Miami Year in Review 2008
In 2007, South Florida developers and investors were still pulling permits, successfully raising capital and buying up property at record prices. Then came 2008.
The residential downturn started with the collapse of the subprime mortgage industry, which then morphed itself into a full blown credit crisis. As the credit crunch spread to virtually every type of financing, real estate activity in our market dried up.
With the nation shedding over 2.6 million jobs this past year, which is the most dramatic year for job losses since 1945, South Florida’s unemployment rate continues to rise. We consistently ranked in the top three in the nation in number of foreclosures.
Thus far, we have not seen anything remotely similar in commercial real estate, and there were even a few high profile sales of South Florida commercial property to foreign investors last year. However, signs are beginning to show as default rates are increasing and workable financing is like finding a needle in a haystack.
It is likely that 2009 will bring in more turmoil to our real estate markets, but at the same time all of this distress will offer a tremendous opportunity to cash buyers that are willing to take some risk.
Vultures are increasing with few landing
Many large real estate funds announced their intentions to purchase distressed South Florida residential real estate, such as Lubert-Adler Related, Strategic Real Estate Advisors, Century Opportunistic Fund, and Rialto Capital Management.
The real estate community took a deep breath hoping for some relief, but the gap in pricing remained wide. A handful of deals did take place with the bulk purchase of condo units in buildings such as 50 Biscayne, Marinablue and The Harbor House.
As the market continues to deteriorate, banks are likely to start accepting much bigger losses to sell off their ever growing real estate portfolios. We did see the ratio of bank owned property sales dramatically jump in the fourth quarter. Many, including myself, are predicting that the banks will have to continue to discount further and that the vultures will begin to feast in 2009.
Community banks keep their heads above water
BankUnited, South Florida’s largest community bank, is at the forefront of the Miami foreclosure crisis. Unable to raise $400 million in capital and with a ballooning Option ARM portfolio, they face some immense challenges.
South Florida’s 80 community banks are beating everyone’s expectations having survived such a difficult year. However, as so many continue to bleed cash, take on more bad loans and burn through capital, this year presents a much greater challenge.
More Spanish banks arrived on the scene, including Caja Madrid’s $927 million purchase of 83 percent of City National Bank of Florida. It will be interesting to see what effect the global credit crisis will play on further distressed sales of local insitutions.
Rampant fraud
With the collapse of the market and visibility of the local FBI mortgage task force, many of the fraudsters closed shop and fled. To top it off, the Department of Financial Regulation had to take responsibility for licensing over 10,000 mortgage brokers that had criminal records.
It is disturbing to learn that, according to the Mortgage Asset Research Insititute, Florida still ranks highest in the nation for mortgage fraud.
Several developers incur major losses
Renzo and Pasquale Renzi had very ambitious plans to develop condo projects across South Florida under a mountain of debt on their development sites. In September, when they could no longer borrow or refinance to stay afloat, the brothers starting handing back their properties to lenders. This included an entire city block in downtown West Palm Beach and a 41,624 square foot parcel in Miami Beach.
The Merco Group, developers and owners of several projects in South Florida, including the Grand Bay Hotel, Akoya Condominiums and Deauville Beach Resort, lost a 4.5 acres waterfront site valued at $30 million to lender Eastern Financial Florida Credit Union.
Developer Enrique Dilon lost the 210-unit condominium building in downtown West Palm Beach to iStar Financial. Dilon handed over 141 units to iStar in a deed in lieu of foreclosure, which was valued at $43.8 million.
EB Developers was hit with multiple foreclosures throughout South Florida. Bank of America filed to foreclose on a $35 million loan secured by 108 acres near Boynton Beach. AmTrust also foreclosed on 42 acres in Palm Beach Gardens as well as over 1,200 acres in an unincorporated part of the county.
Lenders are suing Boca Developers for nonpayment of $189.7 million in loans and guarantees on nine projects in Florida, including the Las Olas Riverfront complex and Biscayne Landing project in North Miami. The developers claim that they are not in default.
And so the saga of South Florida developers will continue.
Even the super-rich suffer
Veronica Hearst, the widow of newspaper heir Randolph Hearst, lost her 52-room mansion in Manalapan after a long battle with her lender, New Stream Capital, to whom she owed approximately $45 million. Court papers revealed that she had even mortgaged some of her art and was paying $290,000 a year in interest payments on her loans. The couple paid $29.9 million in 2000 for the oceanfront estate.
We are now starting to witness oceanfront homes in very presitgious areas, such as the Venetian Islands, in the advanced stages of foreclosure.
Foreclosure crisis slams South Florida
South Florida banks and other major lenders dramatically increased the number of foreclosure filings over the previous year, a trend that does not appear to be slowing. Banks are under tremendous pressure to remove non-performing loans from their books as soon as possible.
Adjustable rate mortgages continue to have the highest share of foreclosures and Florida has over 40 percent of the prime and subprime ARM nationwide foreclosure starts. In Miami Dade County, we experienced over 27,000 foreclosures in 2007, which more than doubled in 2008.
Option ARM mortgages were especially popular in South Florida, and Option ARMs are the next major wave of mortgage resets to hit the market starting in 2009.
Condo association woes
Associations have been severely financially burdened by the growing number of foreclosures and difficulty in getting lenders of repossessed condos or exisiting owners to pay their dues.
Lenders do not like to own condos as they are automatically liable for up to six months of monthly dues or 1 percent of the original mortgage, whichever is the lesser amount. This has created a snowball affect of sorts – as more owners default, the assocation has to assess the existing owners that are in good standing, and so more unit owners are pushed into paying late and possibly foreclosure as well.
To add to an already difficult situation, banks are so concerned with the creditworthiness of associations that they have stopped lending to associations or pulled back on lines of credit. This is forcing condo associations to seek alternative sources of funding.
Lender pains grow with new maintenance requirements
The Miami-Dade Commission passed two new ordinances at the end of the year to make lenders responsible for maintaining foreclosed properties.
This includes informing new buyers of any zoning and building code violations, which creates yet another hurdle and delay for banks to sell repossessed properties. Code enforcement officials have also been coming down on lenders for violations adding to the difficulty and expense of managing large real estate portfolios.
Glut of office and retail space arrives
You see it everywhere, huge signs on most office or retail buildings “Space Available”. The office and retail segments are facing a major over-supply situation with over 2.0 million square feet to come online in Miami Dade County in the next two to three years.
The glut is most obvious in Miami’s downtown Brickell district. The oversupply will provide a clear benefit to tenants, who will be able to negotiate more favorable rental rates and concessions to occupy space.
For more information or further assistance with South Florida real estate, please do not hesitate to contact Ross at 305.673.5300 or via email info@miamiangelproperties.com
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