February, 08, 2008

Despite fears that South Florida's economy could be on the brink of a crippling recession, there is reason for optimism, albeit cautious optimism. That is the consensus among a cross-section of real estate, banking and academic experts contacted by The Real Deal.


Mark Vitner senior economist, Wachovia Bank

While rising foreclosures, a glut of condos and falling home prices will continue to slam the region, Vitner sees little evidence that a recession will occur in 2008.

Vitner said the outlook in Miami and Fort Lauderdale is challenging and conservative and warns there is much work ahead for many sectors that work in and serve the real estate industry.

As chief economist for Charlotte-based Wachovia's Economics Group, Vitner keeps a close watch on employment trends, housing activity and manufacturing production.

In a Monthly Outlook report released by Wachovia in mid-January, Vitner said he "believes the economy will avoid an outright recession but recognizes the next few quarters will be very challenging."

"The unwinding of the housing boom is now far worse than originally anticipated," said Vitner.

"The housing slump has entered a decisive and worrisome phase where weakening homes sales, falling prices, rising foreclosures and tightening credit standards feed on one another, creating a violent downward spiral that threatens to unleash enormous losses to homeowners, the financial system and the overall economy."

Although it could take time to feel the impact, Vitner believes the Federal Reserve's rate cut in January might still be able to help contain the housing crisis from spilling over into the rest of the economy. In the South Florida market where affordability is a big issue, Vitner anticipates the pace of homebuilding will drop significantly from 100,000 single-family condos and apartments in 2007 to an estimated 50,000 this year.

"There were 100,000 homes built last year. That was too many," said Vitner. "We haven't worked off that supply yet and actually, that could take two or three years to work off the excess inventory."

Vitner said Fort Lauderdale is a great example of what has happened throughout Florida, where affordability is a big issue. Sticker shock chased people away who couldn't afford the market.

"Prices rose too fast, for too long and are now simply out of whack with competing areas in other parts of the country as well as residential rents," said Vitner. "When you add in higher insurance costs and property taxes, you have a multifaceted imbalance that will take years to unwind."

In Palm Beach and Miami-Dade counties where a glut of condos continues to hit the market, the oversupply could drive prices down 20 to 30 percent or more.

"The greatest excesses occurred throughout Florida, particularly along the Atlantic Coast from Palm Beach County north to Daytona Beach, over and around Orlando, and then down the Southwest Coast from Tampa to Naples," said Vitner.

Vitner blames part of the housing woes on speculators and investment funds that snatched up entire tracts of new homes in Fort Myers, Port Charlotte and the Sarasota-Bradenton area, which "contributed to some of the most dramatic gains in home prices anywhere." Between 2004 and 2006, home prices in Fort Myers, Sarasota and Port Charlotte surged 70 percent, 60 percent and 58 percent, respectively.

David Denslow director of the policy studies program for the University of Florida Bureau of Economic and Business Research

Denslow said the state could face a recession this year, especially if the nation falls into one.

On its own, if the U.S. as a whole doesn't sink into a recession, Florida's chances are minimal.

The economist suggested an influx of retirees and foreign buyers could keep a recession at bay. Florida's sunny weather lures Baby Boomers while the weaker dollar attracts European spenders.

Terre Blanca senior managing director of Cushman & Wakefield's Miami and Fort Lauderdale offices

Blanca agrees with Denslow, adding that she believes a strong international economy in South Florida could help sustain the local market. "We're seeing a lot of people come here from Canada and Latin America because of the weaker dollar and I think that could play a role in a recovery of sorts by early 2009," said Blanca.

"Retail sales will certainly remain strong this year. Wealthy people who have second residences here are not going to feel much pressure this year."

Even so, Blanca is cautiously optimistic about this year's outlook.

"I think generally across the board, we're going to have a good year in office, industrial and retail," she said. "It won't be the stellar growth we've had over the past three years."

"It will be a conservative year," said Blanca. "We're going to see modest growth in health care, aviation, life sciences and education."

