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South Florida Condo Construction Poses Limited Threat to Apartment Fundamentals

South Florida Condo Construction Poses Limited Threat to Apartment Fundamentals

The South Florida skyline is seeing new additions as residential towers are on the rise and construction cranes are firmly planted along the coastline. Much of the new construction is due to a recent increase in condo development. But apartment development has increased in recent years as well, especially in downtown Miami. Can South Florida support all of the additional housing units? Experts in the condo market suggest development is not over heated. But a persistent risk to the South Florida apartment market is growth in the condo shadow market – where condo units are purchased by investors, then leased for rental income, creating competition for the apartment market.

Even with growth in the shadow market, it appears that the region can absorb the additional apartments. At a submarket level, the greatest risk to apartments is in downtown Miami, primarily because that’s where condo construction has been heavily concentrated. However, apartment construction has been better distributed among South Florida submarkets. As such, the threat to apartment performance should be mitigated due to greater distribution of apartment construction within the South Florida region.

Condo and Apartment Development Concentrated in Downtown Miami/South Beach

Looking at apartments and condos, the Downtown Miami/South Beach submarket remains the focus for new construction. Just over half of all South Florida condos developed since 2011, under construction at year-end 2014 and in the planning stages are concentrated in this submarket, which includes popular areas such as Miami Beach, Key Biscayne, Fisher Island and parts of the Design District. Though condo development has been heavily concentrated in the submarket, Downtown Miami/South Beach accounts for only 11.4% of all the region’s apartments recently completed, under development and planned. Other key submarkets with heavy apartment development include Boynton Beach/Delray Beach (10.5%), Coral Gables/South Miami (9.5%) and Pembroke Pines/Miramar (9.4%).

Apartment Dev Stage

Historically, the apartment market is a key player in the recent development run in South Florida. Since the end 2010, construction activity has steadily climbed from around 2,000 units to approximately 14,000 by mid-2014. MPF Research identified 21,068 units under construction or in planning stages across South Florida at the end of 2014, on top of the 17,983 units that completed since 2011. The majority of recent apartment construction falls in the Miami metro (44.4%); this is well beyond neighboring metros of Fort Lauderdale (29.1%) and West Palm Beach (26.5%).


Likewise, condos are a significant contributor to South Florida’s development boom. According to, a market data firm that tracks condo development, more than 40,000 condos are underway in South Florida, accounting for every stage of the development life cycle. However, only a small portion of condos have actually completed. Approximately at third of condos are currently under construction, and another third have met proper permitting. Over 70% of these condos are concentrated in Miami-Dade County, while Broward County and Palm Beach County are anticipating around 20% and 10% of the region’s total, respectively.

With so much condo development, a key question remains whether there are still enough buyers to absorb new units. So far, the answer appears to be “yes,” according to recent research from IRR Miami. However, the market is just “beginning to see the tempering of annual price appreciation in the resale condo market and we are also beginning to see signs of a slower absorption of pre-sale units,” IRR Miami reported. Inventory for new condo units is creeping higher, to approximately 11,800 units, 14% above this time last year. What’s more, the median sales price for a condo was $188,500 as of January 2015, up 45% since 2012. Anecdotal evidence suggests price inflation has also influenced rent growth in South Florida markets. In other words, renters in downtown Miami could be feeling squeezed, and are either looking for lower-quality product or relocating to surrounding areas with lower rents. Recently, most growth is driven by mid- to lower-tier product as new deliveries come online. At the beginning of 2015, units built before 2000 recorded rent growth of 5.6%, while those built since 2000 yielded 3.6% rent growth. One unique feature in this development cycle is the financing structure. Condo buyers are currently required to pay large deposits of up to 50% of the unit cost. As such, speculative buyers are less likely to walk away from projects under way. All told, the condo market remains healthy, but could be approaching an inflection point in pricing as inventories remain elevated.

South Florida

Foreign Capital Influencing South Florida Real Estate Market

Miami is the global epicenter in terms of real estate development bubbles. The most recent (and most notable) is the housing crisis and Great Recession. In 2007, the condo market specifically was grossly oversupplied, which pushed prices down as much as 30%. As a result, capital dried up, available buyers left, development ceased and construction already underway was abandoned. Foreign capital has played a part in previous development cycles, and in other coastal cities. What is unique about Miami from other mature, coastal markets is the concentration of foreign capital for real estate development, especially from South America as well as China and Russia. Foreign economies are experiencing economic distress whether it is recent deflationary forces in Russia or runaway inflation in Venezuela and Brazil. As such, foreign investors are seeking a stable conduit in which to park capital. Enter Miami, which boasts scenic beaches and propensity for rapid real estate booms and busts. Foreign buyers view Miami’s real estate market as a more secure vehicle to park capital. And in purchasing condo units, they are able to rent these units to generate cash flow, thereby creating a shadow market. However, it is too early to determine too what degree a shadow market has materialized in South Florida as they are difficult to track. 

Historically, South Florida’s real estate market is a well-known center for wide swings in growth and contraction. Given the flurry of recent development from both condos and apartments, a shadow market could adversely impact the apartment market; though it is too early tell. The majority of all condo construction falls within the Downtown Miami/South Beach submarket. That said, the share of apartments under construction within Downtown Miami/South Beach is well below condos under development. As such, apartments threated by condos are less than perceived, given less exposure than perceived. We will continue to see moves in the condo market influencing apartment market performance (indirectly and directly), specifically rent and occupancy. Further, if development strategies shift such as targeting surrounding submarkets, a shadow market in this area could adversely impact the apartment market as well.

Image Sources: Shutterstock

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