SOUTH FLORIDA CONDO INVENTORY UNDERGOING TRANSFORMATION

Miami's real estate market in 2008, was the victim of a deadly concoction made up of exotic artificial financing and investor speculation, that fueled unsupportable values. Formidable financial institutions failed and the largest insurance company in the world, AIG needed a bail out. The global financial market was at the brink of cataclysmic failure. Fast forward to 2010, when after avoiding financial collapse and undergoing government led consolidation, an interesting mix of lender led re-positioning was going on, as many banks dealt with their newly acquired REOs made up primarily of new construction condominium projects. For example, loan assets from lender Corus Bank of Chicago got absorbed into a public private venture led by the FDIC and Starwood Capital which created ST Residential with a focus on re-positioning the portfolio of new construction condo developments in major U.S. metro markets.

Corus' main exposure was in South Florida where it was involved in multiple large scale construction loans. Faced with ownership of the assets, ST Residential hired local developers or sales and marketing companies to refresh their inventory, and to re-model and or complete projects on a portfolio of $4.5 Billion while wielding a powerful FDIC backed $1 Billion credit facility.

As the inventory got a redo with lower pricing, it initiated a new wave of absorption which again stimulated foreign investment into South Florida. The pricing methodology changed from one driven by maximum profits to a loss mitigation strategy which focused more on velocity. For example, when HSBC took over The Related Group's Icon Brickell project, they reduced prices significantly to successfully achieve sales velocity, which at one point reached 70 sales a month. HSBC hired Fortune International Group as asset manager and exclusive sales and marketing agent. The collaboration yielded market changing results, slowly increasing pricing as demand grew and selling out almost 800 units in under a year. Icon Brickell's success by a lender re positioning an asset, impacted the market positively, helping it to recover as foreign investment became more confident in Miami's condo market.

As interest in Miami spiked and cash rich vulture funds and Latin American investors looked for opportunities, the fact still remained that construction financing was not available for developers wanting to launch new projects and take advantage of a new cycle. End loans for buyer and investors were also difficult to source, limiting the pool of buyers. The Related Group faced with this challenge introduced what has been called the "Latin American method" for development financing and sales. The structure used the buyer's deposits to fund construction and required a larger percentage of the purchase price- up to 70-100%, eliminating the need for financing for both developer and buyer. In comparison, back in the boom cycle of 2002-2008, deposit requirements were 20%.

Related went on to launch My Brickell and then Apogee Beach in Hollywood, FL under this premise and began selling with significant success. With Latin American capital flight to fund projects, it was cash buyers instead of lenders that propped up the condo market at that critical time. Helping foreign investors was a devalued dollar, that suffered in the downturn, and gave them increased buying power.

2012 marked the beginning of a cycle of development in South Florida that now has finally reached a close in 2020. After thousands of units were delivered and absorbed by cash investors, the remaining projects set to deliver between 2019 and 2020 are experiencing very different market dynamics:

• "On the shelf" inventory from developers faces downward pressure on valuation, as the resale market grows in size.
• Traditional Latin American buyer struggle with economic and political upheaval in their native countries, as their currency devalues against the dollar and their buying power erodes.
• Savvy New York and other US domestic buyers motivated by Trump's new tax law seek value in resales while still exploring new construction condo options only for negotiated opportunities.
• Mexican investors that face political change from a left leaning President, are still on the fence about making investments in Miami's new construction market as they come to terms with a shift in purpose- while deciding on occupancy and property types.
• Investment fundamentals are off. Most new condo purchases yield a very small return if any, making investment opportunities in other categories including multifamily, commercial, office, and industrial more attractive.
• New projects based on short term rentals add to the competitive landscape as they offer a value proposition more in line with desired returns while providing flexible use.
• Rental inventory grows as new condo units are marketed for rent
• Financing for condos is more prevalent and rates continue to be at attractive lows.

In 2020, we will experience higher volume in resale condo units, as it becomes the undeniable majority of the inventory. However, what is still more difficult to ascertain is how many and what type of buyers will look to purchase resales and how will financing come into play. Also, will international cash investors that already own free and clear assets look to recapture equity in their properties as a means to navigate difficult economic times and or continue investing in income producing opportunities? The real estate professionals that will focus on answering these questions and understanding the different opportunities in the resale market, will have an upper hand in maximizing business development and sales.