Can Multifamily Continue?

A Hot Market May be Poised for a Breather

By Debra Wood

The Southeast's sizzling high-rise condominium market remains strong, with new starts continuing throughout the region, despite some signs of developers becoming more cautious.

"It's not starting to [cool down] yet," said Mike Hampton, executive vice president of Bovis Lend Lease in Atlanta. "The work just keeps coming. Interest rates are inching upward, and you would think that would slow the market down. It doesn't seem it has reached the saturation point."

In Miami, Bovis broke ground, in March 2005, on Met 1 - Miami, a 1 million-sq.-ft., 447-unit, 41-story, luxury condominium overlooking Biscayne Bay. The company is managing construction of Midtown Miami East Block, a $57 million, 11-story, 548,031-sq.-ft. residential center with retail and office space. And Bovis is building Ten Museum Park, a 50-story Miami condominium tower with shops and offices.

Retail on the first floor has become the norm for urban projects, Hampton said. Restaurants, dry cleaners and other amenities attract buyers.

Urban growth

Orlando has about 7,000 condominium units under way, with more announced. Among current projects is The Vue at Lake Eola, a $100 million, 35-story condominium being built by Turner Construction Co. of Orlando.

Hardin Construction Co. of Orlando began working late in 2005 on The Paramount on Lake Eola, an 809,310-sq.-ft., 16-story residential tower featuring a full-service grocery store, other retail and office space. The company also will begin Tradition Towers during the first half of 2006. The 1.4 million-sq.-ft., dual 37-story towers will hold 325 condos as well as space for retail, offices and a private club.

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Tampa's strong job growth buoys its condominium development, said Jack McCabe, CEO of McCabe Research & Consulting in Deerfield Beach, Fla. Hardin has four residential projects under way in the city's Channelside district. Bill Pinto, Hardin president and chief operating officer, expected the company would break ground on two more early in 2006. He said developers have proposed about 25 additional projects for Channelside, but most won't come to fruition.

Atlanta and Charlotte also have experienced a condo boom. A joint venture of Benning Construction Co. of Smyrna, Ga., and Brasfield & Gorrie of Atlanta is building the $102 million, dual 20-story Plaza Midtown Condominiums in Atlanta. In Charlotte, R.J. Griffin & Co. of Charlotte is going vertical with the $58.5 million, 36-story, 740,924-sq.-ft. Avenue.

In South Florida, Pavarini Construction Co. of Miami Lakes has begun work on the first phase at 360 Degrees, a Lennar Developers community in North Bay Village. The 15-story tower will contain 279 condominiums.

Developer Taylor Woodrow of Bradenton, Fla., has moved up the Southeast Florida coast, as population growth headed north to communities that have not experienced Miami's explosive condominium growth. The company will demolish two motels to make way for The Waters, a 50-unit project in Pompano Beach, with construction to begin in late spring. And at Singer Island, Fla., it is building Mirasol Beach Residences, an 18-story luxury tower set to open in 2007.

"Pompano is relatively untapped and is a bargain compared to cities just to the north such as Hillsborough Beach and Boca Raton," said Bob Glantz, vice president for sales and marketing for the U.S. Tower Division of Taylor Woodrow.

Hotel Connection

With owners seeking more amenities, placing residences within luxury hotel complexes in a trend that has taken hold. Hampton explained that the "sale of those condominiums makes the hotel development viable." Condo owners enjoy all of the hotel services.

Bovis expected to begin site work in January on the St. Regis in Atlanta's Buckhead neighborhood. Also, the company anticipated starting construction this spring on The Stanbury, a hotel and residential building in Alpharetta, Ga.

In St. Petersburg, Hunt Construction Group of Tampa will break ground this spring on the $74 million, 29-story Grand Bohemian Hotel and Residences, a 146-room luxury lodging with 96 condominiums.

Boran, Craig Barber Engel Construction Co. of Naples, Fla., is building One Bal Harbour in Bal Harbour, Fla., for WCI Communities of Bonita Springs, Fla. The 26-story condo tower will adjoin a 17-story Regent International Hotel.

