After the Boom: What Happens Next?

Boom and Bust Parallels

Since Miami’s boom led it to surpassing NYC in new construction, I thought it relevant to look into NYC’s real estate boom of the 1980’s and subsequent crash. What I found was a timeline of the real estate boom and bust of the NJ/NYC metropolitan area that is eerily similar to what is happening here today. Could what happened in the Big Apple during the 1980’s foreshadow the future of Miami’s real estate market?

1980’s NJ/NYC Metropolitan Area Boom and Bust Timeline

  • 1982 – Real Estate Buzz Begins
  • 1983 – Real Estate Gains Limelight
  • 1984 – Prices Begin To Skyrocket
  • 1985 – Prices Rise, Affordability Questioned
  • 1986 – Manic Pace
  • 1987 – Cracks Appear At The Top
  • 1988 – The Crash Begins
  • 1989 – The Market Turns
  • 1990 – Bank Failures And Foreclosure
  • 1991 – A False Glimmer Of Hope
  • 1992 – Reality Sets Back In
  • 1993 – Hope For A Bottom
  • 1994 – Disappointing Bounce
  • 1995 – Uncertainty As The Bottom Is Hit

Apples to Apples Comparison?

The article that I used as a reference has supporting NY Times articles for each year. It’s fascinating to see the parallels:

  • One could begin Miami’s boom-preceding real estate buzz at around 2002. This would coincide with 1982 and 1983 in the above time line.
  • The market gaining the limelight seems to coincide with 2003 and 2004 when projects were announced throughout Edgewater, the CBD, and Brickell on an almost weekly basis.
  • By the end of 2004, Miami’s boom was approaching its height. Everything seemed to be happening at once. There was a flurry of developer and investor activity. The national and international media had Miami in the limelight. It was tantamount to a renaissance of sorts. Prices began to rise sharply and people began questioning affordability as the median home price rose beyond the reach of Miami’s Median Household Income . This would appear to coincide with 1985 in the time line.
  • 2006 was a year where many people got into contracts fearing that there was still time to get a good deal and prices were going to continue to rise. This coincides with the Manic Pace of 1986.
  • Now, in 2007, foreclosures are at historic levels, prices are slumping, there is an over supply of condo units for sale, and still dozens more projects in the pipeline. This would coincide with 1988 – 1990 in the NJ/NYC boom where similar conditions arose.

It took around 7 years for the market to bottom out and recovery to ensue in the NJ/NYC metropolitan area. Are we to expect the same in Miami? So far, events are following a similar track.

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16 Comments

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16 responses to “After the Boom: What Happens Next?

  1. It’s a sobering outlook, but thanks G!

  2. Brad

    The similarities are striking. The NJ/NYC activity spanned 13 years according to the report…I do think it is realistic to assume the Miami market (esp. condos) will not recover for a while- perhaps 2011 or longer. The realtors here will lead you to believe that recovery will occur by the end of 2008 but with the level of inventory now (and in the next few years) there is no chance for a turnaround any time soon.

    X- did you see the DBR article today about the $91M Wells Fargo loan default on the Boca developer? Another great example of a stupid converter. Post it for the readers if possible.

  3. Repost?

    This comparison is only apples to apples in the sense that a cycle is relatively similar in its stages, regardless of the location. The length of the cycle, on the other hand, cannot be reasonably projected or transposed from one city to another.
    I’m sure that you are aware that there many different variables that you need to account in order to estimate the length of a downturn. Inventory, rate of absorption, strength of the economy, population increase, foreign investment, and overall buyer outlook and confidence.

    Can you please provide a comparison between the factors that lead to the previous down cycle in Miami and the current one? S&L collapse, high interest rates, failing economy, oversupply, etc… vs. Oversupply, condo flippers, increase in construction costs and RE prices, high insurance rates and taxes, etc.. And of course, a comparison between the positive market fundamentals in each case?

    Great blog, btw

  4. Brad

    Without delving into a complex economic/demographic analysis, what is most significant to the comparision is the way the media coverage in NY mirrored that of South Florida–from extemely positive and upbeat at first and then shifting over the years to a negative “doom and gloom” scenario, and the public perception followed accordingly. Its definitely worth noting the psychological effect the media can have on the market as a supplement to the actual conditions.

  5. Repost,
    I agree that one cannot transpose a circumstantially, temporally, climatically, and geographically different market on to another. The comparison is food for thought.

    You mention six fundamental factors that one must consider in order to “reasonably” forecast the length of a cycle. Agreed. One can elaborate on the different aspects and levels of each, but aside from the importance of those factors, there is Murphy’s Law, which applies quite uniquely to Miami.

