Developer Chaim Cahane bought a development site at Wynwood in Miami for $6.4 million in December. Three weeks later, a broker called him with an unsolicited all-cash offer: Flip it for 75% more.
Then, in March, Cahane’s Forte Capital teamed up with investor Jon Krasner to buy a separate Wynwood site from East End Capital for $10.8 million. After closing on this site, they turned down an offer to return it for a 30% gain.
“Every day I get calls to sell,” Cahane said. “It’s ridiculous.”
The cost of land and the pace and volume of transactions are skyrocketing in South Florida.
The market is so hot that large multi-family sales have multiplied, and single-family homes are being branded as collectibles. At the same time, developers are rolling out dozens of new projects and quickly selling or renting them. Wealthy foreigners have “discovered Miami”, driving up commercial and residential real estate prices. For these buyers, the city is still a bargain, brokers say.
Miami’s urban core, including Edgewater, Wynwood, the arts and entertainment district, downtown and Brickell, saw more than $1 billion in land sales over the past two years, data shows. of Real Capital Analytics provided by Colliers International South Florida. In Edgewater, eight development sites traded for more than $185 million last year. This represents a 529% increase in sales volume compared to 2020 and a 141% increase compared to 2019.
While industry experts are quick to point out that oversupply is not yet an issue, record prices coupled with rising interest rates and inflation could send the market down, they say.
“This bubble is about prices getting too high,” said Craig Studnicky, CEO of Aventura-based brokerage ISG World. “What is happening with the prices is heinous. How do young people get around here? They can no longer afford it. »
In 2019, before the pandemic, 24 development sites in greater downtown Miami sold for more than $315 million, or about $16 million per acre, according to data from Colliers. Last year, 34 properties traded for more than $808 million in the same area, for a price per acre of around $19 million. Based on dollar volume, this represents a 155% increase in three years.
“Many people believed [prices] would hit a wall and not continue to get worse, but all we see are continued new highs for property sales,” said attorney Keith Poliakoff of the Government Law Group.
“If we can’t get [costs] under control, if rents don’t catch up, and people’s incomes don’t catch up… We could be entitled to projects in three years, which happened before when the economy collapsed in 2009,” said Poliakoff said. “A lot of those projects that we approved stayed in construction services and didn’t move until the economy picked up.”
When the pandemic first hit South Florida, there was an immediate downturn in commercial real estate — until demand quickly returned last year.
Take the sale from the Midas store at 2140 Northeast Second Avenue in Miami’s Edgewater neighborhood. Pre-Covid listing broker Miguel Pinto said he was “really, really struggling” trying to sell it.
“I couldn’t give it away,” said Pinto, who is a broker and owner of Apex Capital Realty. Then, in February, Brooklyn-based Heritage Equity Partners paid $6.3 million for the property, which houses a store built in 2019. Heritage, led by Toby Moskovits and Michael Lichtenstein, plans to tear it down and build an apartment tower on the site. Land costs typically represent 10-15% of a project’s budget.
Today, Pinto said he could “very easily tip over” for over $400 per square foot. It was trading at $283 per square foot.
“There has been a wild appetite from developers keen to enter the market,” betting on rents and housing demand continuing to rise, he said.
Some local developers are selling land they were planning to build on because the offers are just too good to ignore.
On Fisher Island, an exclusive residential enclave accessible only by boat or helicopter, developer Heinrich Von Hanau is contracted to sell the latest condo development site on the island. The buyer is a partnership led by Related Group and billionaire Teddy Sagi, paying what is expected to be a record price, sources say.
The thought: Prices are always on the rise, and if a developer forgoes a buy, they could possibly sell 20%, 25% or 30% more, said Colliers broker Mitash Kripalani.
“Yes, the price is high, but there is so much demand,” Kripalani added. “Most of the buyers paying top dollar are many developers new to the market. “If you’re a local shopper who was buying in Miami five to 10 years ago, you’re in for sticker shock.”
