Back in March we suggested [7] that slower price appreciation in 2014 might be the proverbial canary in the coal mine for a Miami condo market that has, in recent years, benefited from an influx of foreign buyers. Here’s a look at the trend:
[8]
While it’s still “up and to the right” so to speak, the growth rate fell to 16% in 2014 from 20%+ in the two previous years. Cooling prices are in large part attributable to dollar strength, which has hit demand from wealthy South American buyers especially hard.
As Miami’s Downtown Development Authority noted:
“The primary driver for the Downtown Miami Condominium market is foreign investment. At the early stages of this cycle, South American capital was extremely strong versus the dollar and represented significant purchasing power for South American buyers using foreign currency to purchase pre-sale units that were being sold in U.S. Dollars. In addition to the favorable currency exchange rates, South American buyers are typically hedging against their own economies, which experience significant fluctuations due to political turbulence.
Due to the recent advance of the U.S. Dollar vs. most South American and European currencies, the advantageous buying power of foreign investors has been diminished significantly since 2011 (with the exception of China). While the Euro has not diminished as much as the South American currencies, its slide vs. the U.S. Dollar has only recently started and is expected to continue to decrease over the next 6-12 months.”
The trend has continued in recent months and as Bloomberg reports, many developers are now having a difficult time locating buyers as "whole countries" are priced out of the market.
Via Bloomberg [9]:
Downtown Miami’s luxury-condo boom -- fueled by buyers from Latin America and Europe willing to pay half the purchase price up front -- is becoming a casualty of the year-long climb in the U.S. dollar.
Diminished purchasing power and rising prices are holding back the overseas investors that make up the bulk of sales at new towers, cooling a frenzied market.
[10]
In response, developers are delaying projects, lowering down-payment requirements and turning their focus to Americans.
“We’ve seen a very strong shift in the last year in the dollar -- it has literally pushed whole countries out of the marketplace,” said Kevin Maloney, founder and principal of Property Markets Group, which is developing Echo Brickell, a 57-story luxury tower that will have a shark tank in the lobby.
“We look around as real estate guys and say, ‘Jeez, who is our buyer?’” he said.
When last we discussed prevailing market conditions, we also mentioned that even as demand abates, construction and land costs are rising, pinching developer margins. According to the Miami DDA's most recent quarterly report, this dynamic has continued to conspire with slumping foreign demand to create a drag on the market:
As land pricing and construction costs continue to increase, either increased end-unit pricing and/or a decrease in required developer/investor returns will be required to achieve financial feasibility of future condo projects. IRR-Miami projects that a number of recent and pending land sales are being made by long-term investors with plans to sell or develop the site in 5-10 years after the current pipeline has been absorbed.
As was noted in the February 2015 report by IRR-Miami, the Miami economy and the growth of the real estate market are not driven solely by local job and wage growth. The continued growth in the Downtown Miami real estate market remains largely-dependent on foreign capital participation.
The decline in foreign currencies compared to the U.S. Dollar over the past 18 months has narrowed the buyer pool. Several brokers have expressed concern regarding the closing ability of mid-level buyers that may not be fully denominated in U.S. currency. There have been early reports of buyers seeking approval for the assignment of their contract to a 3rd party.
But perhaps most telling, is the following updated version of the chart shown above.
[11]
As you can see, price appreciation has leveled off for the first time in at least six years.
And here's a table which clearly shows that average lease prices are increasing at a far slower rate than they have in the past. Indeed it certainly looks as though overall price appreciation is likely to flatline in the not-so- distant future, having fallen to just 2% from 5% in the previous two years.
[12]
From the report [13]:
According to leasing statistics from the MLS, approximately 350 to 400 units are leased every month, a contraction of the rental market since Q2 2014. This number could be skewed by the significant number of units that are leased every month outside of the MLS, either as renewals or between parties in off-market transactions. Lease rates in the greater Downtown Miami continue to increase with annual lease pricing increasing over 5% per year on average (2012-2013), and 5% per year (2013-2014). Since the beginning of 2015, rental price appreciation has slowed to about 2% annualized.
Despite all of the evidence above, and despite the strong dollar's effect on demand from South America and Russia, some developers say there's nothing to worry about, because after all, "corrections" are always portrayed as "healthy" in the beginning and this time is always different...
Anthony Graziano, senior managing director at Integra Realty Resources Inc. (which prepared the above cited report for the DDA):
“We’re basically going to be in a period of slower growth for the next year, year-and-a-half while the market stabilizes. I characterize it as a healthy correction."
Carlos Rosso, president of Related Group of Florida:
“Everybody is looking at Miami and saying when is something bad going to happen? I say this is a different market. You’re not going to have a bubble burst.”
