99 per sq. ft. “Since 2000, there has been a rapid escalation in prices,” he says. The median price for retail property was $123 per sq. ft. in 2002, up nearly 25% from 2000.
The Rouse Co. is planning a mixed-use development with a large retail component in southwest Miami-Dade. Plus, there are a number of smaller projects in the works, including the mixed-use Mary Brickell Village, just west of Brickell Avenue, which is scheduled to start construction in August and include 192,000 sq. ft. of retail space. Developer Jeff Berkowitz also is planning a 400,000 sq. ft. vertical mall on Miami Beach.
Office Market Remains Soft
Much of Miami-Dade's office market is suffering from high vacancy rates. Nonetheless, Atlanta-based Cousins Properties and Miami-based America's Capital Partners are planning a Class-A office building downtown, at a site currently occupied by a 1-story shopping center, sources say, the first built downtown in almost two decades. The reason for the drought downtown, says William Holly, president of Miami-based Holly Real Estate, is that there were a lot of good sites available on Brickell in the late 1990s, when office construction resumed after the recession of the early 1990s.
Meanwhile, the 47-story Bank of America building in downtown was sold in June by Hines Interests to German investment fund Blue Capital U.S. East Coast Real Estate LP, a subsidiary of Vereinsund Westbank AG. The sale price was $87 million, or $145 per sq. ft. That's substantially less than Miami's average for trophy buildings of $200 per sq. ft., says Doug Campbell, executive director of commercial brokerage with Cushman & Wakefield in Miami. One reason the building sold so cheaply, he says, is the neighborhood surrounding it — which features a MetroRail station, low-priced retail outlets and fast food — is “less desirable” than Brickell Avenue.
Office vacancy rates in a number of Miami-Dade submarkets have climbed in 2003 compared with 2002, according to Cushman & Wakefield. On Brickell Avenue, the overall vacancy rate rose from 16.6% in the second quarter of 2002 to 17.4% in the second quarter of 2003.
More than 480,000 sq. ft. of office space is currently under construction in the Brickell submarket, according to Cushman & Wakefield, including the 260,000 sq. ft. mixed-use Espirito Santo Plaza that is scheduled to open in late 2003. As of mid-July, more than 100,000 sq. ft. was leased, including 55,000 sq. ft. by Espirito Santo Bank and 30,000 sq. ft. by New York law firm Weil Gotshal & Manges.
Industrial Market Takes Its Licks
Overall vacancy rates in Miami-Dade's industrial sector — which consists of primarily warehouse and distribution space — averaged 8.3% as of the second quarter of 2003, down from 8.8% in the same period in 2002, according to Coral Gables-based Codina Realty Services.
Vacancy rates in Airport West — historically one of the country's most active industrial markets — dropped from 12.8% in the second quarter of 2002 to 11.5% in the second quarter of 2003.
But Codina Development, in partnership with San Francisco-based REIT AMB Property Corp., is planning the area's largest industrial project yet. Beacon Lakes, a 336-acre industrial development, will include 6.6 million sq. ft. at full buildout.
Codina doesn't have an anchor for Beacon Lakes, which will include 2.8 million sq. ft. of spec buildings on 140 acres. The remaining land will be sold off or used for build-to-suits. Construction begins on the first spec warehouse with 200,000 sq. ft. this fall, according to Forrest Robinson, president of the firm.
Although Robinson believes Airport West is starting to recover, Walter Byrd, senior director at Cushman & Wakefield, cautions that there has been a dearth of major deals, which he describes as 100,000 sq. ft. or larger, in Airport West recently. Most of the demand is for 20,000 to 40,000 sq. ft. spaces occupied by small import/export firms, according to Dixon.
Hotels On The Mend
After several quarters in the doldrums, the outlook is brighter for the hotel industry in Miami-Dade, says Bobby Bowers, vice president of Henderson, Tenn.-based Smith Travel Research. Revenue per available room (RevPar) is growing and room rates are rising, he says.
Overall, the county's year-to-date occupancy rate at the end of May averaged 69.3%, compared with 68.1% in the same period last year. Room rates averaged $129.71, up from $125.85, and RevPar was $89.88, up from $85.70.
These numbers represent about 4.9% RevPar growth and 3.1% room rate growth, which is very good, says Bowers. “In a lot of markets, that is not the case,” says Bowers. “Miami-Dade is bucking the national trend.” Nationally, RevPar was down 2.6% and room rates were down 0.8%, as of end of May.
But several new luxury hotels will soon be added to the market. In October, the Four Seasons will open on Brickell Avenue with 222 hotel rooms and 84 condo/hotel units. At the Espirito Santo Plaza, Hilton will open a 203-room luxury hotel under the Conrad brand. The property will also have 117 condominium hotel units.
The luxury category is likely to suffer from the onslaught of new rooms, says Ft. Pierce-based Chase Burritt, managing partner with Burritt Associates. In the last three years, the number of luxury rooms in Miami-Dade grew from 300 to more than 1,500. Plus, the luxury category costs operators the most. “Luxury customers,” he says, “demand lots of high-priced services.”
Hortense Leon is a Miami-based writer.
MIAMI-BY THE NUMBERS
Metro area: 2.3 million
UNEMPLOYMENT RATE: 7%
Miami-Dade County Public Schools 37,500 employees
Miami-Dade County 30,000 employees
United States Government 18,276 employees
METRO AREA STATS
18.6% vacancy, 2Q 2003
17.5% vacancy, 2Q 2002
Rent per sq. ft.: $23.08 2Q 2003
Source: Cushman & Wakefield
6.6% vacancy, 1Q 2003
3.4% vacancy, 1Q 2002
Rent per unit: $933 1Q 2003
Source: Reis Inc.
4.9% vacancy, 1Q 2003
5% vacancy, 1Q 2002
Rent per sq. ft: $19.13 1Q 2003
Source: Terranova Corp.
Industrial: (Miami-Dade County)
8.3% vacancy, 2Q 2003
8.8% vacancy, 2Q 2002
Rent per sq. ft.: $5.99 2Q 2003
Source: Codina Realty Services Inc.
69.3% occupancy, YTD as of May 2003
68.1% occupancy, YTD as of May 2002
Source: Smith Travel Research
MAJOR PROJECTS UNDER CONSTRUCTION:
The Four Seasons Hotel and Tower, 200,000 sq. ft. of office space, 222 hotel rooms, 84 condo/hotels and 186 condominiums
Cost: $400 million
Developer: Millennium Partners
Completion: October 2003
One Miami, 896 condominiums and 27,000 sq. ft. of office
Cost: $250 million
Developer: The Related Group of Florida
Completion: Fall 2005
Espirito Santo Plaza, 260,000 sq. ft. of office space, 203 hotel rooms and and 117 hotel/condominiums
Cost: $120 million
Developer: Group Espirito Santo
Completion: Fall 2003
The Performing Arts Center of Greater Miami, Two-pavilion complex with ballet/opera house, symphony hall, theater and a 57,000 sq. ft. plaza
Cost: $370 million
Developer: Odebrecht Construction, the Haskell Co. and the Ellis Don Corp.
Completion: July 2005