“Lo and behold.”
These words tend to herald the advent of something unexpected. Inevitable, perhaps, but something unforeseen by many.
More often than not, the turn is for the worse. But it doesn’t have to be that way, and we had both perspectives on the Fried On Business program recently to discuss the Miami condo market.
First up were the folks from Brickell Ventures, a private equity fund that focuses on the acquisition of residential condos in Downtown Miami.
Peter Zalewski, Director of Acquisitions and a Principal at the firm, said he believes the condo market in Downtown Miami is “all going to heck.”
“We are like heroin addicts. We like the high. So we build and sell the units. Lo and behold, the market changes, and then we have to go through our withdrawals,” he said.
The years 2012-2014 featured a pre-development cycle, Zalewski said. Lots of units sold for 50% deposits – and promises were made for 20% profits at closing table.
That factor, among others, prompts Seth Denison to share Zalewski’s viewpoint. Denison is the Managing Principal for Brickell Ventures.
“Lo and behold, here we are in 2018, and those buyers are sitting at the closing table without being able to dispose of their units because there’s too much saturation on the market,” he said.
The math is the matter, Zalewski said. The units announced just in this cycle number about 47,000. In the 2003-2010 cycle, about 49,000 were built.
“So we’re pretty much on par with last time. Of all of the condos that are coming this cycle, which began in 2011 or so, about 71% are in Dade County. Drill down even further, roughly 45% of all condos this cycle are in Downtown Miami,” he said.
“So you can imagine where we’re playing.”
Zalewski said the developers themselves have provided the information on sold and unsold inventory, which he has aggregated into an online database called Cranespotters.com.
“Now that the market is going to heck, we’re simply using that information against the developers,” he said.
Denison said Brickell Ventures has taken potential investors on “walkabout,” expending actual shoe leather to traverse the market and point out the opportunities.
While some prospects from outside the Miami-Dade area are unfamiliar with the state of the market, he said, locals “smell blood in the water.” But they don’t believe it’s time just yet to jump in.
Denison said many out-of-towners, however, do see the handwriting on the wall.
“We’re showing them why, ultimately, we’re on the brink and the precipice of distress,” he said.
Zalewski said most of the people in Miami work on the sell side – selling condos, building condos, doing buildouts, etc. When the carnage begins, lots of folks are going to experience a major disruption to their lifestyles.
What makes this cycle different from the last are the battle scars, Zalewski said. Many people are still trying to pick up the pieces from the fallout of the 2003-2010 cycle.
An example: If you bought a condo in 2006 in greater Downtown Miami and held on until the peak of the current cycle, you never got back to even, Zalewski said.
“Downtown Miami is this special animal that people keep believing in. Why? Because the prospect is so interesting,” he said.
“Miami is going through a ‘Gangs of New York’ fight between developers. This is a knife fight. All of these developers are trying to put up stuff. Trying to out-do each other. And who, ultimately, is going to benefit? It’s going to be the low-hanging fruit opportunists.”
Now,in my opinion, Downtown Miami suffers from unlimited supply. You can always go up, versus a market like Miami Beach where supply is constrained by zoning and price.
And don’t forget the rental units, Zalewski added, which by some estimates number about 8,000 in Downtown Miami.
“We have 20,000 condos coming, of which at least 12,000 will be constructed. The other 8,000 are sort-of iffy. We’re talking about 20,000 additional units hitting a market that up until 2002 had about 11,500. Where are we going to end up at the end of the day? Somewhere around 60,000 condo units since 2002,” he said.
That being the case, what is the strategy for Brickell Ventures? How can they make this work when the drama unfolds?
Denison said the long-term prospects for Downtown Miami are robust. They plan to acquire a portfolio, rent the units and then sell during the next cycle starting around 2022.
But is there any evidence that prices are becoming attractive now, I had to ask.
Zalewski offered some anecdotal and statistical evidence:
– Commissions for Realtors have risen to around 10% in some cases.
– Some local politicians have been running afoul of the law for expediting development projects, which tends to happen at the end of a cycle.
– Supply is increasing. Downtown Miami is around the 32-month level. Equilibrium is around six months.
This was an incredible interview, and we covered a lot more, including an overview of the other South Florida markets.
Click here to listen to the full conversation with Seth Denison and Peter Zalewski of Brickell Ventures.
Next up, Craig Studnicky, a Principal at International Sales Group, offered another viewpoint.
ISG, which has just published an upbeat Miami report for 2018, predicts that this time next year many submarkets won’t have any new condos for the brokers to sell. Slowly but surely, the units are getting absorbed, and the bigger players are stopping all preconstruction plans.
It’s a new phenomenon, Studnicky said. There’s a perception that thousands of unsold condos remain from the current cycle. ISG research indicates about 85% of everything that was put on the market has been sold.
At the current pace of sales, it looks like most submarkets will be completely sold out by end of 2019, Studnicky said.
“Our conclusion is this: By the end of ’19, there are no new condos for people to buy,” he said. And there probably won’t be anything new available until 2022 or after, partly because the development cycle is expanding to anywhere from four to six years.
Personally, I’m working on the development of three new condo projects, each in a supply constrained submarket. And, yes, the debt and equity are available. It’s real evidence that it’s time for projects like this to get started.
Studnicky agrees. Seller fatigue is settling into the market, he said, even among the major developers. Buyer incentives are on the rise, as are commission bonuses for agents.
The high level of equity in most projects is allowing developers at lot of latitude in pricing.
“There’s always a buyer out there, right Jim? At the right price something will always sell, regardless of politics, regardless of currency exchanges. There’s always a buyer, and we’re watching it,” Studnicky said.
Copies of the new report available at all ISG sales centers.
This was an excellent complement to the Brickell Ventures perspective. Click here to listen to the entire interview with Craig Studnicky of International Sales Group.
