Profit squeeze pumps the brakes on Miami’s new dev condo market

Miami condo developers cope with shrinking profit margins

Renderings of the Waldorf Astoria Hotel & Residences Miami, Lofty Residences and the Aston Martin Residences with J.C. de Ona, Phil Gutman, Edgardo Defortuna and Harvey Hernandez (Photo-illustration by Priya Modi/The Real Deal; Renderings via ARX Solutions, Newgard Development Group, Aston Martin Residendes)
Renderings of the Waldorf Astoria Hotel & Residences Miami, Lofty Residences and the Aston Martin Residences with J.C. de Ona, Phil Gutman, Edgardo Defortuna and Harvey Hernandez (Photo-illustration by Priya Modi/The Real Deal; Renderings via ARX Solutions, Newgard Development Group, Aston Martin Residendes)

Luxury amenities and high-end finishes are on the chopping block in condo projects across South Florida as developers grapple with shrinking profit margins.

That top-of-the-line Italian kitchen, those marble floors, even previous window choices could fall victim to historic inflation and the rising costs of construction, insurance and other line items.

Developers are tweaking their plans to attract lenders or wait out the volatility, putting some new condo projects in a post-sales-launch and preconstruction limbo. 

That could become a problem for buyers planning to live in those units and investors who have tied up their cash in deposits. (Most developers don’t offer interest on deposits.)

Of the 46 traditional condo buildings totaling 6,700 units that have been announced since the pandemic began, a dozen are under construction. The rest, accounting for 5,500 of those condos, are not, according to ISG World, which tracks new projects along the I-95 corridor from Coconut Grove to Fort Lauderdale. 

It’s unclear when many of them will go vertical. 

The velocity of presales has slowed compared to the frenzy developers and brokers enjoyed more than two years ago, but demand is still strong. 

And while no major projects have been canceled, developers agree that some will not get built this cycle. 

“Certainly, all of us are having significant issues with getting the cost of construction under control,” said developer and broker Edgardo Defortuna. “The margins and profitability is very reduced or nonexistent [for some].” 

The average height of the dozen projects that have gone vertical is 20 stories. That’s probably because costs jump noticeably once construction exceeds 30 stories, experts say. Planned supertalls include the Waldorf Astoria Hotel & Residences in downtown Miami, and a Dolce & Gabbana-branded JDS Development Group tower in Brickell. 

Harvey Hernandez of Newgard Development Group, whose firm is building Lofty Residences in Brickell, said the perception that construction will be starting on many projects is incorrect because lenders are just “not going to finance it.” The condo component of Lofty is more than 90 percent presold, and Hernandez expects to close on a construction loan this summer. 

“It’s product that is needed because we have demand, but it’s difficult to build it at this capital cost we have now,” Hernandez said. That includes the cost of insurance doubling or tripling in some cases following Hurricane Ian, which avoided Miami but caused more than $112 billion worth of damage across Florida. 

Financing conundrum

It’s no secret that lenders have pulled back more than a year after mortgage rates doubled and more recently following the collapses of First Republic Bank, Signature Bank and Silicon Valley Bank. Because developers’ profit margins have fallen — one broker estimated by 20 to 30 percent — lenders are even less inclined to finance projects.

Developers also need to lock in guaranteed maximum price contracts with their general contractors before securing a construction loan, something that typically happens a few months before construction begins. 

Lenders are now “really taking a good look at profit and loss statements and sales velocity,” said Phil Gutman, a broker who focuses on new developments.

“A lot of developers will move along and do a lot of the foundation work and the site preparation” while they wait on securing a construction loan, he added.

Though developers have long used value engineering to make their projects more efficient, Gutman said those with thinner profit margins may try to squeeze their existing plans a bit more.

And over the past year, some have even brought on new equity partners to move projects forward — like Jorge Pérez’s Related Group joining the development team behind the Bahia Mar mixed-use project in Fort Lauderdale. But less of that is happening now. 

