More affordable windstorm insurance coverage for residential properties. A solution to rising property taxes. Initiatives to increase the supply of workforce housing.

Value Call

When G.L. Homes opened Greystone in Boynton Beach in October, more than 1,000 prospective buyers lined up outside the sales center for a chance to buy single-family homes starting in the $310,000s. A few weeks later, The Related Group of Florida enjoyed similar sales success with Loft 3 in downtown Miami thanks to prices that began at $159,000.

For Florida residential developers and builders, the lesson is clear: Pricing will be a key factor in determining sales success in 2007. Today, all segments of the market -- primary-home, second-home and investor buyers -- are looking for value.

Unfortunately, most residential developers and builders are finding themselves squeezed between the new market realities -- slower sales, lower prices and more stringent qualifying terms for mortgages -- and their own cost structure. With high land prices and construction costs, there's little room to offer discounts.

Some bright spots on the horizon in the residential sector remain. For instance, single-family home builders in Jacksonville, Orlando and Tampa Bay did not run far ahead of end-user demand, unlike their counterparts in multifamily housing, specifically high-rise condos. By mid-2007, there will be a better balance statewide between demand from primary-home buyers and the supply of houses on the market.

Rentals offer another growth opportunity for developers. Floridians who can't afford to buy today's higher-priced homes are likely to remain renters, and condo conversions have removed tens of thousands of attractive units from the state's rental pool. In Tampa, for instance, more than 30,000 units were converted into condos in the past five years.

"Housing affordability is at a low level right now," says Gleb Nechayev, vice president and senior economist at Torto Wheaton Research in Boston, in a recent CB Richard Ellis multifamily housing outlook conference in Hallandale Beach. "As a result, the number of renter households is increasing for first time in a decade, and we expect to see real growth in rental rates."

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.

Developers are squeezed

While buyers today are looking for deals, Florida developers are finding it difficult to lower their prices. One reason is that land prices rose dramatically in the past five years -- especially for premium multifamily sites.
A recent national study by Credit Suisse's equity research department found that the value of land accounted for 33% of a home's price in 2005, the highest percentage in more than 25 years. "Our analysis suggests that the euphoria of the new-home market was similarly present on the land side," according to the report. "The most likely scenario is a return to 2003 land values, which would imply a fall of 27% from peak to trough."
Many Florida builders are walking away from their deposits on land or negotiating significant price reductions and better terms. For example, publicly traded WCI Communities of Bonita Springs recently announced it was writing off
$13 million associated with terminated land options. "With the current slowdown in demand, we believe we own sufficient land to support our operations through the foreseeable future," says President and CEO Jerry Starkey.
WCI also disclosed that buyers failed to close on about 80 traditional homes valued around $48 million that had been scheduled for third-quarter delivery. In fact, every major public home builder has acknowledged significant losses due to dropped contracts.
But there is a positive side to this picture: Lower land and construction prices. In 2007, expect to see a substantial drop in multifamily parcel prices because of a large inventory of approved projects that were aborted as a result of market conditions. Construction costs are also likely to decline, perhaps by 10% to 15% before year-end.
With lower land and construction costs -- and slimmer profit margins -- developers may be able to build more affordable projects. Many builders use their land inventories to address the state's pressing needs for rental and workforce housing, as well as offer better values to commercial users.
Lewis M. Goodkin is president of Goodkin Consulting in Miami.

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Training

A new, $12-million state program, Florida reBuilds, will offer training to prospective construction workers to help meet the state's annual need for 13,000 new workers in the building trades, including carpenters, plumbers and masons.

The state Agency for Workforce Innovation (employflorida.com) will facilitate the training and help match employers with the workers.

All in the Family
More developers are planning multigenerational housing.

A place for everyone: Builder magazine incorporated a granny flat in its 'Reality House' in Celebration.

Growing up in the Big Apple, Michael Rodriguez was accustomed to several generations of family members living under one roof. "The three-story brownstones in New York -- commonly built as luxury homes in the early 1900s -- those eventually ended up becoming multigenerational housing. If you ended up owning it, you'd live on the top floor. The elderly parents would live on the first or second floor, and if you were wealthy enough, you could have a lift.

"Today, the president of Orlando-based Ample Realty is offering Florida home buyers a new twist on the age-old concept by offering 658-sq.-ft. "multigenerational additions" as an option on new homes it's developing with ICI Homes in the east Orlando community of Lake Price Estates. The MGAs, which Rodriguez believes sounds more palatable than "mother-in-law suites," add about $125,000 to the price of homes, which range from $300,000 to $400,000.

But Rodriguez thinks the added value is worth it. "A lot of families don't have a solution. The greatest expense for assisted living and independent living is the real estate portion of it, followed by the maintenance of it."

Nationally, 4% of all households are intergenerational. In Florida, extended family options have become a strong selling point around the state. Last year, Builder magazine incorporated a "second-generation suite" into the "Reality House" it unveiled at the 2006 International Builders' Show in Orlando. The auxiliary dwelling unit was "designed as a pod stemming from the main residence" complete with its own outside entrance and doorbell.

Susan Watts, a senior vice president of the Naples-based Bonita Bay Group, says the high-end developer is incorporating so-called "granny flats," carriage homes and above-garage units into many of its homes.

Watts says the chief obstacles to building more accessory dwelling units are municipal regulations and zoning codes that limit density. Many cities and counties are already revising their codes to allow for intergenerational housing, which in addition to solving some affordable housing conundrums has the added benefit of reducing urban sprawl.
Jacksonville Realtor Debbie Shagnea says the in-law suites are still a unique enough feature to add significant resale value to the home. "I think it's a great selling feature to be able to say you have an in-law suite." -- Amy Keller