Is bulk buying of distressed assets dictating market prices?

Part two — Developments fail, banks follow, the blood begins flowing.

The trigger to the increasing velocity of recent bulk deals of South Florida real estate assets is the culmination of a chain of events in this historic boom/bust cycle.

Florida’s population is decreasing. Unemployment has more than doubled and continues to increase. According to the Clerk of Courts in Miami-Dade, Broward, and Palm Beach counties, foreclosures have multiplied exponentially to a projected 200,000 filings in 2009.

Pre-construction deposit holders on condominium units are canceling closings on completed units in the thousands. Project scale foreclosures and lawsuits between lenders and developers are accelerating. Buyers seeking refunds of deposits are jamming the court houses and creating a cottage industry for law firms.

Some of the most highly touted condo projects that had previously reported 100 percent sellouts of units during construction now sit finished, but primarily vacant. Many other projects, like Tao in Sunrise and Icon Brickell in Miami, are literally ghost towers.

Since the start of 2008, over 120 banks have failed, primarily due to failed real estate loans. Currently, there are 411 banks on the FDIC’s at risk list that could portend 200 more failures in 2009 and 2010. 

Recently, lenders and receivers in charge of failed assets have sharpened their pencils and accepted offers that previously had been considered unthinkable.

Fifteen of the state’s 28 bulk multi-family transactions have taken place in South Florida in the last 12 months. The deals have been relatively small in size, involving only 10 to 151 units each. Only one large-scale private equity firm, Lubert-Adler, has made an acquisition. Two acquisitions involved construction note purchases with the new buyer offering a “friendly foreclosure” to the developer to take control of the underlying asset. Chicago-based Laramar Group utilized this strategy to purchase the failed condo conversion Villa Ocean, across from the beach in Boca Raton, acquiring the note for $32 million.

Bulk unit condo prices recently recorded on South Florida tax assessor Web sites have ranged from a low of $144 per square foot for 141 units at the Whitney in West Palm Beach, to a high of $324 per square foot for 15 units at Artech in Aventura.

Downtown Miami prices have transacted from $126 per square foot for 63 units at the Brickell Station project, to a high of $246 per square foot for 146 units at 50 Biscayne.  

Of particular note are a few recently completed transactions:

Corus Bancshares, a Chicago-based major condo construction lender in South Florida now under the Federal Deposit Insurance Corp., has recently sold a series of units in one project and a construction loan on another at a reported 60 percent discount. New York-based Melohn Properties purchased the note on the Caribbean Miami Beach condo Aug. 19. Corus has 14 project loans in South Florida with note face values of over $1.2 billion. Twelve of the fourteen are currently in default.

The Miami Herald reported the receiver of WCI Communities, now resurfacing from Chapter 11 Bankruptcy, sold 51 units in the One Bal Harbour condo-hotel tower for an average of $63 per square foot to two area investors. A handful of units had previously closed at $1,100 per foot. 

In a positive sign that bulk sale quick flips for big profits are possible, two separate investors purchased different packages totaling 111 units in the Fontainebleau III condo-hotel project and the Harbour House condo conversion. Both investors have re-sold a combined 46 units at more than 50 percent profit.

As banks and builders continue to fail through 2010, the distressed market will continue to be the driver of real estate values in South Florida. Opportunities are increasing for savvy buyers with cash, from the individual investor to the largest of funds in the next 24 months.

Next up: South Florida foreclosure forecast 

Jack McCabe is CEO of McCabe Research & Consulting in Deerfield Beach, Fla. He is an independent real estate analyst and consultant to major developers, lenders, and investors.