Cover Story - Real Estate
On the Flip Side
Everybody, it seems, is a real estate investor: Speculators of all stripes continue to fuel an unprecedented building boom, undeterred so far by talk of a bubble and fears that interest rates may rise.
A year ago, before the first shovel of earth was turned at either site, DeNapoli bought one unit at Quantum and two at 1800 Club. At roughly the same time, he bought a fourth unit in the proposed Plaza on Brickell condo project south of downtown. The Hollywood man doesn't intend to live in any of them. He would never live in a condo, he says. He aims to flip three to other buyers at a hefty profit and keep the fourth as investment property.
Who's to say whether DeNapoli is a typical investor in a market where speculators come in all nationalities, with differing wherewithal and investing strategies. Typical or atypical, DeNapoli and investors like him are for certain the fuel in the white hot south Florida condo market and the real estate runup throughout Florida.
An unprecedented 69,000 units are proposed or under construction in Miami alone and thousands more on the beaches and from Dadeland to Aventura. From the design district south to Brickell, Miami's waterfront in places is cheek-to-jowl with construction fences displaying images of soaring towers and sultry condo vixens. Ocean Drive magazine, laden with real estate advertising, approaches door-stop heft, and local newspapers grow fat promoting the lifestyle likes of Icon Brickell ("inspired by Yoo by Starck"), Premiere Towers ("Urban chic. Redefined"), Soleil ("Its energy is scorching Miami") and, more to the sales point at condo-conversion Vue at Brickell -- "100 percent financing available to qualified buyers."
The 698-unit Quantum project sold out in 13 months. To celebrate, Pedro Martin, chief executive officer of Quantum developer Terra Group, threw a "success" party in May at the sales center on Biscayne Boulevard. As a homeless man pushed a shopping cart down the block, white-shirted, black-tied valets tended to the cars, and guests sipped drinks and nibbled shrimp. Inside the sales center, buyers looked at a towering building model to see where their units were. Out on the patio, partiers listened to a DJ. Being Miami, there were the requisite number of men in black shirts and bare-shouldered young women balancing atop precariously high heels. "Chic attire," the invitation said. In contrast, DeNapoli came dressed in a lawyerly suit and tie, as if he had come straight from a property closing. Returned from his golf cart tour, he stood over one of the outdoor tables and explained his strategy.
Despite his youth, DeNapoli is no neophyte investor. He attended "lots" of seminars to educate himself on real estate before he began investing in earnest. He has a condo in St. Augustine, a house under contract there and a ranch near Gainesville. He secured a real estate license so that he would get the broker's share of purchases. As an attorney, he saves by doing his own title work. For his condo investments, he struck last year, reasoning that his units would be finished before a wave of buildings nears completion in 2007. (That's why he wanted to know why Quantum wasn't moving faster.) He vowed to buy only at waterfront projects and on Brickell and to protect himself by buying where owners can lease the units out month to month and for vacation rentals. He wanted to pay no more than $330 per square foot and got in at that price at one condo, less at two others and a low of $280 at the fourth. "Try to find that now," he says. "You won't find it."
He put down a total of $200,000 for his four units at the three projects and says he has the money to close if necessary when they're ready next year. But he watches eagerly for when the developers will open the buildings to resales. He will look at cashing out then and pocketing his profit before the buildings are completed.
The fear some market researchers have is that DeNapoli and investors and speculators like him -- as much as 70% of the buyers on some projects, analysts say -- won't find enough end users to take the units off their hands and won't turn up enough tenants willing to pay sufficient rent to cover their loan and condo fee costs.
"We've never had this kind of volume. The same kind of market psychology that drove people into these things is the same kind of psychology when it's reversed. You end up having a mass exodus," says real estate analyst Lewis Goodkin of Goodkin Consulting, who also writes about real estate for Florida Trend. "You've gotten more people who are investing/speculating than the user market. That's very scary."
To be sure, others in the field aren't as worried. Analyst David Dabby, president of Dabby Group Advisors in Coral Gables, agrees there is a potential condo oversupply but says how it shakes out depends on when buildings are completed. Slowing demand can put the brakes on construction, bringing stability. Miami banking analyst Ken Thomas doesn't believe in a housing bust cycle but says a correction can come. "Basically, the condo becomes a commodity," he says. "Speculators in any market not only drive up prices but also create volatility and instability."
Developers, if they're worried about building all those condos on a speculative house of cards, hide it well. Driving demand, developers -- and DeNapoli -- say, are affluent and aging Baby Boomers looking for a Florida home, Europeans scooping up bargains thanks to the low dollar, locals sick of their commute from the suburbs, Latin Americans anxious to put their money where it can't be devalued, low U.S. interest rates, vanishing waterfront and a market that despite its heat is still cheaper than San Francisco and New York. Condo buyers are simply smart, they reason. Three years ago, you could buy on the oceanfront for $400 to $500 per square foot. Now similar units go for $700 to $1,000 per square foot.
