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Condominium Oversupply
Miami as a Second Home Resort Market
February 9, 2005
Supply & Demand
• Miami is an overbuilt market
• There are 10,000 to 20,000 luxury priced units in the pipeline
• Land Prices at Record Levels <$300SF
Interest Rates
• Now Increasing
• Budget deficit at record levels
• High trade deficit
• Weak dollar
Prime vs 30yr fixed
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2/2
/2004
3/2
/2004
4/2
/2004
5/2
/2004
6/2
/2004
7/2
/2004
8/2
/2004
9/2
/2004
10/2
/2004
11/2
/2004
12/2
/2004
1/2
/2005
2/2
/2005
Date
Perc
en
tag
ePrime Rate 30yr Mortgage
Housing Market Still Hot, Due For Leveling
Median Home Prices
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
Miami-Dade Broward West PalmBeach
U.S.
1990-2003 3Q2004
Sources: Marcus & Millichap Research Services, Economy.com
64% 65%91%
23%
2001 – 3Q 2004 Price Increase
Med
ian
Hom
e P
rice
South Florida Housing Cost Comparison
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Miami-Dade Broward West Palm Beach
Median Mortgage Payment Average Class A Rent
Average Class B/C Rent
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
South Florida Apartment Rent Trends
$200
$400
$600
$800
$1,000
$1,200
Miami-Dade Broward West Palm Beach
1999-2002 2004* 2005*
*Forecast
Sources: Marcus & Millichap Research Services, Reis.
2001-2005* Rent
Increase
11% 8% 8%
Year Absorption Completion Starts Vacant1985 1,007 1,216 2,559 1,3381986 2,946 4,022 6,531 2,4141987 5,930 6,387 4,769 2,8711988 4,487 3,902 3,891 2,2861989 3,305 2,499 2,102 1,6071990 4,424 3,919 1,824 1,0681991 3,313 2,228 1,385 3961992 1,206 832 495 121993 1,241 1,246 1,734 171994 873 902 2,301 701995 2,367 2,873 1,926 5761996 1,373 1,011 1,268 2141997 1,105 1,140 1,977 3111998 1,416 1,506 2,511 4011999 1,139 858 1,183 1202000 2,404 2,341 3,878 572001 1,245 1,980 1,697 7542002 2,094 2,548 3,544 1,2102003 3,202 2,392 4,372 779
2004-3 2,206 2,047 555 690
Source: Reinhold P. Wolff Economic Reasearch, Inc. 1985-2004/3
DEVELOPMENT TREND OF NEW APARTMENTSMIAMI-DADE COUNTY
Total $150,000 $175,000 $250,000 + $175,000 % $150,000 %$174,999 $249,999 $449,999 $450,000 +$450,000 County +$450000 County
1Q 753 29 44 68 98 210 27.89% 239 31.74%2 Q 632 14 28 81 126 235 37.18% 249 39.40%3 Q 811 10 47 112 51 210 25.89% 220 27.13%4 Q 883 89 118 136 46 300 33.98% 389 44.05%
3,079 142 237 397 321 955 31.02% 1,097 35.63%
1Q 612 18 29 66 51 146 23.86% 164 26.80%2 Q 813 37 101 158 52 311 38.25% 348 42.80%3 Q 665 33 67 94 97 258 38.80% 291 43.76%4 Q 1,640 77 269 329 284 882 53.78% 959 58.48%
3,730 165 466 647 484 1,597 42.82% 1,762 47.24%
1Q 1,490 45 146 282 406 834 55.97% 879 58.99%2 Q 1,077 54 84 188 202 474 44.01% 528 49.03%3 Q 1,062 80 105 115 163 383 36.06% 463 43.60%4 Q 1,124 97 99 208 84 391 34.79% 488 43.42%
4,753 276 434 793 855 2,082 43.80% 2,358 49.61%
1Q 1,149 56 93 256 215 564 49.09% 620 53.96%2 Q 1,418 123 152 289 235 676 47.67% 799 56.35%3 Q 1,397 178 176 214 376 766 54.83% 944 67.57%4 Q 1,917 270 320 168 389 877 45.75% 1,147 59.83%
5,881 627 741 927 1215 2,883 49.02% 3,510 59.68%
$175,000 $250,000 $175,000 %$249,999 $499,999 +$500,000 +$500,000 County
1Q 1,512 159 231 272 147 650 42.99% 809 53.51%2 Q 2,038 215 355 401 130 886 43.47% 1,101 54.02%3 Q 1,780 265 274 525 160 959 53.88% 1,224 68.76%4 Q - #DIV/0! -
5,330 639 860 1198 437 2,495 46.81% 3,134 58.80%
32,986 13,602 41.24% 15,866 48.10%Annual Avg. 4,256 1,755 41.24% 2,047 48.10%(1997-2004/3)
Source: Reinhold P. Wolff Economic Research, Inc. Note: *From 2004 range varied
20
02
20
03
20
04
Total (97-04)
20
00
20
01
YearDADE COUNTY
New Condominium Prices
Unit Price
Price $600,000
Down payment 20% $120,000
Mortgage $480,000
Monthly Payment $2,878
$34,536 Annual Payment
Taxes $13,161
