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2008 Miami Real Estate Market Review

Investors, brokers and owners of South Florida’s real estate will remember 2008 as the year when talk of a market slowdown became a sobering reality.

After a residential downturn built on a wave of subprime mortgage foreclosures, the region descended into a full-fledged economic crisis as activity in all sectors dried up.

Obtaining loans to purchase a home or commercial property became virtually impossible and the credit crunch spread to virtually every type of financing.

The real estate slowdown was particularly harsh in overbuilt Florida.

In South Florida, it takes 172 days longer to sell homes than in any other region in the U.S., according to an October report by California-based Altos Research and Real IQ.

And thousands of homeowners — many dealing with lost jobs and mortgages with rates that are resetting higher — are in foreclosure or teetering on the edge of default. Florida consistently ranks second in the nation in foreclosures.

The slowdown was most obvious in the region’s condo market, where values plunged and the inventory of unsold units grew.

So far, the commercial market has avoided much of the chaos of the residential sector, but signs are beginning to show that even nonresidential real estate is headed for its own slump.

With financing scarce, investors were making few deals and institutional buyers remain sidelined.

Unless Wall Street and the banking industry stabilize soon, its likely 2009 will usher in more turmoil.

Some projects blacklisted

It was too little, too late when lenders finally reacted to the downturn.

To stem the tide of new toxic loans, many lenders quietly compiled lists of condominium developments where they wouldn’t make mortgage loans — regardless of the buyer’s credit rating.

BankUnited, Washington Mutual, Popular Mortgage and CitiBank were among many lenders that blacklisted droves of South Florida projects.

The move narrowed the options for strapped owners and suffering developers. There is no sign that condo lending will get any easier in 2009.

Vultures circling, not landing

Many looked to so-called vultures for some relief in a market frozen by a lack of credit and plummeting prices.

Vultures — opportunistic buyers hoping to pick big profits from South Florida’s troubled condo market — circled throughout the year as the inventory of unsold units continued to expand.

But the vultures never landed as they waited for prices to fall further.

The region did see a handful of deals involving large numbers of condo units.

But the price gap between what investors were willing to pay and what sellers wanted remained wide and deals didn’t happen.

As the market continues to deteriorate, lenders and developers are likely to accept bigger losses and sell for less. Experts say the price gap has already started to narrow and that trend will continue in 2009 increasing the likelihood that vultures may soon feast.

Even ultra-rich suffer

Even the ultra-rich weren’t immune to the decline.

A number of millionaires — including restaurant owners, developers and financial industry executives — saw their homes go into foreclosure in 2008.

One of the largest residential foreclosures ever involved the mansion of Veronica Hearst, the widow of newspaper heir Randolph Hearst.

Veronica Hearst lost her 52-room Manalapan mansion after a nine-month foreclosure battle with lender New Stream Capital, which tried to recover about $40 million.

Billionaire real estate developer Franklin L. Haney Sr. purchased the mansion from the lender for $23.5 million. Hearst sold her New York co-op for $36.5 million to pay the remainder of the debt.

Staying offshore

As the economic meltdown went global, offshore buyers were also hit with losses and those who still had capital opted to play the waiting game.

This was more trouble for an already imperiled South Florida real estate market that previously could depend on international buyers when domestic investors were out of the picture.

Some buyers with foreign ties completed a few isolated major deals. A New York-based subsidiary of Japanese investment firm Sumitomo Corp. bought the 34-story Miami Center office tower for $260 million in October. Hong Kong-based Swire Properties paid lender iStar Financial $41.3 million for 5.5 vacant acres on South Miami Avenue between Southwest Seventh and Eighth streets.

But these deals aren’t typical of the market and barring an unexpected turnaround in South Florida real estate and a rebound the world economy, foreign buyers can be expected to stay at home in 2009.

Condo association blues

Foreclosure woes hit condo associations, too.

Many were forced to the brink of insolvency as maintenance fees went unpaid on units in foreclosure. It triggered a snowball effect of increasing fees that drove other homeowners to pay late or not pay dues.

Fear over the credit worthiness of condominiums led lenders to pull back on credit for associations.

Banks refused to renew revolving credit lines for condo associations struggling to repair damaged roofs, maintain elevators and pay for other big ticket expenses.

They fear that as growing numbers of owners fall behind on their association fees or go into foreclosure, the associations won’t have enough revenue to pay back the loans.

The money is especially critical to condo boards that are struggling pay for security, garbage collection and make repairs to roof, pools and other facilities.

