Supply chain issues — not oversupply — could slow Miami’s condo boom
Demand is there. Can developers deliver?
Financing is plentiful, buyers are signing contracts with nonrefundable deposits, and developers in South Florida are keeping their sales launches rolling and their condos selling.
Miami’s condo market, known for its booms and busts, is in the middle of a big boom that would typically be threatened by, inevitably, an oversupply of condos. But the dreaded trio of supply chain breakdowns, rising costs and labor shortages poses the greatest hazard.
To offset rising construction costs and prepare for supply chain-induced shortages, some contractors and developers are purchasing materials and storing them in warehouses earlier, or modifying sales contracts to account for changes to materials and appliances. Those measures may be more widely adopted now that a land war in Europe, and some of the toughest financial sanctions against Russians in generations, threaten to disrupt supply chains even further.
“You never know how long [the hot market] is going to last,” said Property Markets Group developer Ryan Shear. “But I think for the foreseeable future, it’s a great time to be in Miami.”
Developers have focused on feeding the surging demand for new housing. Less than a year into the pandemic, once it was clear there would continue to be plenty of buyers for new condo developments, developers started unveiling projects quietly — via friends-and-family campaigns and through small groups of brokers. But there will be a yearslong lag between now and when those projects are completed.
“Construction prices are out of control, and supply chain issues are really problematic,” said Suzanne Amaducci-Adams, a Miami attorney who heads the real estate practice at Bilzin Sumberg.
In 2021, PMG and E11even Partners launched sales of both phases of their nightclub-branded, amenity-heavy condo towers in a less-than-glamorous part of downtown Miami. The first phase almost sold out within two months. By November, the developers had begun construction, and in February they secured construction financing for the first tower.
After years of staying quiet about its condo projects, waiting for demand to return, PMG kicked off sales of the Waldorf Astoria Residences Miami, which could be the city’s tallest residential tower at 100 stories, with its partner Greybrook Realty Partners.
Shear said PMG is “moving as quickly as possible” and that in a “perfect world” the developer would go vertical on four of its six Florida condo projects this year.
“That’s half of the equation. The other half is delivering. That’s where you’ll see developers or builders struggle,” Shear said. “Not only can they sell it, but can they deliver it?”
Developers — both old and new — have been propelled by the hot residential market. Home and condo sales grew exponentially over the past two years, sparking bidding wars and multimillion-dollar flips, as out-of-staters flocked to Florida.
Related Group began selling projects across nearly all price points throughout the tri-county region.
In Miami, District 225, an Airbnb condo building Related is building with ROVR Development, is fully sold after beginning sales last summer, said Jon Paul Pérez, president of Related. There’s been a jump in condo projects with hotel or short-term rental components, which are clustered throughout Greater Downtown Miami. In that area, there are 15 such developments that will add over 4,400 units to the area, according to ISG World’s Miami report.
Related also recently secured 100 reservations within a week of launching a similar short-term rental-friendly building at Miami Worldcenter in partnership with Merrimac Ventures.
With new branding, Related’s projects that were canceled during the last cycle are now selling, including Casa Bella Residences by B&B Italia that Related partnered with Alta Developers to build (on the site of the Auberge Residences project that was canceled in 2016).
And more are planned. Of Related’s 12 condo projects in the pipeline totaling about $5.6 billion in expected revenue, the firm plans to begin sales of new projects in Wynwood, Bal Harbour, Hillsboro Beach and Fisher Island, Pérez said.
Still, supply chain problems and increasing construction costs are some of the biggest challenges Related faces, Pérez said. Construction costs are increasing 10 to 15 percent every month, he said in December.
“Sometimes you’re just not stronger than the market at the time,” Pérez said.
For now, the rise in construction costs has been offset by the increases in apartment rents and condo prices, developers say. Carlos Rosso, a co-developer of the Standard Residences, said he’s raised prices of some units by 15 percent since launching sales late last year.
Labor costs also are a major issue for contractors, who are trying to maintain a qualified workforce that can deliver these developments. Over the next two years, the construction industry will need to hire 2.2 million workers to keep up with housing demand across the U.S., according to a report from the Home Builder Institute. Workers fled the industry during the last recession, and many didn’t return.
“The labor pool has not been the same since 2008,” said Kathleen Romero, regional business development director at Skanska.
The list of potential headwinds for developers comes at a moment of extraordinary market strength. The pandemic accelerated major life changes for hundreds of thousands of people who ended up moving to Florida.
The rapid increase in the sales of single-family homes — many to out-of-state buyers — and the subsequent surge in prices fueled the condo resale market, which was struggling prior to Covid.
In 2019, developers of new projects were dealing with a glut of luxury condos, but less than two years later, the market did a complete 180.
