Miami's Sizzle is Fizzling
Aug 1, 2007 12:00 PM, By Elaine Misonzhnik
During the recent construction boom, nowhere was the trend of converting older properties into new condominiums more prevalent than in Miami. As prices for multi-family properties skyrocketed in 2004 and 2005, developers rushed in and snatched up old class-B and class-C office buildings to convert into sparkling new condominiums fetching up to $400,000 per unit.
During a 12-month span from September 2005 to September 2006, 6,600 new condo units were delivered to the market nearly matching the total number of condos that opened in Miami during the previous 10 years combined.
But that was just the beginning. As of October 2006, another 22,254 units were under construction, according to the city's planning department. Currently, developers have plans to build 60,232 multi-family units mostly condos with roughly 25,000 of those slated to come online in the next 15 months, according to Housing Predictor, a market research firm.
And all of it could't be happening at a worse time.
The flood of new projects is coming in as prices for housing in the Miami area are crashing. The glut of new space, in fact, is just exacerbating the problem, drowning the market in new supply that it does't need (and spreading speculation that some of that supply will be scrapped before becoming a reality). It is because of this that Housing Predictor ranks Miami as the worst housing market in the entire country. It anticipates that the wash of new supply will send prices down 12.7 percent this year alone. (Currently, the median housing price in Miami is $348,000.)
Meanwhile, Forbes magazine named Miami the riskiest real estate market in the country. Most ominously, in late July, Mark Zandi, chief economist at West Chester, Pa.-based Moody's Economy.com, predicted that the rash of condos the largest supply to hit the city in 30 years will send prices down as much as 30 percent. Zandi predicts the impact could be so widespread as to send the entire state of Florida into recession as early as October.
The retail sector would not be spared in the potential bloodbath.
Already projections call for retail sales growth in the city to fall to 4.7 percent in 2007, down from 8 percent in 2006, according to a report from Marcus & Millichap Real Estate Investment Services. That is a direct consequence of the housing fallout, according to Kirk Olsen, a member of the national retail group with the firm.
You drive around here and you'll see a lot of high-rises that haven't been finished yet and a lot of those still haven't sold their units, he says. It's hard to know right now what the end result will be.
However, there are reasons to believe the impact on retail real estate will be muted. For one, Miami remains a popular tourist destination, both for domestic and international travelers, many of whom come to shop the city's collection of luxury retailers. On that front, the city is still drawing new chains. In just the past few months, Danish furniture store Bo Concept and Brazilian Artefacto, as well as Spanish apparel chain Custo Barcelona and French Lollipops have secured storefronts in and around Miami.
The amount of retail space per capita is much lower here than in other parts of Florida, so with tourism, you get a recipe for healthy retail, says Rod L. Castan, vice president with Courtelis Co., a Miami-based developer with a 2.5-million-square-foot retail portfolio.
Moreover, the wave of overbuilding sweeping the multi-family sector is not being replicated on the retail side. Developers will add 1.7 million square feet of retail space to the market this year, which is a bit less than the 2 million square feet of space that was delivered in 2006. Because of this, Marcus & Millichap predicts retail rents will actually increase this year by 5.6 percent to $22.48 per square foot (though this year to date, rents have risen only 1.1 percent). Meanwhile, vacancies are expected to rise a modest 20 basis points to 4.8 percent.
On the investment sales side, however, activity has slowed a bit. The price per square foot on retail properties has fallen to $232 this year, a 5-percent decrease from $245 per square foot in 2006, reports Real Capital Analytics. Anecdotally, Olsen says that while in 2006 every property Marcus & Millichap marketed would get six to eight offers, this year they are only getting two or three.
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