Miami’s roller coaster real estate market is booming again after its worst crash left dozens of unfinished buildings and failed condo projects.
Related Group of Florida, Adler Group and Area Property Partners LP, are among builders developing amid a shortage of rental properties as the economy improves. The average rent for a two-bedroom apartment increased 6 percent to $2,568 a month in the third quarter, compared with the year ago period, according to Condo Vultures LLC, a brokerage and consulting firm.
“There’s a boom in Miami that we’ve never seen before,” said Stephen Ross, chairman and founder of New York-based Related Cos. and owner of the Miami Dolphins football team, at the Bloomberg Commercial Real Estate Conference in New York on Nov. 13. “Miami is probably the hottest real estate market in the U.S. from a residential perspective.”
With most of the unsold, unoccupied condo towers that dominated the Miami skyline as recently as two years ago converted to rentals, the number of multifamily developments is soaring, according to Dallas-based Witten Advisors LLC. The research firm forecasts as many as 3,000 rental units per year may be added through 2015 in Miami-Dade County, which includes the metropolitan area and downtown, more than double the average annual totals of the past three years. Rental activity in greater downtown Miami, including for condos and apartments, jumped 12 percent in the third quarter to 1,650 from a year ago, Bal Harbour, Florida-based Condo Vultures estimates.
Miami’s population grew 2.1 percent in 2011, the biggest increase in at least 10 years, to 2.55 million, according to the U.S. Census Bureau. Growth was helped by the continued influx from abroad, including ethnic groups such as Hispanics, according to Robert Cruz, chief economist at the Economic Development & International Trade department of the Miami Dade County government.
The region’s diversified economy, including international trade, health care and tourism, has helped attract workers, with joblessness in October falling to 8.9 percent from 10.7 percent a year ago, according to the U.S. Department of Labor. Many employed in the area’s leading sectors add to the rental pool as they can’t afford to buy, Cruz said.
For those able to buy, the median sales price of Miami-Dade condos rose 24.2 percent to $146,000 in October compared to the year earlier period, according to a report today from the Miami Association of Realtors and the local Multiple Listing Service system.
“Everybody thought Miami was finished, and now it has become again one of the top locations for developers for multi-family rentals,” said Robert Kaplan, principal at Ackman-Ziff Real Estate, a New York-based adviser that helps to arrange financing for clients such as pension funds and insurance companies. “Miami was counted as being out as recently as 2010 and in the course of a year or a year and a half the market has come roaring back. It’s simply amazing.”
In South Florida, New York-based Area is in a partnership with Coral Gables, Florida-based CC Residential on two projects, one of which is a 352-unit building in the Miami suburb of Doral. Area is also in discussions about a possible coastal project in the northern part of the city, said Richard Mack, chief executive officer of Area Property’s America division.
In late 2010, Area bought Terrazas River Park Village Apartments, a failed condo project at the Miami River, for about $150,000 per unit. The rent at acquisition for a one-bedroom, one-bath apartment was $1,069 and has since risen 38 percent to $1,477, according to Mack.
“It was a great exercise as it showed us how much demand there was for this type of building,” Area’s Mack said. “Everybody told us there was so much shadow inventory from condos and that it was not going to be absorbed. But we realized there wasn’t as much shadow inventory as everybody talked about and that a rental apartment building could very well compete in that market.”
Shadow inventory is a measure of properties that are not yet on the market, but will become available soon. That includes unsold inventory as well as homes with seriously delinquent mortgages, in the foreclosure process or owned by banks but not yet listed for sale. Foreclosure filings in Florida fell 13 percent last month from a year earlier, though the state’s rate still led the nation, according to RealtyTrac Inc.
Between the real estate trough and the middle of this year, price per buildable unit — the price of land per number of units that are entitled to be constructed on it — in Miami jumped 155 percent for multifamily developments, according to Real Capital Analytics Inc.
“If developers are paying more on a price-per-buildable-unit basis, that means they believe that after construction is complete, the property will be worth sufficiently more than the sum of the price of the land and the cost of construction to justify the risk the developer is taking,” RCA analyst Ben Thypin said.
Price per buildable unit climbed to $75,028 during the recovery starting in 2011 through July from $29,455 between the trough between 2008 to 2010, RCA said. Baltimore followed in second place with an 87 percent increase from the trough to the recovery and Philadelphia in third with a 74 percent climb, according to RCA.