“The numbers don’t even look right,” said Ron Shuffield, president of Berkshire Hathaway HomeServices EWM Realty, referring to the huge annual increases in residential sales.
Shuffield, who refers to single-family homes as “collectors’ items,” pointed to the Brickell market as an example. In the financial district of Miami, which was the center of the last condo bust, about 3,300 condos sold in 2021, making it the top neighborhood in the city last year.
Countywide, over 25,000 condos sold last year, up 78 percent compared to 2020 and up 69 percent compared with 2019, according to the brokerage’s data, which cites the Multiple Listing Service.
After selling out the Mr. C Residences luxury condo tower under construction in Coconut Grove, Terra converted plans for the second building into condos from rentals, said David Martin, CEO of Terra.
“There is really a restricted supply in our market,” he said. “Demand has been continuous, but over the last year we’ve really seen a strong push.”
Martin pointed to hurricanes in Louisiana that disrupted the supply chain of PVC products.
“We’ve tried to make as smart decisions as we can on pre-purchasing materials. Supply is really the answer that will normalize pricing,” he said. “That’s where our biggest challenge is going to be.”
For most projects, developers are still requiring 50 percent deposits, although some will go as low as 30 percent. And unlike the situation in previous cycles, the majority of buyers are domestic, though foreign buyers are still present, developers and brokers say. Both points propel developers to keep building.
Attracting more domestic buyers is something “we’ve been talking about … for a long time, and it’s always been on the wish list,” said Vanessa Grout, who leads sales for Vlad Doronin’s OKO Group. “The majority of qualified buyers are flocking to Miami.”
OKO and its partners are almost out of unsold units at two new condo developments, Missoni Baia in Edgewater and Una Residences in Brickell, with a combined expected sellout of well over $1 billion, Grout said.
Depending on their contracts, developers can only lock in pricing once they sign the guaranteed maximum-price contract with their general contractor, which Pérez of Related said is typically about three months before construction is set to begin. But many are stockpiling materials and appliances in warehouses, ordering them a year in advance to ensure they will be ready to go instead of stuck at the Port of Miami. There’s at least a year’s delay on Sub-Zero refrigerators, one developer said.
And there’s only so much compromising that general contractors can do to remain profitable.
Holland & Knight attorney Missy Turra said the delays are a major concern for developers of high-end condos, who promise “model-ready” units to their buyers, as well as for the buyers themselves.
“They’re not really thrilled when there’s months and months of delay in delivering,” she said.
The cost increases are already being built into single-family home sales contracts between homebuilders and buyers. That means buyers are agreeing to pay a price that may not be fixed.
“We have addenda that basically say if our price for lumber, etc. goes above ‘x,’ either the developer/seller has the right to terminate or pass that cost onto the buyer,” creating more of a “ballpark purchase price,” she said. “The price is supposed to be a basic element of the contract.”
Rising land costs
Developers also are paying sky-high prices for land, whether it’s undeveloped property or aging condominiums along the ocean.
One example: The Melo Group recently paid $105 million, or close to $70,000 per buildable unit, in cash for a full block of land north of downtown Miami where the firm plans a residential project. That’s about 40 percent higher than what the Kushner Companies paid per buildable unit for a property with the same zoning in Edgewater in a deal that went under contract at that price more than two years ago, said broker Joel Rodriguez of Global Investments Realty, who was involved in the Melo deal.
Developers are even selling properties they planned to develop, because buyers are willing to pay so much. Shoma Group and Related sold the last undeveloped piece of land at Park Square at Doral to Lincoln Property Company, an out-of-state apartment developer, in December for $16 million.
“I don’t think we’ve ever seen land trade at the pricing we’re seeing in South Florida,” Turra said. “Where does the spinner stop?”
Camilo Miguel Jr., CEO of Mast Capital, is working on a number of condo buyouts of older properties, on top of luxury rental developments on the Miami River and in other parts of Miami. With the backing of Mast Capital’s institutional partners, the company has been able to finance huge land sales in Miami Beach and Brickell.
In Miami Beach, Mast is partnering with Starwood to develop a site into a boutique condo designed by Rem Koolhaas’ OMA. A Mast Capital affiliate paid more than $100 million for the property.
“There’s a lot of opportunity there in that space,” Miguel said, referring to pricey condo buyouts.
Mast Capital also bought a large site in Brickell where the firm plans to build 400 condos and 850 rental apartments alongside Rockpoint Group. If all goes according to plan, the Brickell project could have a $1 billion condo sellout.
Once they launch sales, developers and brokers are just hoping to capture as many buyers as possible, even if that means selling out before the sales office is completed and open. Who actually delivers is another question.
“If you think about it, after the 2009, 2010 recession, there were definitely some developers or contractors who left Florida,” said Turra, of Holland & Knight. “What’s great for some may not be great for others.”