For those studying high finance, Manhattan is the place to be. For film enthusiasts, Los Angeles, of course. And for the wild and woolly world of real estate, there are few better perches than South Florida.
William G. Hardin III, Florida International University’s director of the Tibor and Sheila Hollo School of Real Estate and the Jerome Bain Real Estate Institute, brings an informed and disciplined view to a subject in which just about everyone has a strong opinion: South Florida real estate.
Hardin, a former commercial banker who switched to academia, sat down with the Miami Herald to talk about the market and then responded to emailed questions.
Q: South Florida’s job market is improving, but it’s not great. Are FIU real-estate graduates finding job opportunities?
A: The short answer is yes. There are opportunities within the broad real estate and real estate related industries. The market has improved dramatically in the last two years as real estate activity has improved. For some period, we would hear from industry that they really were interested in people with three to five years of experience who might be in our graduate program, where the majority of students already work in the field. My response would be, “Who did you hire three to five years ago that would now have the experience you need and want?” Of course, three to five years ago, the industry was contracting and few if any were hiring.
With the right skills, there is an opportunity, because the industry lost much human capital in the recession as people did not come into the industry and people moved out — or were forced out. I like to tell undergraduates that if you just do well in school and become active in groups like ICSC (International Council of Shopping Centers) and ULI (Urban Land Institute), there are positions. I know of no student who was active in these groups that has not had opportunities, even during the bust. The silver lining of the real estate boom and bust is that now we have students that are self-selecting to real estate with a keen interest in the industry and not just because it is the “hot” industry. Students are actually becoming more selective as the market improves. Graduate students are moving to new companies and positions.
Q: What are the risks to the new Latin American financing model condominium developers have been using, in which they fund much of the construction costs with big deposits from units buyers?
A: The risk associated with development has not gone away. It has been shifted. From a development standpoint, with regard to high-rise multi-unit residential, the goal is to close out the units when they are delivered — and they are pretty much all delivered at the same time. That is why you have long-term marketing programs in advance of development and as the project is being built. Anytime you have the units pre-sold, you as a developer have reduced your financial risk.
At the end of the last cycle, however, a prospective buyer could control a unit with a minimal deposit, which in the end was more like an option than actual unit ownership. What sometimes traded in the boom was an option to purchase, versus an actual unit, because the unit was in fact yet to be completed. This added to the run-up.
In the present cycle, the developers using the more international model seen in much of Latin America and parts of Asia are actually mitigating their risk, because the buyers have to make much greater financial commitments. The retail investors/owners have real money in the deal from the start, and the developer and lenders have less capital in the stack.
One could argue that the lack of institutional capital and the use of the international model reflect a weakness in the market.
In the U.S., you should not have to use a retail-financing model to fund real-estate development. A developer and equity investors should be able to get capital from institutional sources. What makes Miami different, however, is that the buyer and target market for most high-end residential units are global. This makes it hard to underwrite market risk. Capital markets are better able to evaluate local demand for real estate and are not really focused on residential markets where demand quantification is perhaps more difficult to determine.
Q: Is Miami’s condominium market at risk of overbuilding yet again?
A: I think we need to segment the question to the condominium market for the high-end second home, economic/political risk market, and the local market.
The majority of the projects that get media coverage are marketed outside of Miami. Miami is not creating sufficient jobs that allow people to buy $500,000 units, much less $1,000,000-plus units. Miami is one of a few cities in North America where the global, high-end affluent want to own residential property for both lifestyle and investment.
In North America, you have New York, L.A., San Francisco, Toronto and Vancouver along with Miami that have international appeal. Long-term, the prospects are positive, since global wealth is increasing — and increasing faster outside of the United States. Miami is well positioned, due to geography, the value of units in a global context, a demand for dollar-denominated assets, and the overall quality-of-life attributes.
We also benefit due to the strong run-up in the financial markets. If we look at the bigger picture, high-end real estate is dependent on wealth growth which is tied to and reflected in financial markets.
From the city’s standpoint, overbuilding is a generally a short-term problem, but the product being built is a long-term asset.We would not have the quantity and quality of real estate in the Brickell core and other areas without that prior risk capital.
I do not see the likelihood of substantial overbuilding, especially as long as the international financing model is in place. Does that mean that everyone getting in the game now will make money? No. Some of the land prices we see today will make it harder for development to be economically viable.
Q: You’ve called Miami’s real estate market an “export’’ market. What do you mean by that?
A: I like to use the words “export” and “real estate” jointly, because most people associate “export” with the movement of goods. And, we know that real estate can’t be moved.
Because much of the demand and equity capital for real estate in Miami and South Florida is from outside the area, the area benefits by attracting this economic activity: the building and servicing of the real estate for non-locals.
The non-locals earn income and wealth outside of Miami and use this for real-estate ownership and investment in Miami. So real estate is an export activity, because the demand is external.
By serving the global markets for real estate and lifestyle consumption, Miami benefits. Our non-local owners like to spend time in Miami and like to enjoy that time in Miami. The Miami market for residential real estate contrasts with the overwhelming majority of markets where demand, pricing and value is predominantly local.
Q: Is there a downside to Miami’s reliance on foreign investment in real estate and business generally?
A: Miami’s strength is its diversity and international web of contacts. Miami is entrepreneurial, and as we move to the future, this should benefit the region and the city. The dependence on the international market for real estate, of course, does have a downside, but each time we have new projects and new owners we have strengthened the ties. But the fact is that cities and regions tied to global markets will benefit as the majority of future economic growth will be outside of the U.S. This is the maturation of the global economy and the development of large middle-class markets in emerging countries.
We will see how the market for residential units moves forward. We still see economic hedging, as many in Latin America see dollar-denominated hard assets as both inflation and economic hedges for [their] own country risk.