By Peter Zalewski/Market Intelligence Report
As the Miami real estate market shows signs of stabilizing in certain submarkets, the situation could not be more different in the two other U.S. condo markets that experienced a similar volume of vertical construction during the boom: Las Vegas and San Diego.
This is the assessment of Condo Vultures® founder Peter Zalewski after spending 10 days in Las Vegas and San Diego visiting more than 30 new condo projects that have failed to sell out. Zalewski visited the projects unsolicited and unannounced to gather market intelligence on pricing, product quality, and local professional insight.
"We see a lot of similarities in the Las Vegas condo market today that reminds us of market conditions in Miami in autumn 2008," said Zalewski, who is a principal with the Bal Harbour, Fla.-based real estate consultancy Condo Vultures® LLC. "Our impression of San Diego - where some of the new towers are just now opening - reminds us a lot of Miami in late 2007. Overall, we think the price declines that have already been realized in Miami will be experienced in the near future in Las Vegas and San Diego."
Consider that many Miami developers in summer 2008 were seeking $300 per square on a bulk basis and $400 per square foot on a retail basis for unsold units in any one of the numerous new condo towers that were standing empty at the time.
Compare that to now where bulk asking prices are currently about $300 per square foot in Las Vegas and $400 in San Diego. Retail prices are generally about $100 per square foot more than the bulk asking prices. Replacement costs in Miami, Las Vegas, and San Diego are about the same $250 per square foot but land costs vary dramatically, Zalewski said.
In retrospect, December 2008 was a turning point in Miami's condo market. This is the time when the first arm's length bulk deal closed at $200 per square foot, forcing the entire South Florida market - bulk buyers, individual purchasers, developers, and lenders - to take notice and begin adjusting prices.
Added to the pricing change was a series of bank failures, a foreclosure action against a new condo tower, an unwillingness by buyers with preconstruction contracts to close on units, and a virtual freeze on condo financing.
Within the course of the next six months after the first bulk deal closed, a new retail price range for unsold condos in Greater Downtown Miami emerged at between $200 and $250 per square foot depending upon view, quality, and size. Another trend to emerge, all-cash buyers suddenly became the only inquiries that were taken seriously by sellers given the difficulty in obtaining financing.
"Today, as soon as a new condo tower in Greater Downtown Miami reduces its price to $200 per square foot, the project is swarmed by investors and first-time home buyers looking to purchase a unit," Zalewski said. "Inevitably, the Greater Downtown Miami condo tower sells off a majority of its units in a period of eight weeks or less. The remaining product - typically the least desirable of the lot - is then bundled up by the developer and sold off to a private equity buyer at an even lower price."
Some bulk buyers, facing competition from individual buyers who are depleting the inventory by purchasing one or two units each, have begun paying prices that are closer to the retail asking prices out of concern about the shrinking inventory.
On a bulk basis, there have been 14 bulk deals to close in South Florida since July 2008, and nine transactions since June 2009. At least three additional bulk deals are scheduled to close or already completed but not recorded in government records.
Bulk buyers have acquired a total of 806 units with 946,000 square feet for nearly $199 million, or $210 per square foot. A dozen of the 14 closed bulk deals have occurred in Miami-Dade County, according to the Condo Vultures® Bulk Deals Database.
The failure of Corus Bank, a Chicago lender with 2,300 unsold units in South Florida, is expected to further impact the market. The Federal Deposit Insurance Corp, which insures deposits at U.S. banks up to $250,000 per account, collected bids this week from institutional investors for the Corus Bank portfolio, which is comprised of condo construction loans on new towers located in South Florida, Las Vegas, San Diego, and other places.
The winning bidder, whichever one is ultimately selected, is expected to immediately resell a portion of the units acquired from the FDIC at a deep discount
.
Even without a government induced discount, buyers are purchasing real estate product including even land. A Boca Raton company paid $39 million, or $130 per square foot, on Sept. 21 for nearly 300,000 square feet of vacant land situated on nine parcels in Downtown Miami, according to a new CondoVultures.com report.
The seller paid a combined $32.3 million, or $108 per square foot, for the land, which was acquired between August 1999 and March 2006, according to Miami-Dade County records.
"South Florida has provided many of the opportunistic buyers a laboratory of sorts to figure out how to buy distressed product whether it be on an individual or bulk basis," Zalewski said. "We are encouraged that the skills and experience we have accumulated in South Florida will serve us well when widespread capitulation occurs in the other overbuilt condo markets."
