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{FunnelCast Contributor | Ben Moss} Short-term pains vs. long-term gains in the Miami condo market

07/09/2014
Ben Moss, Miami Commercial Real Estate blog, Miami Condo blog, ONE Sotheby's

I am interested to see how this current condo boom in greater Miami will play out. Granted, this time around a major difference in the cycle is that developers are generally obtaining 50% cash deposits during construction, whereas in the previous cycle the typical deposit was only 20%. I agree that this high deposit level will shield developers from mass contract cancellations that plagued the market in the last cycle. However, while lenders and developers will be shielded, how is this going to pan out in the short-to-mid-term for the buyers of these units?

Let’s consider that the majority of the buyers are foreigners who just want to plunk down cash for a condo in Miami. Of those, a portion don’t care about their return on those units and may not even rent them out. However, I have to think that most buyers of pre-construction condo units do plan to rent them out. Presumably they will do so at the market rent, and get their 5% cash-on-cash return, which is fairly typical if one were to buy a resale condo unit in the Miami CBD (comprised of Brickell and Downtown) right now.

Here’s the rub. According to CBRE, the average rental rate for a unit in buildings built since 2003 in the Miami CBD has spiked 24% since 2010, to $2.48/square foot. This amounts to a rent of $2,480/month for a 1,000-square foot unit, up from $2,000/month four years ago. In Miami, 38% of working households spent at least half their income on housing in 2012, according to the Center for Housing Policy. See an imbalance here? The working folks (people that make the area vibrant and fun) in South Florida are already maxed out on their rent as it is. They are renting units that were basically acquired in large part below $300/square foot. Now, we’re seeing pre-construction units selling from $500 - $600/square foot. These new buyers of pre-construction condo units are going to have a big surprise in store for them when they realize that their prospective tenants can't afford to pay more than what they're already paying in rent. Since so many buyers of condos are investors, this flood of new rental inventory to the market will stagnate and/or push down prices in the area (both, for rent and for sale) when all these condos are delivered, thereby diminishing returns for these investors.

For the foreign buyers who want to use their units part-time or are not buying strictly to obtain a certain return, these buyers will be comfortable holding their units to ride out the down cycle, but I think many of the pre-construction condo buyers are a naïve bunch who think that rents and prices always go up. They have a very short memory and should remember what happened the last time around. In the last cycle, buyers of new condos were scared by the economy and falling prices, and so they bailed because they didn’t have a lot of skin in the game to begin with. This time, they have too much skin in the game to bail. So, they will close, but then they will realize the rental market is not nearly as robust as they thought it was. As a result, they will suffer through years of very meager annual returns or they will sell their units at what the market will bear and move their funds to a better-performing asset.

Meanwhile, the local buyer of a pre-construction unit in the Miami CBD is very rare and will assuredly step up and buy units when the market softens. I remain very bullish on the long-term growth of the Miami CBD, but any buyer who is under contract for a pre-construction unit right now should prepare to be a long-term holder of their unit in order to actually realize the eventual return that I’m sure will come. There will be some pain in the near-to-mid-term.

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By: Ben Moss

Estate Agent | ONE Sotheby’s International Realty

Email: Ben@BenMossGroup.com

Phone: 305.793.4783

Visit Ben’s Website: www.BenMossGroup.com

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