    Miami sits at the edge of the continent in a favorable yet precarious geopolitical position. Consider the city’s tumultuous history of boom and bust. Everything from hurricanes, to wars, and refugee crises have dictated the currents of change in Miami’s cycles. X factors aside, the analysis that you’re suggesting is rather complex, but I like the idea and will entertain it.

    Brad,
    The media’s influence over public perception is incredible, and we’re already seeing the dramatic and often unreasonable approach the media adopts in covering events. What combination of media sources can one turn to for real insight? There are so many angles to cover that no one media source can provide a real comprehensive view of market and on-the-ground conditions.

    In the NJ/NYC metro area it took seven years for the market to begin a healthy recovery. It’s doubtful that many New Yorkers anticipated that. I haven’t looked at the hard data nor undertaken a critical analysis, but I am rather intrigued by the similar albeit general patterns between the booms.

    The Miami boom’s construction-scales tipped heavily in favor of high density residential. Commercial activity was marginal. The scales will balance out. It’s just not clear when. For now, the commercial side remains light and the residential heavy. Miami’s economic vitality will be tested in the coming years.

    I haven’t read up on the $91 million loan default. I perused the DBR site but didn’t spot it. I’ll find it.

  6. Grog Argh

    WOW – So it could be 7 years before this bottoms out – now it makes sense why we have been in this mexican standoff for 1-2 years now.

    The incredible thing is that since real-estate prices is a topic on everyone’s lips, the overall expectation is that SOMETHING is going to start happening VERY SOON – at least that happened a year ago and it keeps pushing back and back… now some latest comments are that the market will recover and stabilize by April 2008 (read that in Money.cnn.com a day or so ago from a builder in Florida).

    But you have to take comments from builders with a BIG grain of salt – they want it to recover really quickly after the mess Real Estate agents made of this place by causing all this hype and panic that was unnecessary.

  7. A market recovery by 2008 would make be great, but let’s be serious, how can that be concluded by a builder of all people? This boom was a monumental event and it has yet to pan out. There is plenty of construction underway. The tangible effects in some cases will span 15 years as with Argent’s Omni plans. Although it’s too early to know when a real recovery will take place, the comparison to the NJ/NYC boom of the eighties provides some historical perspective. I don’t think it’ll take 7 years, but a 2008 recovery doesn’t seem at all realistic.

  8. Brad

    (That DBR article was front page of the print edition Thursday. In brief, a developer bought a 522-unit 34-yr old apt. complex in Boca for $101M with a $91M loan. They initially sold about 250 units but apparently half the buyers walked away. Only $14M has been paid off and the loan is now in default. They grossly overpaid @ $190K/unit. Biggest anticipated foreclosure in Palm Beach Cty. in recent memory.)

  9. FrenchyMiami

    finance mechanism from the 80’s aren’t the same as 2000’s we should be able to overcome theis leak in Miami ..it s just a shakeup of investors…

    Complexity of financial instruments will allow developer and investor to go forward with their investment especially with new funds and proiivate equity money coming in to support them again to try to take advantage of the low prices…

    You have to remember that the long term outlook for miami isnt affected by what happened,…

    It s just a matter of time…people need to see that some over zealous investor and developers are losing money ..get rid of them and everything will start again with the same old sharks…and some new ones who didnt get there earlier and will now want a piece of the action

    commercial real estate and offices need to confirm the residential activity..them everything will follow…

    defineely more than 1 year …for sur2 less than 4 years

    first 2 years of a new presidency sounds about right

  10. B,
    $101 million for a 34 year old building? That’s insane!! That is exemplary of the kind bad judgment that ruins it for other developers vis-a-vis lending institutions.

    FM,
    I agree particularly on the commercial activity solidifying the residential sector. As it stands, most residential high density projects not yet under construction stand a difficult chance of topping off–even for established developers like Daniel Kodsi and Pedro Martin (that’s why, I think, they’re holding off on Paramount Park and 600 Biscayne respectively). My guess is that there will be a pronounced shift in use to commercial because the alternative means defunct developments. Tibor Hollo seems to be doing that with Villa Magna and Boymelgreen with Vitri — switching to hotel use. Despite the lending options you mention for developers, there is much risk in targeting the residential sector at this point unless one has already invested a significant sum on the land acquisition, site plans, and permits.

    The latest trend for developers is the packaged pull out; Element, Flatiron, The Pointe, Lynx, are all examples of this. Developers are selling the site, plans, permits, and building brand. We’ve reached the cap. Now the prices have to bottom out. Would-be developers are likely to wait before seeking financing for new residential while there is a downturn with no clear bottom. The market’s main hope is commercial. Still, it’s not clear whether the commercial side is ripe for a surge. There is an encouraging pick up of activity, but well short of a bail out. Your guess at the cycle time frame is conservative and I think pretty realistic.

