In the last fifteen years Miami has been going through an amazing transformation that is still in full swing today. The once crime ridden city, mostly home to retirees from northern US areas, is today one of the top world tourist destinations with its 10 million visitors every year. The “magic” city saw a urban transformation that is making it today the new business gateway to the Latin American markets, with over 1,500 companies that selected Miami to be the headquarter for their South American operations. In addition to being the number one destination for cruises in the US, Miami has also established itself has one of the two larger commercial ports in the United States, thriving on the high volume import and export business. Furthermore, Miami has become the second most important banking pole in the East Coast of the US, second only to New York, the banking capital of the world.
Along with this evolution, inevitably came the transformation of the city skyline and the redevelopment of many areas that were neglected before, as well as the development of new areas of the city. Today Miami Beach is seeing the completion of its amazing renaissance with several new real estate projects under way, and Miami as a whole is continuing its transformation into becoming a full fledge worldwide metropolis with 5 million people living in its larger urban area (which include Miami-Dade, Broward and Palm Beach County).
Since 2001 the evolution of the real estate market in Miami has reflected this historical transformation of the City, with prices of properties finally starting to catch up with those of the other main urban metropolis in the US. One major and fairly unique element that characterizes the Miami real estate market is that almost half of the residential properties sold are second homes to a vast array of international and domestic owners, attracted by the wonderful weather and beaches as well as the unique nightlife and cosmopolitan flavor that characterize Miami. This has been a stabilizing factor in today's market, which in the last year and a half has been taking a pause to adjust to some of the excesses that inevitably came during this unprecedented time of real estate growth.
As it is often the case, along with the strong growth in the real estate market came an overly optimistic view of how many new units could that market absorb, with the result that an excessive number of residential properties, especially condominiums, were planned to be built by developers around town. A second issue was that many pre-construction units were sold by developers to investors, who did not have the traditional view of renting the property while owning it to benefit from its long term appreciation, but rather to "flip" it to a second buyer before the unit was completed, therefore making a substantial return on their initial investment without ever having to close on the unit. This trick has been working in many cases during the boom years, but in recent times, with the market coming back to a more normalized pace, it has created a situation where several buyers are faced with the necessity to close on properties they did not plan to ultimately buy. A third factor has to do with the psychology of investing: in time of uncertainty, people defer their purchases taking a "wait and see" approach, not knowing if the time to buy is now or later on. Two more reasons of concern have finally been the soaring insurance costs for homeowners, which hit a peak after the busy 2005 hurricane season, and the level of property taxes which have been increasing in the last few years along with property values.
All these factors led to a situation where sales of residential units in Miami slowed down considerably compared to the previous years, although the total volume of sales was still of the highest from an historical point of view, reflecting once more the permanent transformation of the City and its new demographics. The slowdown in the Miami real estate market also came as part of the overall adjustments that took place in the major US as well as international property markets after several years of strong growth.
Having said all that, there are good reasons to be optimistic about the future of the Miami real estate market:
The oversupply of units built is being taken care by the fact that many developers are scaling back or postponing their projects (an estimated 40% of them), helping reduce the previously expected number of units to be built in the market; the new Governor and the Florida House and Senate for the first time are seriously tackling the insurance and property taxes issues, looking into solutions that would substantially reduce the tax and insurance burden for homeowners in Florida; and finally, buyers are starting to see that prices seems to have stabilized, with the result that they will be soon starting to come back to the market and buy. Overall, this pause in the market is a healthy one, eliminating the excesses described above.
Furthermore, if we look at some of the key variables influencing the real estate market at a specific point in time, we can see several positive trends: interest rates on long term mortgages have long stabilized at historical low levels, favoring the purchase of real estate properties; the in-migration toward the state of Florida and the Miami area in particular has been amongst the highest in the country and is expected to be raising strongly into the next 20 years, creating further demand for residential housing; the unemployment rate, the single factor that can most influence a local real estate market, has recently been in the Miami area in the 3% range (one the lowest in the US), a level that is considered as equivalent to full employment.
When we add all these factors to the initial considerations that Miami and South Florida have become one of the top worldwide travel and business destinations, we can expect that the many buyers that have been waiting on the sideline waiting to buy real estate in Miami are about to come back. Furthermore, the artificially low dollar is creating opportunities for foreign investors, European ones in particular, to take advantage of their strong currency and buy at prices that even without that incentive are still quite lower than those prevailing in the major European cities. The influx of funds from Europe into the Miami real estate market has actually increased recently, not only targeting primary locations such as South Beach, but also other areas of Florida.
We believe that the current situation in the Miami real estate market creates very interesting opportunity for the savvy investor, who can buy a piece of one of the most sought after property market in the world, at a time where bargains can again be found.
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