Construction cranes for building high-rise condos are back in South Florida, reminiscent of the building boom that ended in a bust some six years back.
Source: John Spade
Besides two new high-rise condos already completed, 24 other condominium towers are being constructed in coastal Miami-Dade, Palm Beach, and Broward counties. Four of these are scheduled for completion this year. Per one account, at least 160 new condominium towers have been proposed in this region.
Strong demand and low supply have fueled this new building rush. Earlier this year, it was estimated that only some 600 units were unsold out of the 22,000 built in Miami downtown during the boom years. Most of the demand is coming from cash buyers from Latin America seeking investment havens.
Streak of price gains
The cash lure for developers continues, with 71% of Miami-Dade condo closings in September accounted for by cash transactions. For the month, condo closings rose year over year by 4.6%, to 1,352.
Median condo prices in the area rose 21%, to $181,875. This represents 27 consecutive monthly year-over-year price increases for condos sold in Miami-Dade.
With these market lures, condo conversions (a practice common among local developers prior to the last real estate crash) are also gaining traction anew. Several high-profile projects in Miami are now in the process of converting built-up rental apartments into condo units for sale to individual owners. One developer is also set to spend $200 million to convert the idled Miami Heart Institute into a 126-unit condominium.
Stocks likely to benefit
Investors have several options to tap possible gains from this new Florida condo boom. Hong Kong-based Swire Pacific (SWRAY) is one likely choice. Its property subsidiary is immersed in a $1.05 billion mixed-use development -- Brickell CityCentre -- in downtown Miami. It recently upped its ante, announcing that it will build an 80-story tower in the Northern Trust Bank building it bought in July for $64 million.
Swire Pacific said the new tower, eyed as Miami's tallest building, will also be a mixed-use property, with office and retail spaces as well as a hotel, restaurant, and condo units. These are in addition to the two residential towers, service apartments, hotels, and a luxury shopping mall at the Brickell CityCentre now under development near the Northern Trust Bank tower.
The luxury angle
The strong presence of Sotheby's International Realty luxury franchise in Miami should also help boost further the prospects of its franchiser, Realogy Holdings (HOUS 1.12%). In 2012, four of South Florida's top 10 best-selling real estate agents came from Sotheby's. Combined, these agents sold millions of dollars worth of South Florida luxury properties.
Moving forward, even higher output can be expected from the luxury property brokers of Realogy Holdings. Most of the new condo construction in Miami-Dade is geared toward the high-end segment. Current condo deals in the Miami-Dade resale market also trend more toward condo units priced at more than $1 million.
Looking at the lenders' return
The resurgence of South Florida condo developments can also contribute some tailwinds to financial institutions that have committed substantial funding on these projects. One is Wells Fargo (WFC 2.73%), which extended a $214 million loan to Dezer Development for the construction of a luxury 60-story condo in Sunny Isles Beach.
This loan is the largest for a new South Florida condo since the real estate crash, and is among the recent indications that banks are getting more confident on funding choice real estate projects. Per earlier reports, lenders have already provided almost $900 million for South Florida's new condo developments.
Final take
Their exposure to the resurgent South Florida condominium sector stands as positive factors for investing in Swire Pacific and Realogy Holdings, and, to a lesser extent, Wells Fargo. A repeat of the previous crash looks remote this time around as developers are pre-selling their units, with buyers having to shell out down payments of between 30% and 80%. This means that the condo buyers are partly funding the construction themselves.
The high down payments, and relatively higher condo prices, are likewise a deterrent to property flipping, something that contributed significantly to the previous market crash. The current crop of buyers are dominated by end-users who buy second homes, and individual investors eyeing rental profits.
For the long haul, the gradual return of pre-construction financing (as Wells Fargo and other early lenders indicated), can help developers reduce the current 50% down payment norm. This will make pre-construction units more affordable to a larger base of potential buyers, thus creating a more robust condo market in the long term.
