For Miami Real Estate, The Worst May Be Yet to Come
Dark clouds may be gathering over sun-soaked Miami.
As a turbulent market battered South Florida in 2008, the Magic City itself appeared to fare better than some of its neighbors, with a particularly resilient commercial sector. However, emerging data seems to contradict these rosy assumptions.
According to Moody's Economy.com, Miami leads the country in first mortgage write-offs with a percentage of 12.55, as opposed to a national average of 1.95 percent. Moreover, when counting in mortgage delinquencies, Moody's found that more than a quarter of Miami's borrowers have either defaulted or are behind on payments.
The downbeat news continues on the heels of the Florida Association of Realtors' latest housing data. In 2008, sales of existing homes tumbled 4 percent, with a total of 124,215 homes sold as compared to 129,855 a year earlier. The good news: Home sales rose in December for the fourth consecutive month. However, median sales prices slumped to $130,600 by year-end 2008, a 32 percent drop from $192,600 in December 2007.
Commercial market stinging
Though considered as recently as last year to be stronger than the residential sector, Miami's commercial market is starting to feel its own share of fallout. In a Grubb & Ellis report on Miami-Dade County office market trends for fourth quarter 2008, the firm forecasts difficult times. "Office vacancy across much of the South Florida region, including Miami-Dade County, is expected to rise at a brisk pace in early 2009 as tenants continue to downsize and demand less space on average," the report reads. "Although new office construction deliveries will be limited in early 2009, a significant portion will likely be unoccupied, adding to the market's overall vacancy."
The commercial property market is facing a tough year as residential real estate continues to collapse. Commercial real estate in Miami is declining amid the storm of residential foreclosures. Additionally, Grubb & Ellis reports that pressures on commercial landlords are translating into an increasing willingness to make tenant concessions, including short-term extensions to tenants whose leases are close to expiration as well as reductions in square footage and rent in exchange for longer-term leases.
"The number of property owners facing financial challenges will likely increase in 2009 as a result of rising vacancies," the report predicts. "The credit markets will need to become more open to property debt restructuring in order to prevent declining pro formas from translating into pools of bad debt for the creditors ."
Retail woes, Hospitality hopes
Retail is expected be hit hardest. South Florida retail vacancies expected to increase beyond 5 percent. Whole Foods Market has already pulled out from Met 2, a mixed-use downtown complex. Anticipated to add 2 million square feet to the downtown market when completed, the Met 2 will comprise about 20 percent of the total market. However, only 10 percent of that space is currently leased.
Trouble is also dogging the developers of the Miami Worldcenter, a wide-ranging revitalization project in the nascent Park West area. The future of the Worldcenter is uncertain after the failure of a contract to buy a land parcel that would account for a fourth of the property.
Miami's hospitality industry got a boost with November's reopening of the FountaineBleu hotel in Miami Beach. After years of vacancy, the historic 1,500-room hotel has not only been carefully revamped, but added to the U.S. Register of Historic Places.
However, an expected 12 percent drop in revenue per available room in 2009 paints a grimmer picture for the Miami hospitality industry. A report by CBRE Torto Wheaton Research says this benchmark will drop for full-service hotels from $136.74 in 2008 to $120.58 this year. Limited-service hotels face a milder 3 percent drop from last year's $68.25 to $66.22 this year.
In addition, the CBRE report forecasts job losses of 15,300 in 2009, as declining consumer spending drains Miami's tourist industry.
A realtor 's perspective
Ines Hegedus-Garcia of Majestic Properties in Miami's Design District sees her share of challenges in today's market. Hegedus-Garcia, who runs a Miami real estate blog, believes that many of these problems come from a larger-than-average amount of distress sales. These include short sales, foreclosures and bank-owned properties.
"Banks are not in the business of holding inventory, and are in many cases underpricing properties to sell them quickly," she says. "Homeowners then have to compete with those low prices if they want to sell their properties."
Hegedus-Garcia also points to difficulties in securing financing. "We are seeing a lot of deals fall apart because buyers are not qualifying for loans," she says.
Still, she sees a silver lining in the form of good deals for investors, who she says are, "making a move and getting steals—sometimes even 50 cents on the dollar."
Over the next six months, she believes prices will continue to decrease, though not drastically, and then begin to move upward by the end of summer.
"I don't see a massive increase like we saw in 2005 and 2006," Hegedus-Garcia says, "but I see a normal historical upward trend in revaluation of Miami real estate in general."