Although the situation hasn’t become a crisis yet, as the credit crunch heads into 2009, lenders are likely to continue tightening underwriting standards and condo boards will be forced to seek alternative sources of money.

Foreclosure crisis strikes South Florida

While trying to work out bad loans where they can, South Florida banks and other lenders began ratcheting up foreclosures toward the end of 2008, a trend that shows no signs of slowing.

Banks are under intense regulatory pressure to remove bad loans from their books as expediently as possible, while other projects are simply viewed as beyond redemption.

Most visible on the foreclosure front has been Miami-based Ocean Bank, which is operating under a federal cease-and-desist order. The bank in 2008 foreclosed on a number of high-profile projects up and down Florida’s East Coast.

Nationwide, loans in foreclosure rose to 2.97 percent, a record high for the Mortgage Bankers Association’s nearly 30-year-old survey, the association said in a December report, which predicted more delinquencies as job losses mount across the country and plummeting home prices make it difficult for struggling homeowners to sell.

Prime and subprime adjustable rate mortgages continue to have the highest share of foreclosures and Florida has about 41 percent of the prime and subprime ARM foreclosure starts.

“Until recently, it was job and population losses that were the problems in states like Michigan and Ohio, whereas the problems in California and Florida were a combination of too many houses, speculation and weak underwriting,” said Jay Brinkmann, MBA’s chief economist.

“Economic fundamentals are now deteriorating in California and Florida. Over the past year, Florida led the nation in job losses at 156,200.”

Bankers not landlords

As foreclosures surged in 2008, so did the inventory of bank-owned properties.

But banks were overwhelmed and didn’t know how to shift from lenders to landlords.

Initially, lenders were slow to react to the excess of properties on their books. They were reluctant to discount the prices and often rejected offers that were even just 5 percent below their asking prices.

By June, however, reality set in and banks began to lower prices and accept offers 15 percent below the listed prices.

As the foreclosure crisis enters 2009, real estate brokers predict lenders will spend much of the year cutting prices even more to clear distressed properties from their books.

Code enforcement

The foreclosure crisis left thousands of vacant and abandoned homes that dragged down the value of surrounding properties.

And the impact on neighborhoods of overgrown grass, broken windows and fences, dirty pools and piles of trash and became a major concern for several municipalities.

Code enforcement officials got tough citing lenders for violations adding to their distress in managing bloated portfolios.

Keeping up maintenance

Lenders got something else to worry about after the Miami-Dade Commission made them liable for maintenance of properties.

It passed two ordinances in December that make lenders that foreclose on abandoned houses, condos and duplexes responsible for maintaining the properties — even if the delinquent borrowers still hold title to the properties — and for informing future buyers of the residences of any zoning and building code violations.

Lenders will also have to pay for zoning and building inspections and inform buyers of the estimated cost of bringing the property up to code before selling the property. The disclosure of code violations would help buyers negotiate better deals, commissioners said, but banks claim it adds another hurdle to selling repossessed properties.

Foreclosure relief

A little help is on the way to help South Florida deal with its foreclosure flood.

But it remains to be seen how local governments will spend almost $108 million in federal funds to help foreclosure ravaged neighborhoods.

The funding is part of the 2008 Housing and Economic Recovery Act’s Neighborhood Stabilization Program, which set aside $3.92 billion in Community Development Block Grants.

Miami-Dade County will receive $62.2 million, Palm Beach will get $27.7 million, and $17.8 million will go to Broward County. Also, the city of Miami is to receive $12.1 million, West Palm Beach $4.3 million and Fort Lauderdale $3.7 million.

Local governments will have wide lattitude in spending the money. They will have one year to allocate the money on specific projects and four years to spend the funding.

Are tougher terms or borrower fears to blame?

The debate will rage into the new year: Is South Florida’s frozen lending climate a result of banks’ tough new lending terms, or borrower fears of taking on new debt in a severe recession?

While that question may never be settled with any certainty, what is clear is that tougher, back-to-basics lending terms will be in fashion for the foreseeable future. So will cautious borrowing, as businesses await clear signals that a sustainable recovery is underway.

The federal government is doing its best to get lenders lending again, offering capital to banks in exchange for small ownership stakes.

Many local community banks have applied for money, while retaining the option of whether to accept it if they qualify.

The key to any thaw in credit markets will be confidence.

Lenders and borrowers alike will be keeping an eye out for improving cash flows and a tipping point in which low interest rates and the economic stimulus package returns consumers to the marketplace.

