Headlines – Week of March 14, 2010

March 21, 2010

Miami Condos Filling Up

According to a new study by the Miami Downtown Development Authority, in partnership with Goodkin Consulting/Focus Real Estate Advisors, 74% of all Miami area condominiums built since 2003 are occupied.  The area represented in the study stretches from the Brickell district south of downtown Miami north to State Road 112.  The area represents 22,079 condominiums defined as “urban” units.

This reflects a 20% increase over the 62% occupancy rate reported in a similar study completed in May 2009 and means the glut of new condos is being absorbed more quickly than expected. Sharp price cuts and a willingness to rent units, rather than sell them in a down market, have made a huge difference.

A wave of new urban residents began arriving last year as developers and lenders got more aggressive about cutting prices to move units. At the same time, individual owners, who bought condos for investments, realized renters could at least generate some revenue to cover their mortgages

The study found that 68% of these new condos have been sold, a 6%jump from the May 2009 survey. The average sale price downtown was $300,306, although prices were significantly lower than that in every area of the greater downtown area except Brickell Avenue.

The study shows there are still 7,010 unsold units in the new downtown area compared with the 8,000 that existed seven months earlier. 51% of the unsold units  are in the Brickell area, followed by 23% in the Central Business District.

If occupancy trends continue, the study predicts that downtown Miami’s existing condo inventory would effectively be eliminated over the next 25 months.

Renters account for about 52% of the occupied condo units in the downtown.

As the condo buildings fill up with new residents, it’s having an increasingly positive effect on downtown Miami’s commercial base. Residents want places to eat, drink and shop.

The number of retail businesses in downtown Miami grew by 42 in 2009, according to the study. That marked the third straight year the district has seen 40 or more net new openings. Since 2005, 152 new retailers have opened downtown.

A recent Integra Realty Resources survey of the 50 largest markets in the U.S. found that downtown Miami’s retail vacancy rate of 5.06% is among the five lowest in the nation, a huge drop from mid-2008, when the vacancy rate climbed as high as 12.5%.

Full Report

Comptroller Dugan Urges Action on Commercial Real Estate Concentrations

Comptroller of the Currency, John C. Dugan said that the recent surge in community bank failures raises difficult questions and that commercial real estate concentrations warrant special attention.

The Office of the Comptroller of the Currency was created by Congress to charter national banks, to oversee a nationwide system of banking institutions, and to assure that national banks are safe and sound, competitive and profitable, and capable of serving the banking needs of their customers in the best possible manner.

Dugan would like to revisit the issue of the appropriate regulatory response to commercial real estate lending concentrations, especially for construction and development lending.

He stated that experience from the late 1980s and the early 1990s, and from the current period showed that significant concentrations in CRE lending leaves banks vulnerable to an economic downturn.

According to Dugan, while a healthy economy will mask problems with poor underwriting for a while, a rapid buildup of commercial real estate loans is likely to overwhelm risk management controls, and some concentrations are so large that even the most sophisticated control systems cannot protect the bank from a serious economic downturn.

Dugan said policymakers should consider a range of options such as harder limits, increased capital requirements, a more granular approach to defining concentrations (since not all CRE is the same), minimum underwriting standards, more stringent requirements for concentrations supported by substantial amounts of non-core funding, or some combination of the above.

He also warned that regulators should exercise care in moving ahead during the current economic environment since it  would exacerbate the current problems of distressed banks.  He believes that any course of action would have to be carefully phased in taking into account the current activities of all banks.

The Comptroller said that while the vast majority of community banks are sound (nearly 80% of community national banks have strong ratings) problem banks represent almost 9% of all insured depository institutions at the end of 2009. Since the start of the crisis, 195 banks (nearly all of them community banks) have failed, and projected failures this year are expected to exceed the 145 that were closed last year.

Dugan stated that given the surge in losses, problem banks, failures, and costs to the deposit insurance fund, healthy banks will have to bear the burden for a very long time.

News Release

Mortgage Rates Could Spike As Federal Reserve Program Expires

On March 31, the Federal Reserve will stop buying mortgage-backed securities from Fannie Mae and Freddie Mac, returning control of interest rates to private investors. For months, industry observers have predicted that once government supports are removed, interest rates will rise quickly, pushing many of the first-time buyers critical to housing’s recovery out of the market.

In late summer and fall 2009, lured by fixed 30-year mortgage rates under 5%t and the first $8,000 tax credit, which expired Nov. 30, first-timers pushed sales of previously owned homes to the highest levels in at least three years, reducing record inventories and braking price declines. That tax credit was renewed Nov. 5 and expanded to buyers who had not purchased a property in five years, although the credit for repeat buyers is $6,500.

The second credit expires April 30, is unlikely to be renewed.

As the date for the Fed pullout approaches, analysts now generally agree that an immediate rate spike is no longer the likely result. Many believe rates will increase a quarter to one-half of a percentage point.

If the old buyers of these notes don’t come back many believe the Fed will intercede again to ensure rates will not go so high as to stymie an economic recovery.  Many now see that the lenders have instituted rigorous enough standards to ensure that the Fannie Mae and Freddie Mac paper are good loans.

Lawrence Yun, chief economist of the National Association of Realtors rates will rise by year’s end due to natural macroeconomic forces such as a recovering economy and the high budget deficit not because of the Fed’s action.

Economist Brian Bethune of IHS Global Insight believes the possibility of renewed Fed intervention will likely prevent rate increases resulting from private investors demanding large risk spreads.

Posted by Scott R. Lodde


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