The Four Ambassadors, a condominium conversion in Miami, was not bought in foreclosure as was reported here last week.
MIAMI -- The sunny shores of Florida have turned to quicksand for developers and speculators who had expected to be up to their chins in condo riches this year.
The sunken market is a result of overbuilding of luxury condominiums, overspeculation, the national recession and high interest rates, combined with south Florida's image as a center of drugs and crime and hoards of refugees, according to local real estate observers.
"Almost every high-rise that hasn't finished construction is facing failure," said property consultant Charles Kimball. Kimball estimates that there are three to four times the number of condominiums coming onto the market than there are buyers of any kind, either speculators or users.
While south Florida has unique problems that have contributed to the current situation, what has happened here is a classic example of the boom-bust cycle that can occur when a market relies heavily on speculation, so prevalent when real estate values are on the rise.
"If you want to understand Miami: It's like every other place--only more so," said Joseph Kanter, chairman of the National Bank of Florida. "We'll feel the ups more forcefully, and the drops more forcefully."
Miami felt one forceful drop in the mid-1970s, also largely because of overbuilding, but developers went right back to boom-time building at the end of the '70s. And now it's back to bust.
Already there are about 20,000 built and unsold condominium units worth about $2 billion on the market in two south Florida counties--Dade and Broward--and by the end of the year the number probably will have increased to 30,000, consultant Kimball said. That compares with 6,000 in inventory two years ago, and the new units cannot be absorbed until 1984, he estimates.
Prices on the resale market in Miami have fallen 9 percent in the last year, the largest drop south Florida has seen, and speculators are trying to dump apartments sometimes at 50 percent below what developers are asking for their unsold units, Kimball said.
The notorious problems of south Florida have influenced the real estate market in conflicting ways. Drug money, a major part of a thriving underground economy, kept real estate prices up generally, though analysts say this money usually has not gone directly into condominium investments. The influx of refugees has put new demands on the market as a whole while discouraging some buyers. And violent crime--as much the perception as the reality of it, local experts say--has driven some out and kept others away, particularly retirees who now locate farther up the coastline.
The character of Miami is changing, becoming increasingly an international city where the Latin influence is dominant. It is decreasingly a retirement haven.
Two and three years ago, the Miami market was hot. One condo project with units up to $650,000 had buyers lining up the night before sales started and sold its $62 million in apartments in one day. The next month the developer took 275 deposits on units in its second phase, which didn't even have a construction schedule or price list. Construction at that second phase now has all but stopped, and the eager buyers of the first phase now are just as anxiously trying to unload their units.
The buying spree was fueled by speculators counting on "flipping," or reselling, their contracts at a huge profit on the same day they settled. They were banking on appreciation continuing apace in the luxury market, creating a profit between the time they signed the sales contract and left a deposit and the time the developer delivered the unit.
It worked for a while, and fortunes were made. The pyramid broke down, however, when there was a dearth of buyers and a flood of units for sale.
Most of the developers here seem to have a financial lifeline that will allow them to hold on until better times, but many of the speculators are sinking fast in a market they had thought would yield overnight profits of hundreds of thousands of dollars.
Now that prices have fallen, speculators who have not yet settled are trying desperately to get out of their contracts. Some may start walking away from large deposits, and those that have been forced to settle are filling the Sunday papers with ads of distress sales and price cuts in the luxury condo market.
Speculators now "just want to dump at any price. . . . That's happening at every large project here," said developer Irwin Adler, president of the Builders Association of South Florida.
So far there have been no "belly-up situations" for developers as there were in south Florida's last real estate recession in the mid-1970s, Adler said. Those who now are ready to open for sales of newly built luxury condos will have worse problems than those who just finished selling, Alder indicated, but he said lenders are likely to carry troubled projects rather than foreclose because foreclosures are difficult and time-consuming and rarely pay.
The one bright spot for sellers in the south Florida real estate picture is the Latin American buyer, who continues to put cash into real estate here as a protection against inflation and confiscation at home. Even that source of condo sales is dimming, as Latin buyers are turning more to commercial properties, experts say, but so far they have been saviors for some in the industry.
"If it weren't for the foreign speculators and buyers, the luxury condo market would have collapsed a long time ago," said real estate consultant Kimball.
The Latin buyer with cash in hand was largely responsible for one major luxury condominium success in Miami last year, the conversion of the Four Ambassadors hotel into 460 condo apartments. The four-building complex is part of the city's main luxury condo strip--Brickell Avenue--near the heart of downtown but within view of Biscayne Bay.
Laurans A. Mendelson, a partner in the Four Ambassadors development, boasts that he is a major part of the problem along Brickell this year. Mendelson and partner Jerry Gross bought the hotel complex at a bargain rate in 1980 after it went into foreclosure. That enabled them to undersell the Brickell market with condos averaging about $120,000, compared with typical prices of more than double that.
As a conversion, the project was able to go onto the market earlier than the rest of the row of opulent towers being built down the street. The Brickell market will only absorb about 400 to 500 units a year even in the best of times, and the Four Ambassadors took about 365 of those last year, Mendelson said.
"You can't sell 2 million Cadillacs," Mendelson said. "If you have over 500 units a year for five years on Brickell , you're not going to sell them."
Mendelson still has close to 100 apartments to sell and says that he--like the rest of Brickell--has cut prices.
Speculators stuck in the market are trying a variety of means to get out of contracts rather than settle. At the unfinished Palace condominium on Brickell Avenue, planned to rise 40 stories over Biscayne Bay, some of the investors have banded together and started a lawsuit to reclaim their deposits from the New York developer, Harry Helmsley, ostensibly because the project is late being delivered.
Others are reported to be understating their incomes in bank documents to get themselves disqualified for loans so they can get their deposits and get out. Developers aren't letting them get away with it, but say they would be just as happy if speculators decide to walk away from their deposits, as some have threatened to do.
Brickell Key, on its own island just across a short bridge from the Four Ambassadors project, was the smash success in 1979 that had the buyers lining up overnight. A folder full of news clips the developer provides to reporters tells of past glories, dating from 1977 to 1980.
Developer Charles Cheezum is hopeful those balmy days will return soon. If interest rates get back down to 12 or 14 percent, Florida will see "the biggest boom we will have had in housing," he predicts.
He and others involved in south Florida real estate say their market is highly cyclical, and that the current situation is just a summer storm that will pass as quickly as it came.
National Bank's Kanter said the increased number of foreign buyers and a stronger financial footing for builders and developers will keep the market from the kind of disaster Miami saw in 1974 to '76, when mass foreclosures occurred.
And he goes farther back than that to make a point about relative affordability in today's market. As a child in 1936, Kanter recalls, he used to come to Miami's south beach with his father to visit. His father at one point thought he would buy some land and built a modest cabin or lean-to there rather than keep renting. He gave up the idea because of the cost--about $100 for a lot on the then-deserted Miami Beach, approximately where the Fountainbleau Hotel now stands.
NEXT: The Fortress Condo