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2007 Industry Outlook
Residential Real Estate
As the residential market cools, pricing becomes key.
A residential slowdown
 The Price is Right: In Boynton Beach, more than 1,000 prospective buyers lined up for a chance to buy homes in the Greystone development last year, where prices started around $310,000. |
Extensive Florida research points to a continuation of the current residential slowdown for at least the first half of 2007. While Florida is still enjoying strong job growth, most new positions are in the traditionally low-paying services industries. Over the past five years, average wages and household incomes have remained flat, while home prices have risen by 200% or more in some markets, putting too many homes out of reach of the average working family.
Existing homeowners are also facing cost pressures, including higher property assessments and taxes, dramatically higher insurance premiums and potential jumps in adjustable-rate mortgage payments. In the single-family and condominium "starter" home segment, expect to see a significant increase in foreclosure activity as a result of the large numbers of marginal buyers who qualified for loans during the boom years.
Yet, Florida's primary-home market is still likely to recover well before the retirement and second-home segments. These discretionary buyers are simply waiting on standby until they believe prices have reached the bottom -- and they can resell their existing homes in a stronger market.
That's why Naples and Sarasota can expect to see double-digit price drops this year, with much smaller decreases -- on the order of 5% to 7% -- in Miami, Fort Lauderdale and West Palm Beach.
On the positive side, Florida continues to lead the nation in attractive and functional multifamily architecture and design. One good example is S?o Grato, a 23-acre, $100-million mixed-use project in Naples by The D'Jamoos Group. This development incorporates a Brazilian design theme in its 15 three-story buildings that include 224 residential condominiums starting in the $300,000s.
Offering well-designed condos, town homes and new mixed-used concepts with extensive amenities may well be the best long-term strategy for Florida builders and developers hoping to overcome the current market doldrums.
But in the short term, many Florida metropolitan areas are facing a huge oversupply of new condominium units that threatens to become a three-way struggle in 2007. In trying to sell their units to price-conscious buyers, builders will face intense competition from investors who purchased units at preconstruction prices.
Virtually every major condo project in Florida scheduled for completion this year has a sizable investor component. Even builders who tried to limit speculation during the boom years by requiring substantial down payments are finding more investor buyers than they expected.
With appreciation rates turning negative, a significant segment of investors may cut their losses and walk away from their contracts, forcing developers to resell the same units a second time under vastly different market conditions.
Poorly conceived and inadequately financed condo projects on marginal sites will be most vulnerable in the coming year. As developers try to unload these properties at a discount or to muddle through, their lenders may take a financial hit as well. And the inflated market appraisals of the past few years may come back to haunt lenders who financed these projects.
The same trends apply in the hotel/condo market, where developers also overestimated end-user demand. Higher pricing on both a per-unit and a square-foot basis makes it difficult for investors to justify the purchase financially, as the potential income from renting the unit to hotel guests won't cover the costs.
In the residential and hotel/condo markets, some investors may be able to rent their new units at a loss for a year or two -- but many other owners will need to unload them at "fire sale prices" as soon as possible after closing.
Those potentially deep discounts -- along with rising foreclosures among home buyers and overstretched builders and developers -- have turned Florida into a major target for opportunity funds. It may take another 18 months for the state's condominium market to reach the bottom, at which point the vultures will begin to land.
And it's important to remember that when Florida's residential market eventually recovers, it will not be a repeat of the speculator-fueled boom of the past four years. Higher pricing, stringent loan requirements and the likely availability of other investment options will limit the market's overall upside potential.