Meanwhile, the winners will be those institutions who are able to compete for a dwindling pool of qualified borrowers. In South Florida, that battle will pit newly-arrived megabanks like Wells Fargo and JPMorgan Chase against community banks who will try to emphasize their local roots and customer service.

Borrowers with solid track records in the market will also benefit as they shop around their business for the best deal.

All eyes on BankUnited

Community Banks will face a year of reckoning.

South Florida’s 80 community banks defied expectations when — in the face of a yearlong recession and the greatest financial crisis in eight decades — they survived.

Their staying power was largely due to the higher regulatory capital requirements imposed following the 1980s savings and loan crisis.

The coming year poses a much greater challenge, however, as many banks continue to hemorrhage money, pile up delinquent loans and burn through their capital to alarm-sounding levels.

The canary in the coal mine heading into 2009 is Coral Gables-based BankUnited, which has unsuccessfully sought $400 million in capital as it prepares for $3.5 billion in resetting option-ARM mortgages over the next two years. The bank’s holding company disclosed in SEC filings that mounting losses raised “substantial doubt about our ability to continue as a going concern.”

Spanish acquisition

South Florida continued to say “ole” in 2008 as Spanish banks kept buying local institutions.

The buying spree was capped by Caja Madrid’s $927 million purchase of an 83 percent stake in City National Bank of Florida.

Caja Madrid joined a crowded field of Spanish banks already active in the region, including a number that have purchased local institutions to use as a launching pad into the U.S. market.

While South Florida’s demographics, proximity to Latin America and centuries long historic ties to Spain make it naturally attractive to that country’s banks, the central question looking ahead is what role the global credit crisis will play in Spain — and to what extent that distraction crimps its banks’ New World expansion plans.

Fraud exposed

The real estate collapse exposed fraud that was previously easy to hide because of ever increasing property prices.

But when prices started falling the problem came into fuller focus.

A year after Miami-Dade created a mortgage fraud task force that included real estate industry insiders, the feds are considering similar nationwide programs.

The federal Bureau of Justice Assistance in Washington wants to begin a fraud crackdown in the 10 hardest hit areas nationwide.

Hit by a different kind of storm

South Florida may have dodged a hurricane or two in 2008, but the state’s hurricane catastrophe fund has been buffeted by an economic storm.

Known as the cat fund, it is considered a key source for payment of hurricane claims. The fund currently is obligated to cover up to $28 billion in losses.

But the fund’s money is largely derived from bonds and the nation’s deepening financial crisis has cut into the ability of the fund’s administrators to raise bond money. Now the cat fund faces a shortfall ranging from $10 billion to $15 billion, according to the Florida Insurance Council.

It’s likely lawmakers next year will consider reducing the fund’s exposure but that would require insurance companies, including the state-run Citizens Property Insurance, to buy more reinsurance from the private markets.

And those costs would be reflected in higher premiums paid by property owners.

Holiday season does little to brighten retail hell

South Florida retailers are feeling the sting of the worst economy in decades.

The holiday shopping season officially kicked off with a fairly strong Black Friday — the first shopping day after Thanksgiving — but analysts and shopping center owners say retailers will struggle in the new year.

As many as 14,000 retail locations are likely to close nationally in 2009, nearly doubling the amount of closings from 2008, predicts Carol Wyllie, executive vice president of commercial real estate owner and developer Graham Cos.

And consumer confidence continues to sink.

Reflecting the national retail climate, Boca Raton-based Office Depot is closing 9 percent of its North American stores. And General Growth Properties, a major owner of South Florida shopping centers, is scrambling to refinance its loan portfolio to avoid bankruptcy.

In the face of declining home values and mounting unemployment, consumers are cutting back. Unless president-elect Barack Obama’s economic stimulus plans take hold early in his administration, retailers can expect a dismal 2009.

Las Olas pessimism

The grim retail picture is evident on Fort Lauderdale’s Las Olas Boulevard.

For more than a year, the Las Olas Co. has talked about expanding the Riverside Hotel, but financing for the project still has not been secured, company chairman Irv Bowen said.

In the current global financial crisis, loans are scarce and what money is available comes with high interest rates, even for creditworthy borrowers like the Las Olas Co., the street’s main landlord.

Surviving merchants along the street, once considered the city’s premier shopping district, say shops that closed in preparation for the expansion only make the effects of a bad economy appear even worse.

With the economy certain to deteriorate in 2009, is it likely money will be arranged to fund the hotel expansion — and spur a retail revival along the street?

“I’m not in the guessing business,” Bowen said.

Glut of office space arrives at a bad time

Office projects planned while the economy was roaring will be delivered in the midst of the current recession, sending South Florida’s inventory of high-end office space soaring.

