May 17, 2018

A Decade Later, Miami’s Condo Market is Poised For Another Correction  

A Decade Later, Miami’s Condo Market is Poised For Another Correction

The Miami condo market is poised for another one of its headline-generating corrections that seems to occur at some point every decade in this burgeoning South Florida community that is marketed as the “Gateway To Latin America.”

The number of new condos currently under construction and recently completed during this current real estate cycle that began in 2012 is adding to a resale market that is already dealing with more sellers than buyers in Miami.

Supply levels in South Florida markets, such as Greater Downtown Miami, Miami Beach and Sunny Isles Beach are now being tracked in terms of years rather than months of absorption.

Adding to the growing pessimism about the Miami condo market is fear that three macro issues – South American currency fluctuations, rising interest rates and an anti-immigrant climate – in the United States could trigger challenges similar to the last real estate meltdown in South Florida, about a decade ago.

Back then, the combination of the U.S. housing market meltdown combined with Latin American political turmoil encouraged many investors to move cash holdings out of their respective countries and into safe haven markets.

Miami was a major benefactor for investment dollars coming from Latin America and the Caribbean.

As the global financial crisis occurred, condo prices in Miami tumbled from an average price of more than $385 per square foot during the growth phase of the cycle down to under $220 per square foot in 2009 – a loss of more than 57 percent – at the bottom of the last cycle.

Most industry experts and media sources claimed a decade-long inventory existed at the time.

This was not hyperbole for the times.

Remember, lenders were taken over by regulators back then. Developers terminated most – if not all – of their staff and left projects partially built. Unit owners walked away from their investments.

Large institutional investors, such as ST Residential, Starwood and Blackstone, acquired large swaths of inventory from lenders at dramatically reduced prices at the instruction of federal regulators.

Ultimately, a combination of cheap real estate prices, a weak U.S. dollar and value-oriented investors from Latin America who believed in Miami led to the purchase of a majority of the unsold or vacant condos quicker than many had expected.

Many stories have been shared – and even reported – in Miami of condo unit acquisitions at under $200 per square foot – with rental returns in the seven percent range for several years during the hold – that eventually led to disposition prices of as much as $450 per square foot.

Now, it is a decade later and the problems of yesteryear are supposed to be long behind us.

We were supposed to have learned a valuable lesson so that we could not possibly repeat the mistakes of the last cycle.

When the development spigot was finally shut off in 2009, no new projects were developed for three years as the existing inventory was absorbed.

In 2012, a series of developers returned to the market with new projects to meet the demand for condos from foreign investors who were enjoying rising rental rates prompted by local residents who could – or would – not buy condos after the experience of the preceding downturn.

During this latest cycle, banks required developers to have a minimum of 50 percent of the units pre-sold and the buyers to put down 50 percent cash deposits, in hopes of limiting the lenders risk of default.

With these significant new requirements, developers reasoned the higher deposit requirements would taper both demand and the number of units constructed encouraging price stability in Miami for years to come.

Speculators bought into the concept wholeheartedly, putting down deposits on thousands of new condo units proposed for development in South Florida which brings us to the present.

As the busy South Florida winter buying season concluded with a whimper, it is increasingly difficult not to consider the 18th century poem by Robert Burns that effectively states “the best laid plans…often go awry.”

Seth Denison is the managing principal of the Miami-based private equity firm Brickell Ventures LP that focuses on opportunistic real estate acquisitions in South Florida. Seth can be reached at