June, 04, 2008

Owners of Florida's glut of distressed condos are looking for Santa Claus, but so far the gifts have been few. It seems Santa is waiting for a 20 percent rate of return before he comes down the chimney.

Welcome to the era of the distressed condo market, in which developers of the 75,000 condo units recently completed, or about to come online, are aggressively looking for ways to sell their excess inventory. A variety of companies now are stepping forward to buy, sell and reposition the under performing properties.

So far, those entering the field are finding that wealthy international buyers are best positioned to take advantage of the distressed market, leveraging the strength of the euro against the weakened dollar to purchase at astounding 50 percent discounts off listed prices.

The fund or bulk buyer is out there as well, although one Miami-based realty services group has found this holy grail of buyers hasn't been willing to pull the trigger on any deal presented so far.

"Everybody is looking for bulk purchasers. It's Santa Claus," said Craig Studnicky, executive vice president and a founding partner of International Sales Group and the newly launched International Realty Services. The latter is working with developers to present unsold inventory to the international investor market.

Studnicky declined to name any of the developers his firm represents, but says there are currently nine with 5,000 units in some stage of life, buildings that are either nearing completion or are in the process of closing.

"Developers are looking at 30 to 40 percent defaults in every building across Miami. Everybody knew we might be building more than we need ... but nobody expected so many defaults," Studnicky said. "The developers would love it if I came in with a contract for 100 units from a hedge fund or wealthy investors in Europe. I've been approached by 50 significant bulk buyers [but] nobody is pulling the trigger."

In his experience, Studnicky said, bulk buyers come with committees trying to pencil out a 20 percent return on their investment, and right now that's hard to do. A buyer from the UK though, already has a 50 percent discount, thanks to the strength of the euro, turning a $500,000 condo into a $250,000 one.

"We can't promise 20 percent, [but] you cannot be buying at a better time ever. We're having tremendous success with individual buyers, because they buy at a 12 percent return," he said. "The European investor knows the delta is not going to stay like this. They know that by the end of 2008, it will start to shrink so they should buy American assets now. When it starts to bounce back, they can put the units back on the market. It's reverse arbitrage."

Miami-based Alterra Capital Group, meanwhile, finds itself reentering acquisition mode. Founded in 2003 by a group best described as young and hungry (of the four principals, one is still in his 20s and another is barely into his 30s), Alterra is focusing on acquiring underperforming multifamily properties and has a portfolio valued in excess of $130 million.

Most of those properties are in Houston and Memphis; the Group, which owns 3,100 units, sold off its Florida assets in 2005 but has the goal of growing to 10,000 units here by the end of the year.

According to Alterra partner Matthew Wanderer, the group just finished raising capital and is looking to combine aggressive offers with conservative estimates of the "shadow market" — vacancies and concessions for individual condo owners in the market.

"We've considered trying to bring a broken condo back to life as an apartment building, and we're working on that in a few cases, trying to find reasonable ways to structure it in Florida," Wanderer said. "The only deals penciling out for us now are where only a few units have been sold. That way, we can own the building wholly, which is our business model. We don't want to own 30 out of 300 units."

Three months ago, had you asked Wanderer if opportunities existed in South Florida for Alterra's model, he would have said no.

"I feel now like there are opportunities and strategic relationships," he said.

Like Alterra, the Skyvest Real Estate Opportunity Fund, a joint venture of Sky Development and SunVest USA, is looking to acquire more properties, having pulled out of the residential market in the second quarter of 2006 to focus on commercial properties.

The $1 billion fund plans on investing $300 million in the next 24 months to acquire multi-family rentals, distressed and failed condo conversions and condo developments, as well as other specialty properties.

Fund manager Yizhak Toledano, chairman and CEO of Sky Development, said the fund is "getting offers every day" from people who want to sell their inventory, but mainly the offers are coming from outside of Florida.

"We still don't see the opportunities" in Florida, Toledano said. "We only want projects where we can take control of the whole building. We are also looking at new construction that buyers will walk away from, which gives us an opportunity to take ownership."

In the end, Studnicky said, the buyers walking away are going to allow developers to recover from the market debacle.

"Many developers are discounting to 2002 and 2003 pricing levels and they can afford to do that because defaulting buyers are leaving their deposits behind. There were no specific performance clauses in their contracts," Studnicky said. "When the market recovers and developers start building again, buyers will see big, big prices. The prices in 2009 will rise."


Condo fallout by the numbers

Number of condo units recently built or near completion in South Florida:
75,000

Percentage of expected defaults in every new Miami building:
30 to 40 percent

Rate of return many bulk buyers want before purchasing:
20 percent

Author: Mary Duan