Miami's Property Market

Take Advantage of the US Downturn

The big question is how can an investor get the most out this added value, especially in a downturn? The answer is wherever there is still demand and a niche in the market. And with a relentlessly popular location, such as Miami, there is always an opportunity. One just needs to drill into the market to reveal where’s best. For example, on the surface, headlines suggest that Miami has the biggest glut of property in more than 30 years, which is expected to force overall prices down by as much as 30% this year1. Altogether, in Miami-Dade and Broward counties, there are 78,000 homes for sale; a rise of 650% from two years ago2. Many of the existing developments under construction were started in the boom years of 2001-2005 when Miami and the US as a whole were experiencing a housing boom.

What’s important to realise is that there is significant market segmentation, and that most of these properties for sale are in the low to mid markets. This is because many of the properties in this sector were bought using sub-prime mortgage lenders, a number of which have increased mortgage payments to compensate for the dip in property prices, thus creating a wave of panic amongst owners who cannot afford to pay the extra amounts required. Think the late 1980s in the UK. However, the upper end of the market was and is still typically bought up by High Net Worths who either used a stable, prime mortgage lender or secured a property with cash. Therefore the same desperation to cash in and sell quickly to rid themselves of the potentiality of increasing sub-prime loan payments does not exist at this end of the market. Indeed, the luxury end is still continuing to flourish, with the fundamentals identifying that the local and national property market is holding up better than the other sectors. For further information on mortgages and sub-prime market see p.34. This would include One Bal Harbour. One agent in Miami reported that sales volumes for properties priced between $1.2 million to $2.5 million are particularly healthy while those priced below these levels are suffering the most3. Indeed, while America as a whole is going through a recession, many of the very wealthy are being spared, and substantially prospering from these economic conditions, just as Europeans can also take advantage of this downturn if we grasp the best opportunities on offer right now.

Get Into a Traditionally Unaffordable Marketplace While You Can

According to Bizjournals, an American business news website, Miami is one of the least affordable real estate markets in the country4. It is placed 83rd out of 95 markets, with the 95th, San Francisco, being the least affordable using an index calculating average total housing payments as a proportion of overall household income. Perhaps surprisingly this rating is a reflection of the exclusivity of this marketplace. The ‘least affordability rating’ reflects the fact that Miami attracts high-value investors from around the world to its many prestigious developments, such as One Bal Harbour. Incidentally, all the other least affordable markets in the US are also in highly desirable areas such as San Jose - California, Honolulu - Hawaii, and Long Island - New York.

Miami’s Popularity Will Never End

It is important to realise that analysing the US property market and then extrapolating those findings to a specific city will prove ineffective with Miami. The city is unlike other American cities for several reasons: it is immensely popular with overseas investors, such as those from Latin America attracted to the cultural similarities (57% of the population is of Hispanic background with the largest Cuban population outside Cuba). Also with sun-seeking, second-home owning Europeans who find properties very cheap thanks to the weak dollar. These two segments provide buoyancy to the market and ensure continued interest in the city.

Hotel occupancy in Miami has barely been affected by the economic downturn, signifying the appeal of the city: 79.8% occupancy in Q1 2007 compared to 83% same time last year, while average daily rates have actually increased from $176.54 in Q1 2006 to $199.86 in Q1 20075.

Growing Popularity for Condo-Hotels

The trend towards design-conscious condo-hotel properties on Miami Beach has grown exponentially in the last few years. These properties, anchored by trendsetting hotels such as the W, Gansevoort, the members-only SoHo House, and the Regent Bal Harbour are perfect models for Miami. This is because the city draws young, affluent tourists looking for stylish places to stay while partying in Miami, which results in year-round high occupancy and room rates6. The exclusivity of these properties also keeps their value intact and interest from buyers looking for a unique opportunity.

Get into the Market Now Before Prices Start Rising Again

The NAR state that “the [US property] market is underperforming when considering positive fundamentals such as the strength in job creation, economic growth, and favorable mortgage interest rates”9 (see US Economy snapshot below). Also, the cyclical nature of American real estate demand does indicate that the market is bottoming out. Evidence of this comes from:

• The Pending Home Sales Index increased by 5% in June over the corresponding figure in May and stood at 102.4, based on a base figure of 100 in 2001. Significantly, this was the largest gain in three years. The index is a forward looking indicator that is based on pending sales of existing homes and when it rises it is usually a positive indicator for future home sales.
• A reduction in inventories: 182,000 fewer homes on the market in June than there were in May, which means supply is getting closer to demand.

US Economy snapshot

GDP growth rate: 3.2% in 2006,
3.4% annualised rate in Q2 2007
Unemployment: 4.6% (July 2007)
15 -year mortgage (current): 5.89%11

Miami is One of America’s Most Important Cities

In terms of a wider economic profile Miami remains among the most influential and international of American cities. The city is home to 64 foreign consulates and 25 international trade offices. The largest collection of international and national banks on the East Coast, after New York, is in Miami, representing total deposits of $74.3 billion (in 2003). Brazilian, British, Canadian, French, German, Israeli, Japanese, Spanish, and Venezuelan banks all have offices in Miami-Dade County. The international trade infrastructure is equally strong: Miami International Airport is the nation’s top airport for international freight and third-largest for international passengers. Its economic impact on the area is estimated to be around $18.6 billion. The Port of Miami contributes $8 billion to the local economy and ranks ninth among containerised ports in the US. Miami is also petitioning to be the site of the Permanent Secretariat of the proposed 34 nation Free Trade Area of the Americas. In total, nearly $50 billion in total merchandise trade passes through the Miami Customs District.12

$13.5bn Injected from Tourism

Tourism has always played a major role in the Florida economy and Miami especially, with its lifestyle imaging and effective branding in the world of films, TV, and music (Miami Vice, Gloria Estefan, Scarface for example). Out of the total metropolitan area economy size of $184.2 billion (ranked 11 out of 20 largest metro regions in the US), tourism injected Miami-Dade county $13.5 billion into the economy.13 About 10.4 million people visit greater Miami every year, including 5.6 million international visitors. One-third of these international tourists come from Latin America. Also, business travel is an important aspect to tourism in the Miami area, with almost 900,000 delegates arriving for conventions and bringing over $930 million to the local economy.

Miami Beach Tourism Stats14

• 94,820 residents u $6.3 billion local economy - per capita income level over $66,000 (2005)
• $3 billion worth of real estate sold between 2000-2006
• More than 5 million visitors a year in 2005; 63% domestic, 37% international growing at 14.8% over 2004 figures
• Average expenditure per visitor per trip at $1,354.3 over an average 6.14 days per visitor
• 18,000 hotel rooms in Miami Beach and 1,273 condo/hotel units
• $800 million in food and beverage spending per year
• Average room rate of $215.62, occupancy of 81.7% on a yearly-adjusted basis
• 9,000 residential units per
  square mile