“What the buyers are asking the brokers now is ‘tell me the truth.’”

Craig Studnicky, ISG World

J.C. de Ona, a regional president at Centennial Bank, said construction costs are beginning to settle. But Craig Studnicky, CEO of ISG World, said the cost of materials like concrete and steel is still rising. 

“You haven’t seen a huge downtick in pricing, but some projects are rebidding out some trades and costs are coming in lower,” de Ona said. “There was a period of time where you were given a price and it wouldn’t hold.” 

Securing larger construction loans will remain a bigger struggle. One developer, who wished to remain anonymous, said that he and his partners “never anticipated interest rates going crazy” the way they did. 

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Most projects that launched sales before the pandemic arrived or shortly after didn’t factor in supply-chain issues and dramatic cost increases, which means they may be taking a bigger hit than projects launching sales today. 

PMG and E11even partners added units to at least one of their projects, E11even Residences Beyond. In late May, they closed on a $262 million construction loan from New York-based Madison Realty Capital around the same time they expanded their development site footprint. The developers had already received a nearly $150 million construction loan for the first tower, E11even Hotel & Residences Miami, a year prior. 

The 449-unit E11even Hotel & Residences Miami sold most of its units quickly after launching sales in early 2021. The second, previously planned as a 461-unit condo tower, will now include more than 550 units, give or take. It was more than 90 percent presold when the developers amended their plans to add more units and amenities to the building.

The developers held a ceremonial groundbreaking in 2021, what some might deem a “fake groundbreaking,” but held off on sharing delivery dates early on. 

Construction will soon go vertical on the first tower, and that building could be completed by the end of 2025. The second building could be completed by the end of 2026. 

“Tell me the truth”

Delivery dates promised by real estate agents in a glossy sales center and those printed in ads or other marketing materials don’t always match up with what’s on a contract. That’s not new. But some buyers have been especially frustrated with a lack of updates and communication from their developers. 

“Most Americans who are moving here are moving here now. They can’t wait five or six years,” Studnicky said. “What the buyers are asking the brokers now is ‘tell me the truth.’” 

Studnicky tells his agents to use Aston Martin Residences as a guide for realistic timelines. The nearly 400-unit, 66-story waterfront luxury condo tower is in its sixth year of construction and is now expected to be completed by the end of the year. It faced an extra hiccup: Edgewater Construction, a stucco and drywall subcontractor working on the skyscraper, filed for bankruptcy in March, creating an additional delay. 

Still, as with other projects in the pipeline, presales are strong. A spokesperson for the developer, G&G Business Developments, said Aston Martin is 98 percent booked. 

Some developers have built price increments into the contract, which means that buyers are responsible for the cost of some supplies increasing. 

“Certainly, all of us are having significant issues with getting the cost of construction under control.’”

Edgardo Defortuna , fortune international group

“We don’t because we feel a buyer needs to know exactly what the unit is going to cost at the end of the day,” Hernandez said, adding that his firm will end up absorbing some of the increases. “It’s business.” 

Studnicky and others believe buyers in Miami will shift their search from new developments to existing condos or homes or projects already in the vertical stage of construction. 

“A lot of the sales pitch is being shifted toward investment sales,” Studnicky said, referring to new developments. The theory is that investors are in less of a rush. 

For buyers who can afford to wait, they stand to benefit once a building is completed. 

“Some buyers, especially if they bought with dates in mind of having to move to Miami, may have an issue, but in general terms they’re happy because the prices have significantly gone up since they bought,” Defortuna of Fortune said. 

Hernandez of Newgard agreed. 

“Where are you going to buy?” Hernandez said. “It isn’t like [buyers] have another option.” 

Developers and brokers stressed that these are all temporary issues. They’ll be able to ride out the current environment when interest rates and construction costs come down, possibly in 2024. 

But it all comes down to timing. 

“If all of this doesn’t get resolved quickly, we could become a victim of our own success,” Studnicky warned. “Then it becomes too expensive, and momentum slows way down.”