The Miami real estate market has continued to move from strength to strength throughout 2020 and 2021, and shows no sense of abating especially as the latest wave of blue state restrictions, mask and vaccine mandates prompt an even greater exodus of New Yorkers and West Coast types.
Furthermore, as travel restrictions eventually ease on international visitors to the U.S., we expect demand from international buyers to come roaring back, which will only add fuel to the fire.
Keep in mind that the unprecedented price increases we’ve seen in Miami real estate have been fueled entirely by domestic buyers. What will happen once buyers from Latin America and China come back?
There’s much to be said about the ease and freedom of renting an apartment, especially a fully furnished one, in South Florida. As a tenant of a fully furnished Miami condo, you can literally fly in and move-in with suitcases only.
You won’t have to worry about paying out of pocket if anything breaks, and your landlord will usually already have all the furniture, dishes, silverware etc. that you’ll need to comfortably live your life. It’s like renting a hotel room, but bigger, long-term.
In a normal, stable market with relatively stable rent prices, this is often a great idea because the carrying costs for owning a condo can be quite high in South Florida, and there’s usually a glut of condo inventory which helps to keep prices low.
However, all of that logic gets turned on its head if the market gets heated, and especially if it gets red-hot like we’ve seen during the pandemic.
The ironic thing is in 2019, the Miami condo market was starting to roll over due to overbuilding, especially of luxury and “super-luxury” condos. As one local mortgage lender said at the time, there simply weren’t enough wealthy Russians or Venezuelans to soak up all of this luxury inventory.
However, no one could have expected what happened next with the pandemic in 2020 and 2021, as wealthy New Yorkers and West Coast types fled blue-state lockdowns and restrictions to move to South Florida en masse.
The scale of this migration was so huge that it completely eclipsed the evaporation of international buyers due to travel restrictions to the United States, especially from Latin America which historically made up a major part of the buyer base.
It’s all fun and games until you don’t have a place to live
As a result of the overwhelming migration that’s happened, and continues to happen, as transplants from blue states flee to South Florida, rents and sale prices have skyrocketed.
In late 2021, it’s not uncommon for tenants coming back from their summer vacations to be shocked that the new rates their landlords wish to renew at are 50% to 100% higher than the lease rates they signed in 2020.
For example, a 3 bedroom, 1,500+ sq ft apartment at the One Paraiso building might have rented for $5,000 in 2020, but the owner now wants $10,000 for it in late 2021. Or a 1,400+ sq ft, 2 bed, 2 bath apartment at the Carillon Miami Wellness Resort might have rented for $6,300 in late 2020, but the owner wants to renew in 2021 at $7,500 minimum, and maybe up to $13,500.
Pro Tip: If you believe that prices will continue to go up and that price stability will be hard to come by, then buying a place so you can lock in a stable cost of living becomes much more attractive. You can also mitigate being surprised by a large increase by asking your landlord well before lease expiration to agree on a renewal rate.
In Miami, the real estate market is highly cyclical due to the lack of serious zoning restrictions or historical districts that might ordinarily put a damper on overbuilding.
In contrast to the West Coast or cities like NYC, there are pretty much no restrictions against building a fancy new condo tower as long as you can buy out all the necessary lots.
Therefore, as long as developers can acquire the lots and build for $200 or $300 PPSF and sell for $700 to $1,000 PPSF, they will continue to do so all day long, even as they risk over-saturating the market.
Eventually, the market turns south either due to over-saturation or because buyers evaporate due to some exogenous event.
Then, new construction activity comes to a standstill, and takes a long time to resume its former pace, typically only after prices have started rising significantly again, often years later, due to a dearth of inventory due to the long pause in building activity.
Therefore, we often reference the long build and bust cycles of the metals and mining industry as an analogy for the long cycles that Miami real estate experiences.
Pro Tip: Just like Warren Buffet said about stock investing, try to buy Miami real estate with a defensible moat, i.e. waterfront, beachfront, unobstructed views, prime location, lively neighborhood etc.
One of the prime reasons for why Miami real estate experiences booms and busts is because of the unusually high carrying costs associated with properties in South Florida.
Often times speculators, investors or even second home buyers are betting on price appreciation to cover the negative carry associated with their properties.
What if you rent out your property?
Unfortunately, in a normal market it’s hard to make a positive return after expenses due to property taxes being close to 2% of the acquisition price per year, condo common charges ranging from slightly under $1 to $2 per sq ft and the prevalence of high interest rate mortgages in South Florida.
Furthermore, insurance costs are astronomical in South Florida, especially for single-family home owners that have to buy their own flood insurance. The all-in cost of hazard insurance for a single-family home can be north of 1% of the property value, per year.