"We're going to be a great city," enthuses Martin, developer of the Quantum. "I just see that Miami is going to continue to grow. This is here to stay."
A record 69,000 condo units are planned for Miami -- including projects on Biscayne Boulevard -- and that's not counting the beaches and the areas nearby.
Martin, in an interview the day after the party, says he expects only 10% to 12% of his building to wind up in the hands of investors.
Developers have a tortuous relationship with speculators. Many developers complain that they don't want flippers and take steps to, for example, restrict sales of multiple units to single buyers. Yet they keep lists of previous buyers and e-mail them with news of new projects they're opening. And, as DeNapoli points out, contracts like the one he signed at Quantum give developers a 1.5% cut each time a contract is assigned to a new buyer, making flipping in developers' financial interest.
Developers also call on power brokers who provide an instant supply of investors and buyers to grab up units before a project is even formally announced, clearing the way for the developer to reach the sales goals he needs to get his project financed. "Those of us brokers and Realtors who specialize in preconstruction, we keep our ears to the ground. They call us and tell us, 'We'll be launching a product soon. Get your people together,' " says Mark Zilbert, a Miami broker. Zilbert is a condo bull who says the market can absorb 100,000 units by 2009.
"It's our culture here to buy and flip," Zilbert says. "Historically that's how we sell condos in Miami. If someone can get a 100% return on investment in 60 to 90 days, that's a damn good investment." Zilbert, in fact, has a patent-pending flipping calculator on his website. It's not to encourage flipping, he says, but to help people understand the costs and their effect on returns. "I get them to almost commit to me they're willing to close. I want you to close and hold it. However, we may have some opportunities to flip and if one comes, let's go for it, whole hog, but that's going to be plan B."
The signs of a bubble are there. As with the tech bubble, developers have legions of PR people pushing their products. There's a can't-lose mentality. Sage economists and officials talk about a lack of realism. A man named Leon Cohen told the Miami Herald he wants to build a 110-story condo tower on a Miami site he bought. There are not one, but two contestants from "The Apprentice" TV show pushing condos in south Florida. For those who find insufficient opportunity in south Florida, the Miami Herald recently had a Sunday advertising section devoted to Las Vegas real estate.
"We've never had this kind of volume... You've gotten more people who are investing / speculating than the user market. That's very scary."
Condo froth is nothing new in Florida. The word condominium didn't even appear in Florida Trend until 1970 -- "a new lifestyle is evolving in Florida and with it, a new habitat, the condominium" (hat tip to University of South Florida history professor Gary Mormino and his painstaking research). But by 1972, the "habitat" had taken off so well that the headline on one article was "Condomania." And of course the state has a storied history with real estate excess, most notably in the 1920s when the Miami Herald was reportedly the heaviest newspaper in America and the Marx Brothers framed a comedy hit around the Florida land craze. Somewhat akin to now, people bought property -- home lots in promised subdivisions -- through the famous binder boys with the expectation of reselling their properties for hefty profits before they ever needed to close on the deal. That boom ended unhappily in 1926 with hundreds of bank failures in the state, giving Florida a three-year head start on the Great Depression. Prices didn't return to 1925 levels for decades.
This craze is different -- at least in some respects. No analyst says he's worried about the bank lenders. All are much better capitalized and regulated and careful about what they underwrite than in past booms, banking analyst Thomas says. And this craze, Mormino notes, has something to show for the speculation -- hard assets. "Things are being built. We're witnessing something remarkable now, this property escalation," says Mormino, author of "Land of Sunshine, State of Dreams," a social history of Florida. Mormino says the state's had one long boom since 1945 (interrupted by a recession-related downturn in 1973 from the oil crisis and the 1990-91 recession). Real estate kept Florida out of the nation's most recent recession, and with retiring Boomers the prosperity should roll on "as long as there's saltwater and palm trees and the good life."
As of May, DeNapoli, on paper, was living the good life. He was up $400,000 on his four unfinished condos. "I know it's all baloney until it happens," he says.
Plenty more projects are on the way. Martin's Terra Group paid $190 million for 10 acres around the Miami Herald building for a condo-retail-hotel project, for instance. But DeNapoli isn't interested in investing in condos anymore. "I wouldn't touch them now," he says over the hors d'oeuvres at the Quantum party. "When the taxi driver starts talking about how great real estate is, it's time to get out. The condos are the scariest. It's becoming the greater fool theory. Is there a greater fool who's going to buy it from me?"