For the past 50 years, the Miami condominium market has followed a boom and bust cycle. Developers, investors and buyers rush to purchase new products, creating an unsustainable bubble. But despite that history, the hard lessons of the past can easily be forgotten.
Let’s take a quick look how the obvious was missed in the aftermath of the market collapse a decade ago. Many developers, lenders, investors and buyers attributed the rapid upturn in product absorption to end users, missing the market indicators that showed this was an investor-driven recovery. What actually happened is that individuals, investor groups and institutional buyers jumped at the opportunity to pick up bargain-priced units and immediately placed them into the rental market. At that time, there was a genuine void of pure rentals in the downtown and Brickell Avenue submarkets, because most of the existing rental stock had been converted to condominiums during the boom.
Domestic end-user demand for this distressed inventory was limited due to the unwillingness of lenders to provide financing for condominiums in a market that had plummeted not long ago. The largest stream of end user demand came from affluent offshore buyers from South America and Europe who could make all-cash purchases.
However, it is important to remember that most of these offshore buyers placed their units in the rental market. Fortunately, there was strong demand for rental stock and the residential energy created by a larger rental community spurred demand for retail and entertainment uses, and converted downtown Miami into a 24-hour city.
The rapid absorption of formerly distressed residential product as rentals, spurred a new development boom in rental apartments catering to domestic working-age households and condominiums seeking offshore buyers. Sales were impressive for several years, particularly in light of the high pricing bands for condos and the continued lack of end-user financing.
Now, the built-it-and-they-will come mentality has once again taken over the Miami luxury condominium market. From downtown and Brickell Avenue to Coral Gables and the Beaches, the region is now in an “egonomic” driven market, with too many players producing too much product.
The supply is increasing in an economic environment where demand is falling because of a reduced buyer urgency to purchase and unfavorable conditions in the largest offshore markets. When you factor in the increased scrutiny now associated with cash buyers and money laundering, it’s amazing that so many projects move forward without analyzing all the warning signs.
Through the years, I have spoken many times about the boom-bust cycle, only to be told that I was a negative thinker. But my approach has always been focused on actual market conditions, rather than wishful thinking on the part of developers, investors and lenders. I am also a believer in prevention – it’s far easier to design, construct and market a building that caters to real market drivers than to develop a building and hope for the best. After all, real estate is sold and rented to real people – not household averages or other statistics.
Market research should not be a fad that goes in and out of fashion. Instead, it is the least expensive investment one can make in order to achieve the highest possibility of success. For years, many builders and developers considered market research as a step in the process to obtain financing, while lenders used those analyses to support their decisions. But that thinking misses the real value delivered by good market research.
A thoughtful analysis can also identify hidden opportunities in the marketplace that can be exploited by investors, owners and developers. When research is done at an early stage of the project, it can provide insights to shape the design, pricing and amenities, resulting in a product that is superior to the competition.
Risk management is greatly aided by an independent analysis of all of the factors that will likely influence both the market and the project’s performance. This means both a review of the local economy and all the economic influences that have been shown to drive demand.
Remember that developers often copy existing success stories, including their own projects. Knowing the strengths and shortcomings of the competition is vital for determining the best possible design and features of a project being contemplated and measuring its market performance.
Lastly, develop as much intelligence on the consumer market segments that you need to address if you are to be successful. Nothing can totally prevent a project from a serious decline in demand, but you can manage the severity of the impact. When things go wrong, that can make the difference between disappointment and financial failure.
By Lewis M. Goodkin