As a result, most rental properties during a normal market experience negative carry, meaning the owners have a negative net operating income on their investment.
What happens when the market starts to crack?
Once the real estate market in Miami starts to turn south, all of these over-leveraged, underwater owners will see their paper gains as well as liquidity evaporate, and won’t be able to get out at yesterday’s price.
Once their justification for holding a negative carry asset disappears, they’ll need to sell, and usually soon due to high monthly carrying costs.
Remember that much of the new inventory built this time around consists of “super-luxury,” i.e. 3,000 sq ft condos with $50,000+ in annual property taxes. How many people can ordinarily afford that?
Pro Tip: Remember there’s friction in terms of buyer and seller closing costs in Florida just like anywhere else. Fortunately, closing costs are generally lower in Florida vs New York. Check out our Miami Buyer Closing Cost Calculator and our Miami Seller Closing Cost Calculator to learn more.
Another factor to consider in the South Florida real estate market is that depreciation is very tangible and real, vs a mere paper loss to offset income tax liability in other markets like NYC.
For example, in NYC it’s not uncommon to see buildings in historical neighborhoods like the West Village or SoHo to be over 100 years old, i.e. 321 West 13th St in the Meatpacking District, a beautiful building built in 1900 that still fetches top dollar over 100 years later.
Why? Because of restrictive (or protective, depending on your view) zoning and historical districts in NYC and other markets like San Francisco.
You’re never going to see skyscrapers going up in the West Village because it’s a protected neighborhood. And the reason it’s a protected neighborhood is because the old buildings in these historical districts are generally very pretty with a lot of historical charm.
As a result, if you want to live in the West Village, then you have to work with the inventory that you have. And everyone wants to!
There are no such protections in Miami
In contrast, newer is almost always better in South Florida. There are no relevant historical districts to speak of, and the Art Deco district in Miami Beach doesn’t have much in the way of actual housing vs hotels and restaurants for tourists.
Furthermore, due to the merciless climate and the real wear and tear associated with being in a hurricane zone, buildings do become run down over time.
Therefore, you don’t see the same level of pricing resiliency that you see in NYC for older buildings, and the depreciation is very real when it comes to re-sale prices for units in older buildings.
In Miami, there’s always a newer and “better” building being built with more unique or luxurious amenities. As a result, if you’re buying a condo in-land, then you’d better be careful about excess supply coming onto the market in the near future!
Pro Tip: Look ahead to see where older properties are trading for, and fast forward a few years to imagine what your place in the future might sell for. Any depreciation may well be worth it if the price is right, but try to pick properties that are unique or have some type of defensible moat (i.e. waterfront, unobstructed views, unique amenities such as lots of fitness classes, etc.).
We saw plenty of negative articles pre-pandemic, around 2019, about how the Miami real estate market was going to crash due to overbuilding.
These articles would hyperventilate about how this time the glut is in “fake super-luxury” vs the “solid” middle-class product that was overbuilt before the Great Financial Crisis of 2007-2008.
These critics claimed that the crash would be worse this time around because who could afford paying $50,000 a year in property taxes on a $3,000,000 condo?
Fortunately for the Miami real estate market, what has transpired since the pandemic has proven them solidly wrong, even with the absence of international buyers due to travel restrictions.
The disappearance of luxury condo inventory at the high-end during 2020 and 2021 proves these naysayers solidly wrong.
The total absorption of the inventory at the high-end started with luxury single-family houses and progressed to luxury and ultra-luxury condos.
And to re-iterate, this happened despite a dramatic decrease in international buyers, particularly from Latin America due to pandemic travel restrictions that are still in effect.
How could this have happened? Well it makes sense if you understand the demographics behind the greatest migration in recent U.S. history.
Due to blue-state restrictions and unpopular local politicians and policies, high-income and wealthy citizens of states like New York and California are migrating en masse to red states like Texas and Florida.
This should not be confused with the initial wave of transplants early on in the pandemic which consisted of pretty much anyone able to work remotely due to state and local mandated lockdowns.
However, as vaccines became widely available and back-to-the-office plans for major corporations commenced, only a select group of transplants were actually able to stay in Miami long-term.
As you can imagine, the type of transplants that actually have the freedom and wherewithal to permanently move to Miami tend to be wealthier, and often run their own businesses.
Therefore, with the top earners and asset owners of these blue states changing residences to places like Miami, it’s actually quite logical that this time around, the supposed glut of luxury inventory has been soaked up without a hitch.
Pro Tip: We believe inventory on the high-end will continue to tighten, especially as travel restrictions ease and international buyers return. Miami and NYC real estate have historically been the top destinations for international buyers seeking a safe store of value, and we do not see that demand waning as borders re-open.
