Miami condo glut augurs recession

The construction site of Capital at Brickell by Cabi Developers, which is going up next to five other buildings, in Miami. "Floridais the epicenter for all the problems that exist in the housing industry," a consultant said. "A lot of people will get burnt."

In the middle of the biggest glut of condominiums in more than 30 years, Miami developers keep on building.

The oversupply will force prices down as much as 30 percent, the worst decline since the 1970s, and help push Florida's economy into recession as early as October, said Mark Zandi, chief economist at West Chester-based Moody's, who owns a home in Vero Beach, Fla.

"Florida is the epicenter for all the problems that exist in the housing industry," said Lewis Goodkin, president of Goodkin Consulting Corp. and a property adviser in Miami for the last 30 years. Goodkin, too, foresees a recession.

Thirty-seven high-rise condos and 20,000 units are being built in Miami's 1,040-acre downtown, where sales fell almost 50 percent in May, according to the Florida Association of Realtors. The new units will join the 22,924 condos in Miami-Dade County that were for sale in April, according to Jack McCabe, chief executive officer of McCabe Research & Consulting L.L.C. in Deerfield Beach, Fla. That is the most unsold units since McCabe began tracking sales in 2002.

"Have you been to Miami lately?" Florida Gov. Charlie Crist said at a home builders' conference this month in Orlando. "It's like we have a new state bird: the building crane."

While the housing industry is responsible for 10.6 percent of the nation's jobs, in Florida it accounts for 20 percent, Zandi said. Florida construction jobs fell 2.9 percent in May to 626,200 from the peak in June 2006, according to the U.S. Bureau of Labor Statistics.

Problems with housing across the country prompted the Federal Reserve last week to cut its forecast for U.S. economic growth for the next two years to a range of 2.25 percent to 2.5 percent in the fourth quarter. In February, the Fed predicted growth of 2.5 percent to 3 percent.

Puig Development Group, which converted rental apartments into condos, filed for Chapter 11 bankruptcy protection May 29. The Hialeah, Fla., Puig and its subsidiaries controlled 2,900 units in Florida, including 980 condos, worth about $210 million, said Ronald Glass of Atlanta-based GlassRatner Advisory & Capital Group L.L.C., chief restructuring officer for the Puig properties.

"Puig got a little overzealous and a little overly optimistic," Glass said, "and was caught when the market slowed."

Loans no longer paying interest to Florida banks jumped 43 percent in the first quarter from the last three months of 2006, according to the Federal Deposit Insurance Corp., and Kenneth H. Thomas, a Miami bank consultant, said Florida's banks had already quit making loans to Miami condo developers.

Because it can take up to four years for a condo project to travel from conception to completion, many of the towers rising from the coral rock of Miami were planned and financed during the Florida housing boom, which lasted from 2001 to 2005.

As many as half of those putting down deposits for Miami condos are speculators looking to flip units, or sell them quickly for a profit without living in them, said McCabe of McCabe Research.

Falling sale prices, McCabe said, mean he expects up to 50 percent of buyers to walk away from their deposits in the next 18 months rather than complete the sales.

Miami Mayor Manny Diaz said "the unprecedented flurry" of residential development makes him happy because it reduces sprawl and brings more people and money into Miami.

"We will continue to build because I see more and more interest from foreign investors coming into Miami," Diaz said in an interview. "I don't think we're done."

The condo glut does not worry developer Tibor Hollo, either. Hollo, 80, was born in Hungary and spent his teenage years in two Nazi extermination camps, Auschwitz and Mauthausen.

Hollo started building in Miami in 1956. His Florida East Coast Realty Inc. has two high-rises under construction: the $603 million, 787-unit Villa Magna; and the $120 million, 635-unit Opera Tower.

"Residential buildings, if they are well-located and top-of-the-line, they will sell," Hollo said. "We sold 38 units of the Opera Tower's 635 units to Russians. I would never have dreamed it. I would understand 38 Venezuelans, not 38 Russians."

The skyline of Miami is visible from Key Biscayne, the barrier island where real estate broker John Rosser lives. At night, he often sees more dark windows than lighted.

"This is dumbfounding to me," Rosser said. "It's a building boom in the middle of a housing bust."