Two years ago at CCIM’s annual South Florida meeting, our consultants took a close look at the downtown Miami condo market, and warned against the risk of overbuilding. Market conditions would be particularly challenging for developments in secondary locations with unrealistic pricing and absorption expectations. Although we have called every down market in Florida well in advance over the past four decades, many developers felt we were being “too negative” and moved forward with their plans.
Today, it seems like everyone is writing about the problems in the Miami market. The pace of condominium sales has slowed dramatically, foreign demand has declined, purchasers are selling their unit, and many developers are facing serious losses .
Sadly, this is a familiar story that reminds me of the Bill Murray movie, “Groundhog Day,” where the same events occur again and again. Through the decades, developers have consistently overbuilt during “boom times” and suffered the consequences during downturns. During the recession of the early 1990s, our firm conducted an extensive portfolio analysis and found many failing project had appraisals in their files, but no market research studies.
One of the key reasons for the cyclical problems in Miami – and other major markets across the country – is a failure to focus on market research before investing in a new project. After all, market research is the key to identifying promising opportunities in the local market, as well as one of the fundamentals of due diligence and risk management. Otherwise, a developer may well be missing the obvious, particularly in a highly competitive market like downtown Miami.
All too often, developers approach us with their plans already in hand. They already have expectations for pricing and absorption rates, and don’t appreciate hearing that their forecasts may be unachievable. Sadly, “egonomics” seems to trump economics, even when a well-prepared market analysis could save them and their investors a fortune.
In our long experience, a market study delivers the best results when conducted early in the phase, before the site is acquired, an architect has been hired and the plans are firmly in place. That’s because the project’s location, design, amenities and features are all crucial factors in achieving the desired financial results. For example, a new residential development in a secondary location may not be able to attract as many buyers or renters as a better-situated competitive project, despite a lower land cost.
In our next blog, we will take a close look at downtown Miami, which continues to be one of the most intriguing real estate markets in the country. In the meantime, remember that there is simply no substitute for objective market research when considering a new development.
By Lewis Goodkin