The Real Deal Miami

The spec home slowdown

Developers of decadent mansions are hitting pause on new projects as buyers increasingly take their time to commit, but a lower price point remains a sweet spot
By Ina Cordle | September 20, 2018 11:00AM

Brett Palos’ 13,000-square-foot waterfront spec mansion on Miami Beach’s Sunset Island II has been on the market for more than six months, priced at $26 million.

Even in Miami Beach’s ultraluxury, waterfront spec home market — where houses once moved into contract at a feverish pace — it’s possible to have too much of a good thing. It’s the latest sector of the South Florida market to slow down, with new houses taking longer to sell and developers holding off on buying their next parcels.

That means less product in the spec mansion pipeline, and — in many cases — price reductions, developers and brokers said.

Nelson Gonzalez of EWM Realty International estimated that there are about 10 to 15 ultraluxury Miami Beach spec homes on the market now, compared to at least 25 in 2016. “There are not a lot of developers starting new construction as of today,” the broker said. “My sense is that the developers that started homes a couple of years ago are finishing up what they started and putting them on the market, and hopefully selling them.”

Some asking prices are falling and deals can be made, he said. “It is cyclical,” Gonzalez added. “But we are toward the bottom of the cycle and I think in the next year to two years, prices are going to start going up again.” The broker said developers that start building today “will benefit greatly” because of the reduced pipeline.

Gonzalez has had the $18.95 million listing for New York developer Peter Fine’s 6010 North Bay Road mansion since January. Fine, who heads To Better Days Development, which focuses on the Miami Beach waterfront market, also completed 6440 North Bay Road. Though it’s not currently listed, that home has been on and off the market since 2015, initially asking $30.5 million and later $29 million, then $26.95 million. Fine also owns a property at 6342 North Bay Road, which is not yet under construction. He did not respond to requests for comment, but Gonzalez said that like other developers, he is waiting to sell and then will start developing again.

High-end spec home developer Brett Palos is also hitting the brakes. His 13,000-square-foot waterfront spec mansion on Miami Beach’s Sunset Island II has been on the market for more than six months, priced at $26 million. That’s a particularly long time because, he said, he usually sells his homes shortly after completing them, or even before they are finished. The home, at 1600 West 25th Street, has drawn plenty of interest, but no one has yet pulled the trigger, Palos said.

“It’s a slowdown in any urgency people might have had to be a buyer,” said Palos, who heads Brett Palos Investments. “Before, they wanted it before anyone else got it. Now, they appreciate the fact they have more time. They come again and again. There are a lot more third and fourth viewings.”

Buyers of the new, modern, multimillion-dollar mansions are mostly what Gonzalez calls “domestic tax refugees” from places like New York, New Jersey, Connecticut, California and Illinois — states that have an income tax.

Palos is in the midst of completing an 8,000-square-foot waterfront spec home at 5712 North Bay Road in Miami Beach, which will be priced at $16 million or $17 million when it is finished early next year.

He said that at this point he would normally have already purchased another piece of developable land to start his next project, as he likes to have one home completed and ready to sell, one under construction and another in the planning and permitting stages. In that way, he usually sells two homes a year.

But this year is different. “The cycle is going to be slower,” he said. “So when I sell [the Sunset Islands home] and the next one, I won’t have stock for 18 months,” he said.

By that time, he figures, there will be fewer spec homes on the market and more urgency from buyers.

Penciling out a profit

While Gonzalez sees some prices going down, spec developers — with their eagle eyes on profit margins — are loath to offer deep discounts. Builders measure the cost of buying land and construction costs against their desired profit margin of between 30 and 50 percent, and some, like Palos, say they can’t budge on pricing.

“Where people want something, the prices are holding up,” he said. “I haven’t reduced prices, and I haven’t managed to acquire any land that would enable me to produce homes at a different price point.”

Palos said he has tried to buy developable waterfront land, but the prices are too high to be feasible, with costs for design, construction and high-end finishes at upwards of $800 per square foot.

“There’s not too much profit in the business today — we either need to see land prices coming down or finished asset prices going up, because the cost of construction is not going down,” he said. “I got less for the last house I sold per square foot, and I will probably get less for this one than I sold prior. So prices have not gone up in the high end in the last three or four years, but costs have, so it makes it difficult.”

For now, Palos is focusing more of his time developing properties in Europe, though he owns a home on La Gorce Island and said he loves Miami Beach. “I’ll continue to put money into Miami Beach if I can, but it has to be the right circumstances, and at the moment I haven’t come across the circumstances that I am chomping at the bit to put another $20 million into a spec home,” he said.