Also, Suffolk Construction Co. of West Palm Beach will wrap up construction this coming winter on the $69 million, 718,786-sq.-ft., Diplomat Oceanfront Residences, adjacent to the Westin Diplomat Resort and Spa in Hollywood, Fla. Taylor Woodrow has sold 127 of the 135 units.

Resort living

Escaping city life propels another component of the fast growing residential market - vacation or retirement homes in resort communities, such as Myrtle Beach, S.C., and Destin, Fla. Michael Hughes, an estimator with R.J. Griffin, called coastal areas white hot, with limited beachfront land for development. Other contractors also are enjoying the boom.

"We see a vibrant market," said Shaw Dargan, president of Dargan Construction Co. in Myrtle Beach. "Our 2006 is already booked solid, and 2007 is just about taken up."

Destin and the Florida Panhandle also have experienced tremendous growth. Moss & Associates of Fort Lauderdale, in a joint venture with Roy Anderson Corp. of Gulfport, Miss., is building HarborWalk Village Emerald Grande Towers in Destin. The $101 million, twin 13-story towers will hold 269 condominiums as well as retail and restaurant space.

Dargan does not expect a slowdown for another five to eight years, based on conversations with developers and bankers. McCabe disagrees, citing risks associated with Myrtle Beach's high volume of speculators. Likewise, investors hoping to flip units have purchased much of the Destin inventory, he said.

Flipper Peril

Investors make for a more volatile market and may not close on units if they are losing value. Glantz questions whether speculative demand for real estate will stay high or if investors will return to the stock market as its gains improve and real estate cools.

"Think about demand decreasing and supply increasing simultaneously," Glantz said. "Once those lines cross, you will have a positive supply."

McCabe believes Southeast Florida already has crossed that line and has an over supply of new high-end condominiums. He anticipates luxury units, priced at $700,000 or more, could drop 20 percent to 30 percent in value.

McCabe said local governments have permitted 14,400 units in Miami-Dade, Broward and Palm Beach counties, another 11,465 are under development, and 36,000 more announced. He expects fewer than half of those announced will receive funding and break ground.

"We are running at 10 times the previous annual absorption," McCabe said. "Seventy percent to 80 percent of the units have been reserved or contracted by speculative flippers."

While investors create a more unstable market, developers rely on them to buy multiple units early and get the project moving. Lenders typically require that half the units be sold before releasing construction funds.

Unknowns

Rising material and labor costs also pose a threat to new development.

Rex Kirby, president and general manager of Suffolk Construction, Florida Division, said the price of PVC pipe has doubled. Drywall and metal studs are in short supply, too, due to factories damaged during Hurricane Katrina. In addition, South Florida land costs have doubled or tripled during the past five years. Hughes and others have noted developers holding off on some jobs due to price increases.

"It's at a point where a lot of developers are saying, 'we are at the top of construction cost that we can have and still have any reasonable return,'" Kirby agreed. "If this continues, it will put projects on hold. We're starting to see a little bit of that now."

Suffolk has about 10 residential projects under way, including the $29 million, 18-story Beach Front at Singer Island, Fla.; the $68 million, 16-story One City Plaza in West Palm Beach; and the $56 million, 25-story New River Village, Phase II in Fort Lauderdale.

Increased labor and materials costs change market dynamics and lead to more luxury units, but that could price some prospective owners out of the market.

"[Residential] has been very good for us, but with the increase in construction costs and land cost, the price points for future projects will be real interesting," said Jerry Shaw, senior vice president of Opus South Development of Tampa. "I don't think they will come down any time soon, but I'm not sure they will keep going up the way they have been."

Opus South is building the 30-story Parkshore Plaza on the St. Petersburg waterfront. It's scheduled for completion this spring.

Rebuilding hurricane-hit Gulf Coast states will exacerbate already tight labor and material markets. Hampton warned that the Panhandle was dangerously busy and that some craftsman in that area will likely head west for higher wages during post-Katrina cleanup.

"Subcontractors are saturated with work and charging more," Hampton said. "We're struggling to keep pace with schedule. We can demand more people, but they cannot find them."