Condo Cooldown

Rising material and labor costs are forcing developers to adjust, particularly in the high-rise market. Some have put projects on hold or repriced units to reflect higher construction costs. Overall condo sales, meanwhile, have slipped. "The residential condo market just is not there anymore now that the speculator left," says Jack McCabe of McCabe Research & Consulting in Deerfield Beach.

The trend is particularly pronounced in south Florida, where speculators have fueled one of the most prolific condo markets in the nation. In January, angry buyers sued the Fort Lauderdale-based developers of Promenade Condominiums in Boynton Beach after the company returned their deposits. Developers canned the project in December, citing "meteoric rises in construction costs" and a shortage of labor and material caused by the spate of hurricanes in 2005. In February, another south Florida developer, the BBB Group, pulled the plug on its plans to build a $150-million, 49-story luxury condo tower along Biscayne Bay in Miami. Surging costs and slowing demand are making it more difficult for high-rise projects to secure financing.

As some developers, particularly novices, find their expected cost basis has escalated, they're shopping their projects to other developers with deeper pockets and more established connections to contractors.

Other first-timers are managing their inventory differently. Enrique Dillon is building an eight-story condo called The Whitney in downtown West Palm Beach that will be topped off sometime this month. Rather than selling all the units during the grand opening and the week afterward as many developers have done during the torrid market, Dillon is selling his 210 units on a staggered schedule that allows him to adjust prices to reflect changes in the costs of construction and other variables that affect his bottom line. He also required buyers to put 20% down and prohibited the reassignment of contracts. "It might be a little more conservative approach, but it's definitely more secure," he says.

Building Costs
Ken Simonson, chief economist for Associated General Contractors of America, predicts 10% to 20% increases this year in the cost of everything from fuel and asphalt to PVC pipes because of a spike in petroleum and natural gas prices. Hurricane Katrina affected the whole range of construction inputs, from the cost of labor and fuel to key supplies manufactured in the region.

Conversion Fever

After a torrid 2004, conversion of apartment complexes to condos leveled off in most of Florida's biggest counties, but the sale of apartment complexes is still brisk. In 2005, a record 401 apartment communities in Florida sold for $12.6 billion, most of which were converted to condos. At an average sales price of $112,056 per unit, that's a 23% increase over the previous year, according to an analysis by Apartment Realty Advisors' Florida office, which handled the sales for more than 19,000 of those units. Nowhere was the trend more pronounced than in Orlando, which led the nation in conversions with 39 properties -- 13,400 units -- sold to converters in 2005. Broward County, meanwhile, led the state in sheer dollar value, with 56 transactions totaling more than $2.55 billion. "Last year was an astronomical year for the conversion world," says Tony Martin, executive vice president of Tarragon Corp.'s Florida division, which develops and markets homes and apartment and condo-conversion projects. "Everybody in 2005 decided they wanted to purchase something."

What's driving the trend? Affordability. With Florida growing by 1,000 people a day, the median cost of a single-family home has risen 109% over the past five years to about $250,000. Increased construction costs, meanwhile, are making new construction costlier and riskier. Figure in the dwindling supply of land, and buyers seeking to take advantage of historically low interest rates have nowhere else to turn but the multifamily real estate market.

Some intended condo conversions haven't gone as well as expected. The Gateway Club in Boynton Beach, for instance, announced it was going condo early this year, but initial sales were so dismal that the owners opted to keep it a rental community. That's good new for renters who've seen rents rise sharply over the past year or so as condo-conversions have shrunk the supply of apartments.

Expect conversions to continue, though at a slower pace. Owen Beitsch, executive vice president of Real Estate Research Consultants in Orlando, says the condo-conversion market is "starting to slow" namely because apartment complexes are becoming more difficult to find, especially in markets like south Florida. "The prices on apartments that remain are getting bid so high that it's either difficult to convert them, or the property itself is wholly unattractive," Beitsch says. Investors interested in apartment-to-condo conversions, Beitsch says, will look for opportunities in "smaller" cities like Tallahassee or Gainesville.

Multifamily Housing

While existing single-family home sales in Orlando slipped in January and February, condo sales sped along. A total of 871 condos changed hands in the first two months of this year -- a 119% increase over last year -- and the median sales price rose 29% in February, from $129,000 to $164,400, according to the Florida Association of Realtors. Condo sales in Gainesville also were brisk in January and February, up 78%. But the statewide data suggest that the markets for condos and single-family homes are slowing.

Townhomes

High land prices and some buyers' preference for the feel of a traditional home are spurring development of townhomes. While some are being marketed to upscale buyers, many are offered as affordable alternatives to detached homes. Townhomes are a "much better product than condos" in the current market, says McCabe, the Deerfield Beach real estate analyst. They cost more to build on a per-square-foot basis than condos, but garages, green space and greater privacy make them more desirable for homebuyers.

KB Home has at least eight townhouse developments in the works from Clearwater to Jacksonville, including four in Kissimmee, with unit prices from $199,990 to 252,990. The median existing single-family home price in the state, meanwhile, is around $250,000. In Fort Lauderdale, The Island Enclave, which is going up along Northeast 15th Avenue in old Victoria Park in Fort Lauderdale, offers 11 Key West-style residences from $989,000 to $1.15 million. In the desirable Rio Vista area, 32 planned modern loft-style townhomes are selling in the $600,000 range. "In south Florida, it's a resurgence. In a lot of parts of Florida, it's a new phenomenon," says Lewis M. Goodkin, president of Miami-based Goodkin Consulting and a longtime contributor to Florida Trend.

Out of reach:
Rapid appreciation of home prices in Florida during the past five years has pushed average prices to a record 6.1 times household income. Today, only 33% of households in Florida have annual incomes of at least $60,476, the level needed to purchase the median-priced home of about $250,000 using conventional financing. In contrast, 69% of households had sufficient income to purchase the median-priced home at year-end 1999.
Source: Office of Federal Housing Enterprise Oversight