Developer Harvey Hernandez set a purchase price for the Brickell site of his Lofty project before the pandemic and completed his $50.5 million acquisition in October. He said he could sell it for more than double in today’s market.
“People have come to us and tried to buy it from us, but we’re not selling [land],” he said. Lofty is nearly 90% booked after sales launch in late 2021.
Sales volume chart for the Downtown Miami development site. (Adam Farence)
“Developers coming into this market are paying for speed and paying for premium parts.
They look at the market differently,” Hernandez said. “If you come from New York, Chicago, Los Angeles, you might see [Miami, where] you can sell $1,200 a foot as a huge bargain.
Brokers use it in their sales pitches.
“All day we’re knocking on doors, cold calling people,” Kripalani said. “We are pursuing our sellers who we know have not transacted in a while.”
A dangerous game
The developers’ guideline is that they are watching for construction costs (up 30-35%, but that depends on who you ask) and supply chain issues. They say they are locking in the prices of appliances and materials where possible, and so far those increases have been offset by increases in rents and house prices.
“The supply chain always makes it incredibly difficult to buy appliances and goods. The price of steel and wood varies widely,” said attorney Poliakoff. “What worries me is that construction prices didn’t seem to peak.”
Interest rate spikes begin to slow transactions. Buyers who were bidding on 10 properties are now bidding on two, said lender and broker Aaron Kurlansky, director of Sheridan Capital and FM Capital. Rental growth projections are also adjusted. Even on the residential front, some single-family home sellers are cutting prices.
“With the rate going up, it’s really where on a deal before you had 20 buyers, now you have five or six. It’s weeding out a lot of people very, very quickly,” Kurlansky said. a little more caution in the market.”
But the developers are optimists who will push the market to its limits before falling back.
In some cases, buyers are closing land without taking the time to understand a site’s zoning. And because costs have risen, developers seeking to increase the density of their projects have flooded law firms specializing in land use, zoning and rights work, Poliakoff and other lawyers say.
“There is a maximum amount a unit can rent or sell,” Poliakoff said. “To be able to pay the higher prices, [developers] must seek government approval to increase the density of these properties to spread out this purchase price. Long gone are the days when you could pay $25,000 to $35,000 per door for a new development site.
He cited the example of a landlord who secured rights to a 55-unit apartment project on a site two years ago to increase the property’s appeal. A potential buyer recently told the owner that if the density couldn’t be increased to 85 units, the numbers wouldn’t work and the deal wouldn’t happen, Poliakoff said.
New Yorkers and other out-of-state developers are drawn to Florida’s few regulations and no state income tax, but once there, some are in over their heads. , don’t know what building materials to use and how local governments work, say the lawyers.
The Government Law Group’s client developers are all seeking more density on projects worth $2.5 billion, Poliakoff said, pointing to three developments backed by New York-based real estate investment trusts that are growing for the first time in South Florida.
“All three are paying more than I expected anyone to pay, but either way they feel the market is going to keep going up, and as such they see that the rent today won’t be the rent when they’re done building two in a few years,” Poliakoff said. “I always say that while developers can make a big profit out of it, it also comes with huge risks.”
Leading multi-family homeowners, who have arrived in South Florida in droves, are now looking to development from scratch as the investment sales market overheats.
“All today told us that the deals they would normally buy are so expensive that they are unable to make their numbers work,” Poliakoff said.
Apex’s Pinto said buyers need to pay less for land unless construction costs come down.
Institutional buyers flooded the market, attracted by huge rent growth gains. Miami has led the nation in rent increases during the pandemic, with the median monthly apartment rent rising 58% since March 2020 to nearly $3,000, according to a recent report from Realtor.com.
Multifamily rents in Edgewater are around $3.50 per square foot, according to Pinto. And buyers are signing contracts with rents at $5 per square foot, within two to three years.
“Will he make it? Perhaps. I think people are playing a dangerous game,” he said, referring to rising rates, construction costs and inflation. “There’s a huge demand and then a high point of things from a macro perspective that can flip the whole sentiment.”