  11. FrenchyMiami

    This is what saves the day…New vehicles..new instruments…

    Bayrock Group acquired a 30% interest in the Midtown Miami project
    July 17th, 2007 by F D
    First Joint Venture Investment With Strategic Partner Bayrock Group LLC
    Reykjavik, Iceland, July 16, 2007 – (Hugin) – FL Group today announces that together with its strategic partner Bayrock Group, it has acquired approximately a 30% interest in the Midtown Miami project.

    Midtown Miami is a mixed-use development of approximately 5,000,000 square foot in the heart of Miami, Florida. The development includes 8 high-rise condominium towers, an office tower and a mixed-use facility. Midtown Miami’s 26-acre site will encompass:

    * approximately 3,277 residential condominium units (inclusive of 120 condo hotel units); * 265,300 square feet of upscale specialty retail space; and * 501,313 square feet of Class “A” office space as well as an entertainment center.

    The Midtown Miami project will be located in a very attractive part of Miami. Directly adjacent to the Midtown Miami development is a popular retail shopping centre occupied by a number of national and regional specialty retail shops and restaurants.

    The development time frame for the project is expected to be between three to four years. The investment will be funded with own funds and loans.

    This follows FL Group’s investment of $50m in four active US-based real estate development projects alongside Bayrock Group in May 2007. The four projects are; Trump Soho in New York, Trump Lauderdale in Ft Lauderdale, Camelback in Phoenix and Whitestone in New York.

    Commenting on the new venture, Hannes Smárason, CEO of FL Group said:

    “FL Group is delighted to have finalised its first joint venture with Bayrock Group, following the investment in four Bayrock development projects in May. Midtown Miami project is an exciting opportunity for FL Group to be a part of. FL Group looks forward to exploring further opportunities with Bayrock Group both in the US and internationally when the possibilities arise.”

    Tevfik Arif Chairman of Bayrock Group commented:

    “We are excited to have entered into our first joint venture with FL Group and to be a driving force in the redevelopment of the largest urban infill development in South Florida. We believe that this development will bring numerous benefits to the surrounding community and will serve as a testament to the urban renewal vision of Bayrock Group and FL Group.”

    For further information:

    FL Group: Kristján Kristjánsson Director Corp. Communications Tel: +354 591 4400 / 354 899 9352 http://www.flgroup.is Brunswick Group LLP Anita Scott, Leonora Pou Tel. +44 (0)20 7404 5959 Bayrock Group: Mr. Felix Satter Tel. +1 212 207 6650

    Notes to Editors

    About FL Group:

    FL Group is an international investment company focusing on two areas of investment. The majority of its operations are run through the Private Equity and Strategic Investment division which can take stakes in listed and private companies as well as lead private equity buy-outs. The Capital Markets division is a proprietary trading desk focused on taking short-term positions for profits in primarily equities, bonds and currencies. With its head office in Reykjavik and offices in Copenhagen and London, FL Group invests in companies in Northern Europe, focusing primarily on the Nordics and the UK but also has investments elsewhere. FL Group is listed on the OMX Nordic Exchange in Reykjavik (OMX: FL). At the end of first quarter 2007 FL Group’s total assets amounted to ISK 303 billion (EUR 3.4 billion). Its market capitalisation at the end of March 2007 was ISK 236 billion (EUR 2.7 billion). The largest shareholders of FL Group are Gnúpur fjárfestingafélag hf. (20.2%), Oddaflug BV (19.8%), owned by Hannes Smárason, CEO; Baugur Group (19.6%) , Icon and Materia Invest (10.7%). The shareholding can in some cases be in the name of Icelandic financial institutions because of forward contracts. More information on http://www.flgroup.is

    About Bayrock Group:

    Bayrock Group, LLC is an international real estate investment and development firm focused on top class real estate product throughout the world. Bayrock’s professional team combines countless years of experience in all aspects of real estate development and has come together to create a world class team of real estate development specialists. Bayrock has made investments in transactions comprising real estate assets valued in excess of $5 billion.

  12. FrenchyMiami

    Smart move for those funds…they re coming in at the right time and are gonna make history(..and a lot of profit)

  13. I’ve always said it. Midtown is far to expansive and significant a project to fail. There is no doubt in my mind that Midtown buyers in the long run will be very pleased with their decision. But even more importantly, Miamians in general will have a more desirable urban core because of it. that area is going to be a hotbed of economic activity. Bayrock recognizes this and we’ll see how they play in to mix. Great update FM!

  14. FrenchyMiami

    Yep that ‘s great news! i almost doubted

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