CCS Strategy

CCS Competitive Advantage

Housing Cycle Strategy

 

Home > CCS Strategy > Housing Cycle Strategy

Previous Downturn Case Study - Miami Condos

Currently Miami is in a severe downturn for both garden style conversions and high-rise condos. It is important that we estimate how long the downturn will last and how deep the fall in values will be, Miami highrises represent the posterchild for a severe downturn and no one can know how long the downturn will last nor how deep the downturn will be (i.e. how far the values will fall). We are interested in purchasing assets now, but recognize it is dangerous buying condo assets too early, unless there is a deep discount

While every product type and sub market is different, it is important to study the previous cycle for a Miami high rise condo project to gain insight to the length and magnitude of the current high rise downturn. We’ve undertaken a study of a representative high rise condo project (Brickell Bay Club) to model these two factors and outline what might happen in the current downturn.

General Observations:

In the above chart we are able to observe three distinct condo cycles. One from 1975 to 1985, one from 1985 to 1994, and one from 1994 to current. The following is a discussion of what we can reasonably conclude from these cycles.

Cycle One 1975-1985

Upturn Phase: The upturn was characterized by a slow growth period starting in the 1970s, lasting until 1976, and followed by a steep climb resulting in 217% increase in average prices ($63,936-$201,250).

Duration: The upturn was at least 5 years (note: the project was built in 1974 so its likely that it was built in the midst of the upturn resulting in data for only a portion of the climb).

Downturn Phase: The downturn lasted 5 years (1980-1985), and resulted in a very substantial price drop of 50% ($201,250-$100,000).

Cycle Two 1985-1994

Upturn Phase: The upturn cycle lasted 5 years (1985-1990) and was characterized by an initial flat period where values did not increase for three years, followed by a sharp increase in values the final two years to the amount of 55% increase ($94,000-$145,500).

Downturn Phase: The downturn phase lasted 4 years (1990-1994). During this phase prices dropped resulting in a 29% decrease in average condo prices ($145,500 to $103,167).

Cycle Three 1994-Current

Upturn Phase: As with cycles one and two, after the bottom was reached there was a slow recovery phase lasting 6 years where values recovered 3.5% a year. This phase was followed by a "hyper growth phase" of 5 years (2000-2006). Through mid-2007 prices had already dropped 15%, and with a massive amount of new construction due to come on-line in 2008 and 2009, we anticipate this drop will accelerate.

Current Downturn Phase: It is clear that the Florida condo market is entering a severe downturn phase. Through mid-2007 prices had already dropped 15%, and with a massive amount of new construction coming on-line in 2008 and 2009, we anticipate this drop will accelerate into 2010-2011.

Note: Highrise price deterioration is very different from low rise condo and single family dynamics. Safe buying of distressed product can only occur after the massive "supply bubble overhang" has crushed owners (and banks!) for 12-24 months. The capitulation and deep discounting required to clear the market usually happens only after excess supply has distressed owners and banks holding inventory causing them to slowly and reluctantly seek a "clearing price".

While nominal values reflected the dominant peak in 2006, adjusted real prices show that the initial 1980 peak was larger. The peak value has actually declined by $71,623. This is approximately -0.6% per year from the previous peak value.

This project's decreasing value is because of Brickell's considerable age and growing obsolescence. (33 years old) compared with the considerable amount of new product coming onto the market.

Observations And Tentative Conclusions:

For our full report, contact us by clicking here.