South Florida had better hope the lessons learned from the last condo boom-and-bust cycle that devastated values, destroyed developer reputations, and damaged lenders’ balance sheets will be remembered – and adhered to — in the next few quarters of the current market run-up.
Clear-headedness about the Great Recession could prove crucial, especially for the veteran players of a gamble whose repercussions are still being felt.
Two-thirds of the more than 21,800 new condo units proposed for coastal South Florida are slated to be developed by individuals and groups that built during the last cycle, which ended with a spectacular crash in values in 2007, according to an analysis of Condo Vultures’ preconstruction condo project website, CraneSpotters.com.
Many of today’s developers were stuck with unsold new condos – both recently completed and still under construction – when the real estate market began to unravel five years ago, some even taking hits to their personal wealth.
The current fervor for preconstruction distorts the not-too-distant past, when developers were suddenly unable to compel buyers – many of whom were speculators making deposits on multiple units during the boom – to close on their contracts, notwithstanding 20-percent cash deposits down.
In a market spiraling downward, developers were forced to play a kind of real estate Hunger Games, competing for a scant supply of buyers and loans. Many of the same developers who today are commanding record prices for luxury preconstruction were forced back then to slash prices, offer incentives like cash allowances for interior design and even release buyers from multiple contracts if they agreed to complete even one deal.
When all else failed, developers were compelled by the courts to negotiate a workout with lenders or else hand the condo units over.
Often times, though, it never came to that. In order to repay the construction loans, the developers who opted to work with their lenders were permitted to collect fees associated with managing the buildings and broker sales of the remaining units, albeit at less lucrative margins.
Edgardo DeFortuna’s Fortune International had to drop prices at Jade Ocean from more than $1,000 per square foot to an average of less than $715 per square foot, according to county records.
Similarly, Jose Ardid’s Key International was forced to slash prices to offload the 530 units at Mint, a tower on the north bank of the Miami River. With presales at $600 per square foot, it took Ardid nearly four years to sell out, with average prices failing to reach $320 per square foot.
Even after original buyers paid as much as $850 per square foot at 900 Biscayne Bay in downtown Miami, David and Pedro Martin’s Terra Group ultimately sold off the units for an average $445 per square foot, records show.
Improving market conditions have attracted a host of international builders with extensive resumes overseas but limited histories in South Florida.
The question going forward is whether South Florida developers, lenders, and buyers will remember the lessons – and pain – of the 2007 market crash even if the good times return to South Florida’s real estate market in the quarters ahead.
Peter Zalewski is a real estate columnist for The Real Deal who founded the real estate consultancy and publishing company Condo Vultures LLC in March 2006. His analytics firm Condo Ratings Agency operates CraneSpotters.com in conjunction with the Miami Association of Realtors.