Blanca predicts Class A office will remain strong throughout 2008 and 2009 as new developments come online.

"There hasn't been a supply of office delivered in more than 36 months. That's about to change and that will give tenants an opportunity to relocate to new buildings. I think we will see a lot of renewal activity too."

"There wasn't much leasing activity in 2007 compared to 2006 and 2005, but rates do continue to appreciate and Class A office is a very tight market with single digit vacancy rates," said Blanca.

But tightening credit standards could shift the small office market as consumers scale back on spending. More jobs linked to the sagging housing market — real estate agents, title insurers, appraisers, contractors — could tank this year, driving the vacancy up slightly.

From a residential standpoint, Blanca believes the housing market hasn't seen rock bottom just yet.

"There are a number of high-rises under construction that won't be delivered until later this year," she said. "I think that's when we're going to see a significant impact on the housing market. That could be rock bottom."

Alfredo Lowenstein CEO of the Lionstone Group

To Lowenstein, the Miami real estate market is like no other in the U.S.

"You have an influx of foreigners and foreign dollars, and with the relative weakness of the dollar against foreign currency, you're going to see a lot of foreign buyers coming into the market," Lowenstein said. "If you look into the past, Miami always has cycles according to inventory and demand. Now the demand is slower and it takes time, but time will take care of it."

Peter Zalewski, principal of the market intelligence company Condo Vultures, and the related Condo Vultures Realty LLC

The always-quotable Zalewski said there's a little bit of schadenfreude right now for his company in the current market. Since the Vultures only represents buyers, "when everyone else is crying, we're smiling.

"But the same anxiety exists on the way up also exists on the way down," he said. And in terms of being down? Miami Beach is there, he said, but the downtown area still has a little way to go.

Condo Vultures is still tracking an average price drop of 22 percent on an ask basis, while properties aren't actually transacting until they hit a 29 percent price drop.

"That's an average or index, but we see it as a typical property," Zalewski said.

Summer, meanwhile, saw price drops of 31 percent.

"We are seeing a strengthening in pricing, but is it an artificial bottom? In the downtown area it is because so much new product needs to come online," he said.

"In Miami Beach, we are at the bottom. You're seeing all cash transactions and financing is hard to get hold of. We're not able to negotiate down on the good quality, trophy-type properties. People are doing everything they can to get as much out of those quality properties."

Foreign buyers, meanwhile, are coming into the market like "gangbusters," he said, taking advantage of the 29 percent drop in price and buying property at the rate of 33 cents on the dollar.

"Europeans, Canadians, Brits … they are coming in gangbusters. They're saying 'I will do this all day long,'" Zalewski said. "If you look at the historical high, 33 cents is breathtaking. Generally speaking, wherever appraisals were coming in high, say in November 2005, we are going to return to that price point. We will get back to that price point."

In downtown, Zalewski predicts the bottoming out won't occur until June or August. The fallout from that will last through the end of the year and the buying frenzy will begin once again.

"Smart people will say, 'Why not have my choice of property at 10 percent too much instead of having to pay 10 percent too much and not having my choice at all," he said.

"Now is the time to do your research and your homework . This market," he said, "has nothing to do with interiors, color choices or materials used—it's all about the numbers."

"You have to make sure your credit score and finances are in order. It's going to be all about the research. You can't buy on emotion," he said.

Mark Zandi, chief economist at Moody's Economy.com

And finally there's Zandi, whose projections for the South Florida real estate market are less than sunny.

Miami's already seen a 12 percent decline in housing prices, according to the Case-Schiller index.

Zandi said places where there was higher-than-normal subprime lending, more investor demand, and where prices rose the most will have the steepest declines, and take the longest to recover. In areas where two or more of those factors are in play—like in Florida—his outlook is even gloomier.

"I think the only way out is to cut construction and price," he said. Without more price cuts, the excess inventory will continue to sit, he said. "I think it's necessary for everybody to get realistic about the health of this market."

Writers Becky Bergman, Mary Duan and Mara Lee contributed to this report.

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