01/07/09

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Falling appraisals creating drama

While residential closings are an issue, office space keeps selling, says Marcello Agostini of Fortune International, shown here at 1200 Brickell.

Lucas Lechuga has a client with a serious decision to make. After three separate appraisals, she’s still facing a $50,000 gap between the appraised value and the actual price of the new downtown Miami condo she’s under contract to buy.

Lechuga, a condo specialist with the Keller Williams real estate firm, has advised her to either show up to the closing with the $50,000 or be prepared to forfeit her deposit and walk away from the deal altogether. The developer, who Lechuga didn't name, resolutely refuses to budge on the price.

But his client's story is becoming more familiar.

"It varies from project to project, but I am getting a lot of calls from clients asking whether they should stay or walk. If a development was priced in January '04 or earlier, then they're OK," said Lechuga, who also runs the popular real estate blog Miami Condo Investments (www.miamicondoinvestments.com). "If you priced in 2005, you priced at the top of the bubble, and prices since then are down 30 percent."

The 2005 date is a pivotal one: Developers who priced their buildings starting that year are having a tough time closing on units now just starting to come online. A perfect storm of excess inventory, declining values, and lenders burned by the sub-prime mortgage fallout are combining to make the downtown condo market what some observers are calling "a disaster that everyone should have seen coming."

"This was so predictable and that's the thing I find amazing," said Lewis Goodkin, president of the Miami-based real estate intelligence firm Goodkin Consulting.

"Everybody who participated, whether it was the end user, the builder, the mortgage people, Wall Street, it goes on and on and on ... What I find amazing is that none of them saw the danger in the high levels of speculative building."

The issue was illustrated further in February, when BankUnited issued a five-page list of "non-permissible" projects — buildings on which it would not issue loans to buyers.

Every downtown condo project made the list, said Condo Vultures Realty head Peter Zalewski.

The list is stunning in scope, and while it might be an understandable move, "in today's world, in the real world, for a lender to say they're not going to make any loans to new buildings coming online is a travesty, he said."

Washington Mutual also issued a non-permissible list, and while it's smaller than the BankUnited list, it's a move that other lenders might follow.

"Especially on new projects, we're finding a situation where original purchase prices are not appraising out. Developers are scratching their heads. They sold at justifiable prices and now appraisers are coming back with conservative numbers," Zalewski said. "It's a reaction to regulator scrutiny."

The situation "will get worse in downtown Miami," Zalewski added. "There's no question about it."

Goodkin said that if your building has been online and ready for occupancy for months, and you've only closed a percentage of units, it could spell trouble.

"Typically with a vertical building, the lenders require 50 percent of the building to be sold out prior to the start of construction. So if you have 300 units, it could take a period of at least a year to reach the point of reaching pre-sale," Goodkin said.

"If you're under 50 percent (in closed deals), you might have to start discounting units or bulk sale it to a fund, or the building could end up in the lender's hands. It's a tremendous headache," Goodkin said. "The last thing a lender wants is to end up with that building."

According to Lechuga's analysis of county records based on February closings, the 48-unit Star Lofts on the Bay, which was set for delivery in the summer of 2005, began closings last June and has reported closing 56 percent of its units. Ten Museum Park also began closings last June and has closed 74.5 percent; Latitude on the River began closings last July and has closed 77 percent; Onyx on the Bay also began closings last July and has closed 45.3 percent of its units; Loft Downtown 2 started closings last September and has hit the 80 percent mark; and 50 Biscayne, which started closings in October, has closed 56.7 percent.

Nearly 30 would-be buyers have filed suit against 50 Biscayne developer, the Related Group, alleging that Related changed the building's design after accepting their deposits.

The 1800 Club, which started closings last November, has 45 percent of its deals closed, while Brickell on the River 2 and Opera Tower, which both began closings in December, have 20.9 percent and 7.7 percent closed, respectively.

Meanwhile, Plaza on Brickell began closings in January and has 6.4 percent closed, while Avenue at Brickell, which also began closing in January, has 2.7 percent closed. Avenue, Lechuga notes, only has a temporary occupancy certificate on one of its towers, and he expects its numbers to improve.

Lechuga said that more closings could be in the works, but the numbers gleaned from county records reflect deals that have actually closed; there can be a gap of several weeks between numbers being updated. But more and more clients, he says, have been asking whether to stay in a deal or walk away from the table when appraisals come in low.

Quantum on the Bay, developed by Pedro Martin's Terra Group, also began closings in January. Zalewski has tracked 290 closings at Quantum, which is also on BankWest's list of non-permissible projects. A spokeswoman for Martin said neither Martin nor anyone from Terra Group would speak on the subject of closings for the foreseeable future.

Zalewski said that Martin "is having no problems at Quantum because the pricing is so attractive."

As the downtown Miami residential condominium market began its slow decline last year, some proposed office condominium projects began leaving the market as well. Of 59 proposed projects, seven were cancelled last spring, according to a report by CB Richard Ellis. But Fortune International, which launched as a residential real estate firm in 1983, is in the midst of closing its second office condo project in the financial district.

The project, a 20-story conversion at 1200 Brickell Avenue and Coral Way, is adjacent to its first project, at 1110 Brickell, which sold out, said Fortune sales director Marcello Agostini.

As of early March, Fortune had sold 60 percent of the units at 1200 Brickell and reported zero cancellations.

"It's a great option for companies that want to secure their office locations. They can finance their purchases rather than renegotiating their leases," Agostini said.

"Banks are interested in funding our clients. First, they see it as an alternative product so they don't have to focus so much on residential, and second, the commercial buyer is stronger than the typical residential buyer," he added. "There are less question marks on this kind of deal, because it's being underwritten based on having a tenant in place with a cash flow negotiated."

Office rents in the Brickell corridor have been on the rise, up 30 percent in the past two years. Prices at 1200 Brickell start at $900,000 and top out at about $5 million, for an average of $425 per square foot.

"We're seeing two types of buyers: ones who will come and buy as the end user, and the investor who is buying an investment product with a tenant in place," says Agostini. "They're expecting price appreciation, but not betting on 100 percent appreciation in one year. They're not looking to flip."