Insurance $649
Yearly Payment $48,346
Yearly Income $161,153
30 % of annual income
30 yrs, 6%
1,500 SF$400 SF
Construction Costs
• Increasing above inflation rate
• New construction loans are participated to reduce exposure
Developer buys Miami waterfront hotel for $94 million• By Matthew Haggman, The Miami Herald
Knight Ridder/Tribune Business News • Dec. 14--Developer Jorge Perez has paid $94 million for the waterfront Sheraton Biscayne
Bay hotel on Brickell Avenue, which he plans to demolish to make way for a mixed-use project that will include high-rise condominium towers.
• The 598-room hotel will stay open for at least six months while plans for the project are developed, said Perez, chairman of Miami-based Related Group of Florida.
• The Sheraton will continue to manage the property, he added. • The 5.1-acre property at 495 Brickell Ave. stretches to Biscayne Bay. The sale price is the
highest total price Perez has ever paid for land. • Flanking the hotel are the Miami Circle, a protected Tequesta Indian site, and the 2.2-acre
Brickell Park. • Springfield, Mass.-based MassMutual Financial Group sold the property to Perez. • Manuel de Zarraga, executive managing director of Holliday Fenoglio Fowler in Coral Gables, led
the team that brokered the sale, which closed Friday. • (c) 2004, The Miami Herald. Distributed by Knight Ridder/Tribune Business News. For
information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail [email protected]. HOT,
Physical Market Cycle CharacteristicsPhysical Market Cycle Characteristics
Below Inflation & Negative Sales Price
Growth
Negative Sales Price Growth
Below Inflation Sales Price Growth
Increasing Sales Prices Tight Market
Sales Price Increases in Decline
Sales price growth above inflation
The Role of Research In Identifying Cycles in Real Estate
• Demand for Space Increases
• Rents Rise Faster than Expenses
• NOI spike Attracts Capital
• Over Building Reduces Occupancy
• High Vacancy Reduces Rents
• Lower Income Leads to Reduced Prices
Valuation Considerations
• Business cycle• Inflation or deflation• Interest rates and credit• Population demographics• Tastes and preferences• Regional economic base• Construction costs• Legal and regulatory
environment• Taxes
• Physical characteristics of property
• Location• Legal• Nature of leases• Financing
Valuation Considerations
Return
• Purchase price or cost
• Price appreciation
• Leverage
• Inflation hedge
Risk• Liquidity and
marketability• Interest rate risk• Inflation risk• Systemic/non-systemic
Principle of Balance
• H&BU of residential sites will revert to commercial use as demand for condominium units weakens
• Result will be lower land prices in the CBD
DEVELOPMENT TREND OF NEW APARTMENTS
0
1,000
2,000
3,0004,000
5,000
6,000
7,00019
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
03 20
YEAR
UN
ITS Absorption
Completion
Starts
Vacant
Profit
• Construction lenders see lower profits on gross sales to 5% from 10% - 15%
The Life Cycle of a Real Estate Investment
Product Characteristics Risk
Land No income, but high appreciation potential
High Risk
Development No income, but high income/appreciation potential
High Risk
Renovation Limited income, but higher appreciation
Higher Risk
Lease-Up Limited income, appreciation
Lower Risk
Operating Stage
Income and appreciation, depending upon market cycle
Lowest Risk
At What Point in the Market Cycle Do You Invest?
Recovery Rising Stable Declining
Discount Pricing Increasing pricing Highest pricing Decreasing pricing
Low occupancy Increasing occupancy
Full occupancy Declining occupancy
Flat rental rates Increasing rental rates
Maximum rental rates
Softer rental rates
Supply exceeds demand
Demand exceeds supply
Supply & demand in equilibrium
Over supply