Miami-Dade County is facing a glut of space with 1.9 million square feet to come online in the next three years.

Much of the construction activity is in Miami’s Brickell Avenue financial district. Three projects that will have significant impact on Miami’s market when they open are:

• Rilea Group’s 570,000-square-foot building at 1450 Brickell Ave.

• Foram Group’s 600,000-square-foot project at 600 Brickell.

• MDM Development Group/MetLife’s 700,000-square-foot Met II at 355 SE Second Ave.

To the north, brokers in Broward and Palm Beach counties are dealing with the most office vacancies in several years as tenants downsize or close operations entirely and more space is built.

Palm Beach brokers expect more than 1 million square feet of space to hit the market this year, including the 300,000-square-foot CityPlace Tower and the 150,000-square-foot 1800 Boca Center Phase I building in Boca Raton.

Broward’s available office space unexpectedly increased earlier this year when Duke Realty was forced to take back 255,000 square feet of space in its Sunrise and Weston buildings from two tenants.

Tenants could benefit, of course, as landlords offer more favorable rent rates and plenty of concessions to fill up space.

Losers were plentiful during 2008

Renzo and Pasquale Renzi’s ambitious, debt-driven plans to build condo projects across Miami-Dade and Palm Beach counties collapsed under to the weight their overleveraged development sites.

The brothers refinanced their rapidly appreciating sites multiple times during the 2000s and used the proceeds to buy more land. But the strategy fell apart in 2008 when property values plummeted and they could no longer borrow their money to keep going.

In September, the Renzi’s started handing properties to lenders, including a 41,624-square-foot parcel near Collins Avenue and 67th Street in Miami Beach and an entire city block in the heart of downtown West Palm Beach.

Merco Group

The Merco Group, headed by developer Homero Meruelo, lost a $30 million waterfront site to lender Eastern Financial Florida Credit Union. Meruelo tried to dodge the 4.5-acre foreclosure of the site for about a year.

Meruelo claims he was only a minority shareholder in the project, which he said belonged to his father, who died in August.

But Meruelo Jr. and the Merco Group of the Palm Beaches are named as defendants in several pending lawsuits regarding the site, including several filed by buyers who want to recover deposit money and one from the entity who sold the site to Meruelo in 2004 and claims he still owes $5 million on the purchase.

Whitney condominium

In West Palm Beach, developer Enrique Dilon lost the Whitney condominium.

iStar FM Loans, a subsidiary of iStar Financial, won a $37 million foreclosure lawsuit against the developer of the Whitney, a 210-unit condominium building in downtown West Palm Beach.

The developer recently handed over 141 units to iStar in a deed in lieu of foreclosure. The transfer was valued at $43.8 million. The units, which are listed through CB Richard Ellis, are under contract.

EB Developers

Financially troubled EB Developers was hit with multiple foreclosures throughout South Florida, including three in Palm Beach County.

EB lost 42 acres in Palm Beach Gardens in a $29 million foreclosure by lender AmTrust. The same lender also has a pending $30 million foreclosure on about 1,200 acres in an unincorporated part of the county. Bank of America also filed to foreclose on about 108 acres near Boynton Beach seeking to recover a $35 million loan.

And the Boca Raton-based company’s owner, Ellie Berdugo, died in February.

Convention center hotel

After years of negotiations, plans for a much-needed hotel adjacent to the convention center in West Palm Beach died. Palm Beach County commissioners killed the deal with Delray Beach-based Ocean Properties, the developer selected by the commission four years ago to build a 400-room Westin hotel.

County officials are restarting the search for another developer, but that will be difficult in the down real estate market.

Meanwhile, the county will continue to lose millions of dollars each year as convention planners take their events to other locations better suited for large meetings.

Boca Developers

Boca Developers was hit hard, with several projects in turmoil.

The Las Olas Riverfront entertainment complex in downtown Fort Lauderdale and Biscayne Landing mixed-use project in North Miami were controversial even before the first spadefuls of dirt were turned to build them years ago.

Now, a legal clash between Cerberus Capital Management unit Madeleine LLC in New York and developers Brian Street and James Cohen of Boca Developers in Deerfield Beach is certain to keep the projects mired in controversy even longer.

The lender has sued for nonpayment of $189.7 million in loans and guarantees on nine projects in Florida, including Riverfront and Biscayne Landing.

The developers say they’re not in default.

The suits were filed this month. And a new year of trouble lies ahead.

Daily Business Review - December 29, 2008 - Review Staff

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