The Miami Condo Market: Saturated but not Busting

Has the Miami Condo market peaked? Yes (In some neighborhoods)
Do we expect another Bust? No

Whoever follows the Wall Street Journal will have read their recent article about a looming next Miami condo bust. The WSJ used sensational headlines like: “Developers, seeing sharp drop in sales, inventory surge, take steps to avoid a ‘bloodbath’“, which served the writer’s purpose for creating a stir in combination with numerous shares, comments and likes. In this blog we try to explain to you what the condo market in Miami is really experiencing. Although some elements in the before-mentioned WSJ article are true, we are not expecting another bubble.

Read our article in the Miami Herald about the Brickell condo market and its shift in supply and demand

Based on our Brickell Real Estate Report 2015

The Miami Condo Market: Saturated but not Busting

A Quick Explanation

Please understand this WSJ article is over-dramatized and generalizes the Miami Condo market. We are not heading towards a bubble and the market is not the same as the 2007 market
The Miami condo market does need a price correction (In some areas). The David Siddons Group has announced this last year already.
Miami condo inventory has increased and sales velocity has slowed down
Prices however are still increasing in most markets albeit with a decline in growth percentage
The Miami condo market if today cannot be compared to the Miami condo Market in 2007
We are not expecting the Miami condo market to bust, we do expect price corrections
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The Miami condo market knows a different climate these days

Despite the slower Miami condo sales, we are not likely to see another condo bubble like the one we experienced in 2007 and 2008.

First of all, very little has been bought on credit (most Miami condos are bought in cash), so we’re not going to see our hand being forced where we have to sell at half the price. This means most people are not in debt and can actually afford their investment.

Many developers require buyers to pay a 50% deposit (unlike the 20% required in the last cycle) on the total cost of their units by the time the project breaks ground. Developers don’t break ground until the project is 80% sold, which means the deposits are enough to cover a significant portion of the construction costs.

Miami has developed as a world city with business, services and retail to rival any other major metropolitan hub around the globe. The gap we had for quality retail, banking and services has been filled. What is interesting is the entrepreneurial spirit, open attitudes, and influx of wealth coming into the city. Services that add to the real quality of life in Miami are its arts, shopping, diverse culinary hotspots, and entertainment. Miami is becoming more and more a preferred residential place for young professionals from all over the world.

A slowdown in new projects will prevent the massive oversupply that Miami saw during the last cycle. The current inventory level is not as high as the inventory before the 2007 bubble.

My motto with all investment markets is that you cannot generalize an entire market.

Some Miami condos might decline, some may remain at the same price level and some will even increase in value. Whatever condo is a good investment and whatever condo will appreciate depends on the actual product and what the product is competing with.

What we will see is some sectors of the Miami market will be a correction, as the market is clearly not absorbing the supply of condos.

Refrain from generalization when it comes to Miami Condos

In Coconut Grove for example, there were no ultra-luxury condos while the Grove has been attracting many wealthy families for years. The arrival of condos like Park Grove and Grove at Grand Bay responded to the enormous gap in the market and units sold out very fast. Both projects are very high-end and don’t over promise on the luxury aspect.

Have a look at the graph on the right-hand side showing the months of inventory in some of Miami’s most desired neighborhoods and decide for yourself whether you can generalize the Miami condo market.

Likewise, a condo like the Porsche Design Tower that offers a lot of unique features or a condo like Palazzo del Sol that offers a unique location will be less likely to need a price correction.In the case of a condo unit that does not stand out in the crowd and competes with a handful of other condominiums, which is mostly what is happening in the Brickell Market, then its likely prices will need to be adapted in order to get buyer’s attraction.

Pictured below: Condo Inventory Levels accros Miami (Provided for 3 different budgets)

Pictured below: Park Grove in Coconut Grove

A deep-dive into two very different Miami condo markets – Coconut Grove and Brickell – shows the below differences. We show the months of inventory for the last 12 months (Provided for three different budgets). The trend lines show a steady or even decreasing condo inventory in the Grove, while Brickell is heading to a largely oversupplied market.

Needless to say, the enormous demand for luxury condos in the Grove, together with a shortage in supply (No new projects are planned and waterfront lots are scarce) makes it unlikely for prices to decrease any time soon. Coconut Grove’s latest residential condo project (Park Grove) has almost sold out.

Please note that the X-Axis in the Grove contains lower units of measurement than in Brickell

The condo market seems saturated – Where shall I invest my Dollar now?

The relationship to the supply/demand curve is very important in understanding what neighborhood you should invest in. Right now, I’m seeing more and more frequent opportunity in the single-family market. Neighborhoods like Coconut Grove, Coral Gables, Pinecrest and South Miami have actually seen very strong value increases. Single-family homes are excellent because there is a limited amount of homes available per area (limiting the supply and therefore making it a scarcer asset) and there is flexibility in renting with great returns.