Bulls and bears debate: is another bust imminent in SoFla?

Downtown Miami and Peter Zalewski
Downtown Miami and Peter Zalewski

To more accurately gauge the future, it is often suggested that one need only reflect back on the past.

As South Florida labors through the fifth year of this current residential real estate cycle that began in 2011, a variety of mixed messages are beginning to surface about the state of the market east of I-95 in the tri-county South Florida region of Miami-Dade, Broward and Palm Beach.

Bulls and bears are debating whether another bust is imminent for South Florida.

On the bull-market front, real estate brokers, developers and promoters are quick to point out that today’s South Florida preconstruction condo market is based on hefty deposit commitments of as much as 50 percent of the contracted presale prices.

Few, if any, preconstruction condo unit buyers are expected to forfeit such significant amounts of money out of fear about the future of the market, the bulls contend.  

During the last cycle, developers only required about 20 percent deposits on preconstruction condo units.

In the end, an untold number of buyers — thanks to nondisclosure agreements required by developers ended up sacrificing some, if not all of their deposits, rather than following through with acquisitions of condo units at presale prices that were significantly higher than the going-market price at the time of the completion of the various projects.

The industry supporters are also quick to repeat the Greater Miami Chamber of Commerce talking points that South Florida has a rapidly growing population, desirable weather and a geographic advantage for people and businesses who are trying to connect North America with Latin America and the Caribbean.

Added to this, South Florida real estate prices are significantly less than the levels being paid in other key global markets around the world, including Hong Kong, London and New York City.

Based on all of these factors, South Florida is well positioned to avoid another condo bust like the one endured between 2007 and 2010, the bulls contend.  

The bear-market believers counter that South Florida has more new condo units — nearly 50,800 and counting — in the pipeline now than during the dramatic boom-bust cycle of 2003 to 2010 when nearly 49,000 units were created east of I-95 in the largest cities in Miami-Dade, Broward and Palm Beach.

Bears also contend that South Florida’s growing amount of existing condos on the resale market are sure to drag down prices as sellers eventually flinch in hopes of unloading their units at a time of mushrooming supply.

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As for the South Florida economy, those individuals in the bear-market camp contend the region still does not have a major employment driver that can substantiate the purchase and rental prices currently being sought today.

Given the current market conditions, calls for affordable housing are growing increasingly louder in South Florida.

As market watchers attempt to predict the future of South Florida’s condo market, here are a few factors that could impact the ultimate path:

Buyers of preconstruction condo units are generally risk takers who “buy on the rumor” of what a project could ultimately become once completed, in hopes of purchasing at the lowest possible price.

Waiting for a couple of years for a new condo tower to be built before actually purchasing a unit means having to pay a premium, which is not good for a profit-minded speculator.

As a result, an untold number of buyers have entered into presale contracts for units in which they do not live, but rather plan to resell. For many of these buyers, the contracts were signed at a time when South Florida real estate prices and the value of the U.S. dollar against many foreign currencies was far lower than today.

As a number of new units come online, some of these buyers will be faced with the financial dilemma of having to come up with the remainder of the outstanding balance on their contracted units currently being constructed, at a time when the global economy is sputtering. Talk of the United States entering a recession in the second half of the year is only working to create more concern about the outlook, as banks gradually increase their lending for condo units.  

As of April 25, more than 4,900 units have already been completed and an additional 14,700 units are currently under construction in South Florida since 2011.

Added to that, more than 31,000 units are currently in the planning and presale phase of development.

No one knows the future of this current condo cycle but many are aware of South Florida’s well-documented history of booms and busts.

The unanswered question going forward is which analysts will be focusing their time on tracking South Florida’s condo market in the months and years ahead as this is my last column for The Real Deal Miami after nearly three years.  

Peter Zalewski is a 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.