Analysts eye Miami's condo boom, raise a 'more risk' sign
By Michael Lewis
You know we face trouble when public-relations firms are hired to tell us that we don't.
Right now, they're toiling to tell us that we don't have a condo bubble in Miami. So clearly, something is amiss.
How bad is it?
According to a 20-page Wachovia Securities report issued mid-month for investors, it could be worse. We could be in Chicago, where 26,838 units are being added to a soft economy in a condo market that is already rocky. Wachovia rates Chicago as "most risk" among the top 43 markets.
Unfortunately, Wachovia ranks Miami - along with Las Vegas - right behind Chicago at "more risk." In our case, it's based on what Wachovia says is 19,660 units just finished, under construction or in final planning.
At least they're rising in a strong Miami market. Wachovia notes demand for well-located condos based on our high job growth, the nation's huge Baby Boom crop entering retirement and looking south, escalating prices for single-family homes and strong interest from South American and European buyers aided by the weak dollar.
But Wachovia cites what Miamians have long known: "Many of the current and proposed projects are in secondary and tertiary areas. ... Although demand is strong, much of the current demand is being fueled by speculators and investors" - more than 50%, and perhaps 80%, of it.
And Wachovia adds: "While we are bullish on South Florida's demand potential, we see great risk on the supply side of the equation, given the huge amount of supply under construction and more projects announced seemingly every day."
If anything, Wachovia is understating the case, assuming that Miami-Dade has just 19,660 condo units either finished or in the pipeline. In fact, that's less than 40% of the true total. We are building or are about to start more than 100,000 housing units in a county of 2.3 million people, and more than half of those are condos.
One reason for Wachovia's low estimate is that it's tricky to ascertain total units in the county's pipeline. No database lists all permits sought, all plans on file.
But City of Miami figures alone show more than 71,000 housing units in planning and permitting or rising. That's enough to house a third of the city's population - though in a city near the bottom in average wealth, the glitzy condos we're building are not meant to house Miamians.
Beyond those 71,000 units, Coral Gables has 4,000, about 16,000 are rising in Homestead, Doral is adding about 10,000, and, presto, the total tops 100,000.
And that excludes everything from Miami Beach to the Broward line on the ocean. It leaves out Aventura and Key Biscayne. It excludes massive projects in Dadeland. It ignores Kendall and West Dade. All that makes 100,000 units - at least half of them condos - look conservative.
So how does Wachovia get just 19,660? It lists a mere 739 units in planning for the entire county, projects it feels have the highest probability of actually breaking ground.
I hate to break it to the analysts, but I could throw a rock from our Brickell offices and hit sites where thousands of top-quality units are to rise.
While Wachovia is highly conservative in that estimate, Miami's developers are anything but conservative in their plans. Within Miami city limits alone, surely 40,000 condo units are in the pipeline.
In no year since the 1940s has the city added as many as 2,000 total housing units per year. But city projections show 9,000 new units available this year, 14,000 next year and 7,000 in 2007 if not another project is announced.
So far, the units being built are selling. But while every developer says he takes pains to avoid speculative buyers, speculators are estimated to make 50% to 75% of all condo buys here.
I spoke with five residential developers in Miami-Dade. Like the Wachovia analysts, all see dangers. All see solid demand for good units. But all five say too many units are rising at prices too high for end-user demand. Thus, the concern about bubbles.
Even if Miami is under a condo bubble, however, it's not likely to burst with a bang. It's more likely to slowly lose air, for all the reasons the Wachovia analysis noted.
Because we attract buyers from the US and abroad, the 16,000 jobs we create annually that support about 30,000 new residences annually aren't the total demand. Well-to-do outsiders buy second and third homes or even primary residences here but don't work here. This flow makes our housing demand far greater than the growth of our workforce.
But that demand isn't guaranteed forever.
How long, for example, will the relationship between the dollar and the euro favor outside investment?
Could some shift in national economics be imminent?
Or, could natural disaster play a role? How will Europe and Latin America and the rest of the US look at buying a condo in a hurricane zone after Katrina and Rita and ...? Will potential buyers recall images of the Gulf Coast and think twice?
If outside demand were to sputter in conjunction with a stutter in the domestic economy caused by rising petroleum prices and the very real harm that Katrina's legacy is doing to this nation, it could trigger a sell-off among speculators that would let some air out of our inflated condo prices.
Wachovia's analysts aren't the only ones holding up the caution sign, either. The press is full of warnings.
Those publicists hired to tell us everything's peachy are going to be busy.