Developer Ramin Aleyasin, who has focused on waterfront properties on the Venetian Islands, is less concerned about a slowdown. Aleyasin works on one to three spec homes a year, usually completing the process — from demolition of the previous home to completion — in six to eight months.

“If you buy it right and build it right and the location is right — you have to design, build and stage it right — and you do all of that, the market should not affect you as much,” claimed Aleyasin, of Ramin Designs + Development. “You should be able to offload properties.”

He is currently finishing 500 West Dilido, which will be priced between $14 million and $15.5 million and listed with Gonzalez. The broker also partnered on the development and handled the listing for Aleyasin’s spec home at 705 West Dilido, which sold for $4.25 million in March, before it was finished.

He and Gonzalez are also now under contract to buy a home on San Marino Island in the Venetians with plans to tear it down and build on spec. “I think
Miami Beach is extremely undervalued and underpriced,” he said, offering an opinion that some watching the market might disagree with. Waterfront spec homes are selling for $2,200 to $2,600 per square foot, but Aleyasin thinks the range should be up to $4,000 or even $5,000 per square foot in the next five years.

The challenge he sees is a shortage of bayfront tear-down homes on the Venetian Islands that he considers priced right. Prices are currently $4.2 million to $6 million for a 10,500-square-foot lot, depending on whether it is east- or west-facing and its proximity to a bridge.

Ami Shashoua, a tech entrepreneur-turned-spec mansion developer, also plans to continue acquiring and building. His 14,500-square-foot spec home and guest house at 6360 North Bay Road, built by Todd Michael Glaser, has a total of 12 bedrooms and 18 bathrooms and is almost completed. It will hit the market this fall at $32 million.

Shashoua, who sold his tech company Qpay in 2010, sees spec home development as a hobby. “I like the idea of building something,” he said. The slow market doesn’t scare him. In fact, he’s confident enough in the market dynamics that he may not wait for 6360 North Bay Road to sell before he buys more waterfront property. “By the end of the year I will buy one or two more properties in Miami Beach and build more spec homes,” he said.

Peter Fine’s 6010 North Bay Road has been listed for $18.95 million since January

Aside from his home for Shashoua, Glaser is developing spec homes in both Palm Beach and Miami Beach. He is partnering with Stuart Miller, Lennar Corporation’s former CEO and current executive chairman, to build a 27,000-square-foot mansion at 22 Star Island designed by Domo Architecture + Design. The project, expected to be completed in seven months, will be priced at between $69 million to $79 million. Glaser has two more homes under construction in Miami Beach, one at 1635 West 22nd on Sunset Island IV and another at 119 East Second Court on Hibiscus Island.

Spec for less

Meanwhile, the market for “regular” luxury — nonwaterfront spec homes priced at $3 million to $6 million, rather than $15 million or $20 million and more — looks far more promising, developers said.

“You can drive down any street in Miami Beach and there’s a brand-new house being built dry,” said Glaser, who currently has two nonwaterfront spec homes on the market: 5150 Cherokee Avenue, priced at $4.5 million, and 2821 Lucerne Avenue on Sunset Island I, priced at $5.5 million.

“It’s a growing market, it’s a new market,” Glaser said. “It’s a guy who wants a house that is 5,000 square feet, beautiful and brand-new, but doesn’t want to be on the Venetian Causeway and spend $13 million and doesn’t care about being on the water but wants a big house.”

Andi Greenwald, principal of the Greenwald Group who — in partnership with her family — has built more than 20 spec homes, is also focusing on a lower-priced market, in the $2 million to $5 million range. She recently sold the house she built at 5025 Delaware Avenue in Miami Beach for $3.6 million after reducing the asking price from $4.25 million to $3.95 million, according to Redfin.

Beyond Miami Beach, Greenwald is now building spec homes in Coconut Grove, South Miami, Coral Gables and Miami’s MiMo District, including two homes at 3630 Avocado Avenue and 3640 Avocado Avenue in Coconut Grove that are on the market for $2 million each.

She said she hasn’t seen a slowdown in that market, and she’s not holding off on building more homes.

“If you build a nice product in a nice area on a nice street, people are going to want it,” she said. “These things take time. It’s like a surgery. You don’t ask, ‘How long is it going to take?’ Why, do you have somewhere you have to go? You want to do it right.”