Avoiding a price correction in Edgewater condo market

Peter Zalewski is a real estate market consultant, non-practicing licensed real estate broker and columnist for The Real Deal who now answers reader questions about the South Florida real estate market in a new weekly Friday column. Questions and comments can be sent to southfloridanews@therealdeal.com. The TRD editors will choose which submissions will be addressed.

Question: You have written about the signs of oversupply in resales while there is now so much new construction east of I-95. We are interested in relocating to the Edgewater neighborhood of Greater Downtown Miami in a few years. Do you feel there will be a price correction in 15 months, when the buyers need to close on their properties? Will the higher-end projects be less susceptible to this possible correction?

Forecasting the future of the South Florida condo market is a difficult task given the various unknowns, which range from economic and social volatility in Latin America to the availability of financing for new construction and buyer purchases, that must be factored in when making such a prediction.

Despite the inherent risk – and likelihood – of being wrong, I am willing to attempt to answer these questions based on the information available today.

First, it is important to understand that the Edgewater neighborhood of Greater Downtown Miami is situated on the east side of Biscayne Boulevard stretching from Northeast 17th Terrace – the north side of the former Omni International Mall – to the Julia Tuttle Causeway just past Northeast 36th Street.

In this 19-block long stretch of primarily antiquated single-family houses and rundown apartment buildings, developers are proposing at least 13 new condo towers with nearly 3,800 units in a variety of projects with names such as Bay House, ION East Edgewater and Paraiso Bay.

As of Thursday, one new condo tower has already been built and three more towers are under construction. The other nine planned condo towers are in the presale process.

Some of the biggest names in South Florida condo development are attempting to build projects in Edgewater. The Related Group – South Florida’s most prolific vertical residential developer – is there. The Melo Group, which built the first new condo tower since the 2007 real estate crash, is also there.

Edgewater has also attracted some developers who have limited experience building condo towers in Greater Downtown Miami, including the Russian mining oligarch Oleg Baybakov and West Palm Beach’s Eastview Development.

The variance of experience levels among the developers of Edgewater condo towers is a factor that must be considered, given that most projects are requiring a 50 percent deposit commitment when purchasing preconstruction units.

Edgewater accounts for 58 percent of the nearly 6,500 new condo units announced for the Biscayne Boulevard Corridor, which stretches from the MacArthur Causeway north to the Julia Tuttle Causeway, and Biscayne Bay west to I-95, according to the preconstruction condo projects website CraneSpotters.com. (For disclosure purposes, my firm operates the site.)
Overall, Edgewater represents nearly 22 percent of the 17,400 new condo units proposed for the Greater Downtown Miami market.

The only neighborhood in Greater Downtown Miami where more new condo units are going up than the Edgewater neighborhood is a 12-block stretch of South Miami Avenue – leading up to the Brickell City Centre project – where developers have announced at least 16 towers with nearly 5,400 units and counting.

The mean minimum asking price for units in the proposed condo towers slated for Edgewater is less than $475 per square foot as of June 6, according to the latest Developers Pricing Survey by Cranespotters.com.

Compare this with the Greater Downtown Miami market, where the mean minimum asking price is about $535 per square foot for preconstruction units. Aside from the new condo towers proposed for Edgewater, nearly 350 units are on the resale market at an average asking price of about $440 per square foot, according to the Southeast Florida MLXchange.

In the first five months of 2014, buyers acquired about 162 condo units at an average price of $382 per square foot in Edgewater.

At the 2014 pace of about 32 condo resales monthly, Edgewater has about 10 months of resale inventory. A healthy market has six months of inventory. More months of inventory suggests a buyer’s market, and fewer months reflects a seller’s market.

By comparison, nearly 2,150 condo units are up for resale in Greater Downtown Miami at an average asking price of more than $485 per square foot.

Between January and May, buyers acquired less than 850 condo resales in Greater Downtown Miami at an average price of $400 per square foot. Greater Downtown Miami now has about 13 months of condo inventory available for purchase.

For value-conscious buyers, the research suggests Edgewater is selling units – new and existing – at prices below that of the overall Greater Downtown Miami market.

On the rental front, landlords in the Edgewater neighborhood are asking an average price of $2.55 per square foot monthly for less than 100 units available for lease. In the first five months of the year, tenants leased nearly 350 residential properties at an average monthly price of $2.25 per square foot.

Edgewater has about one month of rental inventory available.

Compare this to Greater Downtown Miami, where tenants leased nearly 2,400 residential properties at an average price of $2.34 per square foot monthly. Nearly 1,000 residential properties are currently on the market for rent in Greater Downtown Miami at an average price of $2.65 per square foot.

Greater Downtown Miami has about two months of inventory based on the number of leases completed in the first five months of this year.

Stats aside, Edgewater is a market in transition. Practically every existing structure in the area has enjoyed a bump in pricing in recent years, as developers scour the market for teardown possibilities that can be assembled for a large vertical project.

As a result, Edgewater is in the early stages of its transformation into an affluent neighborhood, so the early buyers in this market are generally in line to achieve attractive prices and great water views of Biscayne Bay.

The tradeoff is, Edgewater is not as conducive for a walking lifestyle compared to the far more developed Brickell area, where shops, restaurants and nightlife are conveniently located.

The unanswered question going forward is whether condo developers in Edgewater will continue to incentivize buyers in the form of attractive prices and water views as the market heats up in the months and years ahead. The developers that do offer a value proposition in Edgewater are likely to have successful projects with limited risk for price corrections. As for developers in Edgewater who attempt to achieve Brickell pricing, the potential for a recalibration will likely be much greater in the future.

Thought Of The Week:

Foreign investors were credited with not only helping the South Florida condo market recover from the last boom-and-bust cycle but for stepping up as the primary buyers driving this preconstruction boom.

It is against this backdrop that the South Florida market is closely monitoring the American Airlines decision to slash daily flights from Miami to Venezuela by about 71 percent beginning July 1, according to Bloomberg.

American Airlines, which has not been able to transfer $750 million back to the U.S. from the South American nation, plans to reduce the service between Miami and Caracas from 28 flights a week to only eight. The airline’s service between Miami and Maracaibo is slated to be decreased from seven flights a week to only two flights.

American Airlines is one of about a dozen carriers to decrease or cancel service to Venezuela in recent months, according to Bloomberg.

“The airlines are hamstrung by Venezuela’s strict current controls, which prevent them from repatriating earnings from tickets sold in the country without government authorization,” according to the report.

Buyers from Venezuela accounted for about eight percent of the estimated $6.4 billion in international purchases in Florida last year, according to Florida Realtors. For Venezuelan buyers, Miami-Dade County is the location where 62 percent of their transactions occurred in 2013.

Venezuelan investors opted for condos and townhouses for 55 percent of their residential transactions in Florida.

Peter Zalewski is real estate columnist for The Real Deal who founded Condo Vultures LLC, a consultancy and publishing company, as well as Condo Vultures Realty LLC and CVR Realty brokerages and the Condo Ratings Agency, an analytics firm. The Condo Ratings Agency operates CraneSpotters.com, a preconstruction condo projects website, in conjunction with the Miami Association of Realtors.