Coming out of the Great Recession five years ago, many institutional and well-capitalized private investors were scouring Miami for great investment opportunities. Most investors were looking for existing buildings with great cash flow that could be acquired for a song. Those proved to be few and far between. A handful of savvy investors did manage to find the next great investment, and it was literally right under their feet. It was land. The appreciation in land values since that time has been nothing short of astronomical. So, what did they see that others on the sidelines failed to notice? And more importantly, can this appreciation continue?
To deconstruct the past, we should first look at the basic drivers of any market: supply and demand. Demand for new development is principally driven by a growing population. According to the U.S. Census Bureau, South Florida added 363,500 new residents from April 2010 through July 2014 — making it the sixth-fastest-growing U.S. metropolitan area. About 45 percent of these new residents settled in Miami-Dade County. This growing population not only needed well over a hundred thousand new residences, they also demanded places to work, shop and play. Normal population growth aside, Miami has also become a magnet for the ultra-rich. With its mix of yearlong sunshine, lovely beaches, abundant high-end shopping, fine dining and a high tolerance for public displays of wealth, Miami is squarely among the most desirable cities for high-net-worth individuals around the world, on par with London or Paris. Miami’s most recent housing and retail boom is an attempt to fulfill unmet demand since the beginning of the recovery, combined with international demand.
The supply side of the land market is very simple: There is no new supply. Miami is bound to the east by the Atlantic Ocean and to the west by the Everglades. In that regard, we are an island rapidly filling in. Even as development of new projects is in full swing in Miami, the volume of vacant land trading hands is decreasing.
The total acreage of land sold peaked in 2012, and the sales volume peaked in 2013. Meanwhile, demand has continued to grow, causing prices to spike to as high as $100 million per acre for prime downtown parcels. The upper end of the price spectrum is driven less by overall population growth than by the influx of ultra-wealthy investors buying condos — or land to develop condos — in Miami’s few remaining waterfront locations.
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The supply-and-demand equation is unlikely to change. There will be another 300,000 or so new residents moving into South Florida over the next five years, and the availability of developable parcels will remain scarce. However, there will be headwinds to continued price appreciation. Affordability of housing is probably the most significant hurdle. On the other hand, high rents in established areas tends to be a great catalyst for the development of previously underappreciated neighborhoods. After all, it was South Beach residents fleeing exorbitant rents that helped populate Brickell and Midtown. These pioneering residents transformed entire streetscapes, creating neighborhoods that are now attracting wealthy international residents and luxury projects. Inevitably, upward pricing in those new neighborhoods will lead to development on the “fringes.” The pattern of gentrification of urban blighted areas is far from unique to Miami. New York would be the best example of this phenomenon, which possibly explains why there has been an influx of capital from that city into Miami.
So what are land investors to think about where the market is heading? Over the past 12 months, CBRE, a global real-estate services company, advised on the sale of over $250 million worth of land in greater downtown Miami to buyers that have not yet announced any plans for development. These investors believe in the long-term value of Miami, and appear willing to wait for the opportune moment in the real-estate cycle to break ground. The biggest drawback to land investment is the cost of ownership. Owners still pay real-estate taxes and have no income from the asset while in its dormant state. An emerging investment strategy is termed a “covered land play.” In this strategy, the investor acquires a property that has an existing building that can eventually be demolished to make way for a more intensive development. The investment downside is protected by the rents that can be collected during the period of ownership before the eventual redevelopment. This approach seems to be well-suited to the current environment in which vacant sites are extremely rare and there is some uncertainty about short-term price increases.
Industry experts remain divided on the viability of land as an investment vehicle. Land prices can fall as quickly as they rise, depending on external factors such as the economy and the political environment. What does seem to be beyond dispute is that Miami’s population will continue to grow — and as they say, we aren’t making any more land.
Yetming is senior vice president of CBRE | Capital Markets in Miami. He can be reached at cbre.com/gerard.yetming.
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