Downtown Miami’s once overheated condo market will continue cooling off this year, according to a new report from the Downtown Development Authority.
The Annual Residential Market Study Update, prepared by Integra Realty Resources, found that sales activity last year dipped substantially when compared to the growth seen in 2014. Combine that with a glut of condos in the pipeline — 28,893 units in total, up 5,619 units from the last year — and downtown Miami’s condo market is bound to lose the pace it gained over the past two years.
Part of that slowdown is already evident in the reservations section of the condo pipeline. Units taking contracts or reservations fell by 42 percent at the beginning of 2016. Most of that dip is thanks to pre-construction reservations, which fell to only 207 units from the 1,598 seen last year.
Another byproduct of slower sales: developers whose projects were less than 80 percent sold lowered prices for units by 5 percent to 15 percent. Even South Florida’s most prolific condo builder, the Related Group, has lowered deposits on several of its downtown projects.
The reason downtown Miami is losing its steam is because foreign investment, a major driver for the market, has fallen off due to worsening global economies.
“At the early stages of this cycle, South American capital was extremely strong versus the dollar and represented significant purchasing power for South American buyers using foreign currency to purchase pre-sale units that were being sold in U.S. dollars,” the report said.
However, the U.S. dollar has made substantial gains against foreign currencies over the past year, diminishing the value of purchasing U.S. real estate to key buyer pools like South Americans.
The Brazilian real, for example, lost roughly 41 percent of its purchasing power in U.S. dollars last year compared to 2014. Today, a Brazilian real is worth 25 U.S. cents. Those figures were mirrored in other countries like Colombia, Argentina and Russia.
That affected pre-construction sales in particular, according to the report, as new projects saw activity fall as much as 50 percent.
An interesting note from the report is that units currently under construction are cheaper on average than those still in pre-construction. It costs $615 per square foot on average to buy a unit under construction, compared to $706 per foot at a project that hasn’t broken ground yet.
While sales activity has suffered, rental rates have continued growing. All of Greater Downtown Miami’s submarkets — Brickell, the Central Business District, Edgewater and the Arts & Entertainment District — are commanding rents in excess of $3,000 a month. Edgewater in particular has seen a 9 percent appreciation in rents year-over-year, with asking prices now averaging $3,450 a month.
But the report said new rental deliveries will likely halt that appreciation. A total of 880 rental units were delivered last year, and 4,145 are under construction in the downtown area with another 8,620 units proposed.
Those new units, combined with condos being used as rentals, will likely keep rents in the downtown area from ballooning.
“The over-arching theme at the conclusion of 2015 was that presale activity, traffic, and contract sales were not nearly as strong as the close of 2014,” the report said. “As forecast during our periodic market updates, this forced some projects back to the drawing boards or off-line temporarily, and the overall result by year-end 2015 was that the total number of projects taking reservations and in contracts shrunk by 42% year over year.”