In condo boom, some veterans see reminders of recent bust

The good times may be rolling again for South Florida’s real estate industry, but survivors of the last bust warned Tuesday that there may be too much exuberance over the latest boom.

Panelists gathered for a real estate forum at a luxury hotel ticked off a series of cautionary notes that harkened back to the last time housing prices soared too high: developers launching construction without the reserves to handle a drop in sales; lending plans based on price increases; and a stream of condo projects chasing cash not from local buyers but from foreign investors.

“If we learned anything, we learned we didn’t learn much,” said Russell Galbut, managing partner of Crescent Heights, a high-rise developer out of Miami. “What I see in the Miami market is a lot of people coming together at the same time to build. It think it could possibly bring about the same things that we had in the past, which is an overdevelopment of projects.”

Galbut addressed more than 200 people gathered at Miami’s Four Seasons Hotel for a event by the Urban Land Institute titled: “Miami Condo Market Symposium: Embracing Boom and Bust Cycles.” The warnings peppered throughout the talks touched on a central fear behind the current spike in property values and sales — namely, is the market getting ahead of itself once again?

Bullish panelists pointed to reasons why this cycle should be different than the last: lenders nearly ruined by the bust now insist on significant cash deposits before backing projects; novice developers being locked out of financing circles; and Miami’s emergence as a choice destination for the wealthy throughout Europe and Latin America.

“Miami, up until a couple of years ago, was essentially the poster child for distressed real estate in the U.S.,” said Jonathan Miller, president of Miller Samuel, an appraisal firm that analyzes housing trends for Miami and other markets. “Miami has successfully rebranded itself as a luxury housing market and in a very short period of time.”

He said between 60 percent and 70 percent of local condo sales involve all-cash deals — about the double the national rate. Miller and others cited Miami’s growing appeal as a cosmopolitan city, thanks in part to expanding retail and cultural options downtown.

“We have reinvented ourselves,” said Alicia Cervera, managing partner of Cervera Real Estate. “One of the wonderful results of our building boom, the last one, is we in fact built a tremendous city. We have new neighborhoods, and concentrations of neighborhoods.”

Foreign investors helped swamp Miami’s real estate during the last boom, as high-rise developers set up sales centers throughout Latin America and pitched their projects as cheap ways into a red-hot housing market. Buyers, both foreign and domestic, signed pre-construction contracts for condo units with plans to sell them before the buildings even opened. Developers and banks felt confident that the required 20 percent deposits would be enough to force the original buyers to close even if prices disappointed.

But when real estate values dropped sharply, buyers surrendered their deposits rather than pay more for units than they could sell them for. The resulting domino effect sent prices plunging throughout the market as developers were suddenly left with no revenue to pay back construction loans. Miami emerged as one of the most troubled housing markets in the country.

While new home construction remains in the doldrums, the last two years saw a rebound in prices on existing homes. The high-rise cranes also returned to Miami as developers again found demand from foreign investors for new pre-construction units. Condo Vultures, a brokerage and analysis firm, estimates there are 22,000 condo units in the development pipeline throughout South Florida and about 12,000 in downtown Miami. During the boom, developers built almost 50,000 units, and most of them are sold, according Condo Vultures founder Peter Zalewski.

Meanwhile, luxury homes — like the 30,000-square-foot mansion in Indian Creek Village bought by hedge-fund billionaire Eddie Lampert for $47 million last year — have been setting records in resale prices.

Data released Tuesday offer a reminder of the lasting damage of the housing bust, and the relatively modest pace of recovery. Case-Shiller, which tracks resale prices of houses, reported that South Florida values remain 40 percent below peaks set in 2006. But prices have also been on the rise since late 2011, with values up 13 percent from a year ago.

The index does not cover condo sales, and developers say that market has its own fundamentals driving it. The local condo industry now points to internal requirements for pre-construction deposits matching 50 percent of the sales price, so developers see themselves in a far more secure position than they were before the 2007-08 crash. With foreign investors looking to place cash in assets for the long-term, projects see little risk of their buyers fleeing should prices take a dip

“How many condo units are necessary in this town?” asked Carlo Melo, whose family’s Melo Group is building condominiums in Miami’s Edgewater district. “The answer is: unlimited. Because we are selling to the world. It is not a city that is sustained by itself.”

But if developer over-confidence sunk the market last time, industry veterans see this cycle as spawning its own breed of hubris. John Sumberg, one of the city’s top lawyers for developers, said some projects are starting construction with cash from their deposits even if they don’t have a lender aboard pledging to put up the money to finish the project.

“Many of the projects are using the deposits to start construction, and then getting the financing later,” said Sumberg, a founding partner at Bilzin Sumberg. “This works, until it doesn’t.”

Already, some lenders are backing off projects in Miami’s downtown out of fear to too much supply, he said.

Stuart Miller, CEO of Lennar, a national home builder based in Miami, noted that it’s easy to pencil out enough profit from a real estate project when good times are forecast to continue.

“The more the good times roll, the more attenuated our memory becomes,” he said. “It’s amazing what can start working on paper when you have big price increases.”

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