“The biggest difference in Miami to other markets is how far it fell and how quickly it came back, defying all previous predictions,” said Timothy Martorella, managing director at locally based Madison Capital Group LLC, a real estate finance adviser.
Developers active in Miami like Area, Adler Group and Related Group, which is 20 percent owned by Ross’s Related Cos. of New York, are banking on the ability to further hike rents at apartments that are still well below those at “big and expensive” condominiums with “high common charges,” Area’s Mack said.
“What happened in Miami with the significant development of condos is that many people are being priced out because of what condos are renting for,” Michael Adler, CEO of Adler Group, said. “So there is a distinct need for professionally run and managed apartment complexes.”
Developers like Related Group of Florida, founded by chairman Jorge Perez, and Miami-based Adler Group are mostly focusing away from the downtown core, where luxury condos dominate the landscape. The company is breaking ground on five projects this year and “probably another seven to eight” next year, Steve Patterson, head of Related Group’s multifamily housing division, said.
Related Group, one of the biggest developers in the largest condo bubble in the country, accounting for 5,500 of the 22,000 condos built in Miami’s central business district from 2003 to 2008, has 4,000 rental units in the pipeline Tampa to Orlando with a majority in the Miami area, said Patterson.
Adler Group has a project on Biscayne Bay, near downtown Miami. The company bought a distressed piece of property in May after a market study it commissioned found average area vacancy rates to be 4.7 percent as of the fourth quarter 2011. The developer plans to build two 20-story rental apartment towers near the79th Street Causeway in a joint venture with Marietta, Georgia-based ECI Group. Adler is on the lookout for other multifamily projects in the area, according to its CEO.
In many other regions of the U.S., investor interest is starting to wane in the sector as record low mortgage rates help potential homebuyers. The National Association of Home Builders/Wells Fargo index of builder confidence increased to 46, the highest level since May 2006, from 41 in October, figures from the Washington-based group showed today.
While rents are projected to rise through 2017, the rate of annual growth peaked in the second quarter of 2011 at 5.1 percent. Rents are on pace to gain about 4 percent nationally this year, Dallas-based Axiometrics Inc. said in September.
For many developers in Miami, the possibility of ultimately converting their apartment development into a condo project upon completion and selling it off at a profit may be the lesser-advertised motive to build rentals right now, according to Peter Zalewski, principal at Condo Vultures.
“Generally speaking, any developer building near the water in the state of Florida is likely building rentals for the financing but with the ultimate goal to convert them into condominiums,” Zalewski said, adding that developers of rental properties in suburbs may be the only ones looking to maintain properties as rentals.
He added “everything starts and stops with lenders and because lenders are willing to finance rentals that’s why developers are building rentals. Sure, rental properties are profitable and you make money over time but who wouldn’t want to build and be sold out immediately rather than have to wait for profits.”
Lenders are attracted by Miami’s shortage in rentals, according to Miami-based Aztec Group Inc., a real estate investment bank.
“Everybody wants to be in the apartment market because financing is pretty readily available,” Ezra Katz, Aztec’s CEO and founder, said. “Rental apartments are much less risky than condos. Rental apartments have a long history of not tanking.”
Ackman-Ziff, the real estate adviser, has started to arrange financing again for apartment developments for the first time in two years, according to Kaplan, who is based in Miami Beach.
“We used to always do a lot of development finance but then we totally stopped,” Kaplan said. “Now we’re seeing a pickup in demand for apartment developments if it’s a quality project, with a quality developer. That’s a change for us from two years ago when we didn’t take on developments pretty much at all. Now the tide is changing.”
Apollo Bank, a local lender with about $225 million in assets, in May provided a $3 million loan to Adler Group for the land purchase in Biscayne Bay. The bank has further involvements in existing multifamily projects throughout Miami-Dade County with individual loans ranging from $3 million to $5 million, according to Apollo President and CEO Richard Dailey.
Yet the apartment frenzy may only last for so long. For renters, buying a condo may ultimately become the goal again as rents continue to climb, according to Aztec’s Katz.
“You can squeeze only so much out of a renter, then you cross the line into ownership,” he said.
A version of this article first appeared on November 21, 2012 in the Daily Crux, published by Stansberry & Associates Investment Research, an independent investment research firm. You can visit them at www.stansberryresearch.com.