Date: 09.14.2023

Published In: Bisnow

Miami is at “the epicenter of a national affordability crisis” in housing, Francesca de Quesada Covey, chief economic development and innovation officer for Miami-Dade County, said at Bisnow’s Miami State of the Market event Tuesday.

The problem with fixing it, developers and lenders at the event said, is that it doesn’t make financial sense to build market-rate or affordable homes.

High construction costs, the runaway price of insurance and a restrictive lending environment have made building housing for anyone but wealthy South Floridians financially untenable in many cases. While the state legislature and local governments have taken steps to spur construction, developers said the moves may not be enough to clear the hurdles presented by today’s macroeconomic environment.

“If you go into condos and you’re selling a product for $2K a foot-plus, you’re OK,” Inigo Ardid, co-president of Miami-based developer Key International, said at the event, which was held at the Waterford Business District near Miami International Airport.

“The big problem comes as you go down the chain on value. If you’re trying to do market-rate rentals today, it’s very difficult,” he said. “You need to have a fantastic site that can achieve great rents, where you have a low basis on the land, where it’s cheap to build your product, and then you can make it. But even with all that, it’s going to be difficult.”

While the macroeconomic concerns are affecting development nationally, developers said they are especially apparent in Miami, where the price of construction is among the highest in the country, labor shortages have been exacerbated by laws cracking down on undocumented immigrants, and land prices have shot up as owners look to take advantage of a luxury development boom.

Miami is the least affordable city in the country, according to RealtyHop. “Affordable housing is a critical component. Unfortunately, one of the biggest inflations that I’ve seen has been in the cost to build,” Ardid said. “The overall trajectory is faster than the median income, especially for the low-income, and that’s going to create a bigger crunch moving forward that needs to be solved.”

Patrick Murphy, executive vice president at Florida-based Coastal Construction and a former U.S. representative for central Florida, said affordability, insurance costs and climate change are the three biggest risks facing the state today.

While construction costs are high, Murphy said the cost of insurance was more likely to impact a developer’s ability to break ground on a project. Yardi Matrix predicts that rates will rise in Florida by up to 50% this year and could double in some cases, especially in coastal markets like Miami, The Real Deal reported.

“We saw a huge spike with Covid when it comes to cost,” said Murphy, whose firm builds projects across Florida. “I get to joke with my friends in insurance now that we’re rarely the problem anymore; it’s usually the insurance costs that are hurting more jobs.”

As pricing dynamics have become increasingly hard to predict, rising interest rates are also making investment in new projects less attractive. Lenders are able to get better returns on other assets, even in a market like Miami where strong demand has pushed rents to among the highest in the country.

“I can go out and buy a brand-new apartment building for less than what it costs to build,” said Bruce Gago, senior vice president at FCP, a Maryland-based real estate investment firm. “As long as that is true, there’s almost never going to be any reason to invest in the development deal versus the acquisition deal.”

Gago said money-market investments were offering returns at around 5% to 5.5%, the same rate that was being offered by multifamily development. Coupled with the high cost of construction in Miami, investing in market-rate housing in the region is even less palatable for lenders, he said.

“Construction costs are worse than anywhere else in the country, and that really is the key driver that’s holding back the workforce housing component from being developed,” Gago said. “Anything from a public policy perspective like abatements or subsidies that provide enduring financial benefit that gets deals to pencil is really what we need.”

Covey said Miami-Dade County was working to accelerate initiatives created to encourage the construction of market-rate housing, pointing to the county’s Building Blocks Fund as a program the county was using to get projects out of the ground.

The program, which was established in May 2022, includes $70M in funding commitments from private and nonprofit lenders to finance the development of affordable and workforce housing. It aims to help in the construction of up to 16,000 new homes by 2025.

“We’re working closely with private builders to accelerate building over the next three years,” she said. “These efforts have delivered a supply that has outpaced demand for the first time in Q2, which is the first time it has happened since the pandemic.” Florida’s Live Local Act, which went into effect in July, is also aiming to make the development of workforce housing a more attractive proposition.

Among the law’s provisions are property tax exemptions for projects with at least 40% of their units set aside for workforce housing — defined as apartments for residents making up to 120% of the area median income, which was $86,760 for a single person as of May — along with provisions that allow developers to build taller buildings with more density than a parcel’s zoning may permit.

“Affordability is one of the biggest issues Miami faces, building houses not just for the elite but making a whole spectrum of housing available to everybody,” said James Murad, managing director at New York-based Meridian Capital Group. The reduction of zoning restrictions from Live Local has opened up a wider range of parcels for housing development, he said, pointing to a parcel in Wynwood where his firm is working with a developer to build an office building.

“If you were to sell that site today, the highest and best use would probably be somebody who would say, ‘I’m going to do a residential development site,’ and Live Local is giving them a bonus on what they can build,” Murad said.

While some developers were bullish on the prospects for Live Local to spur new projects — for example, Asi Cymbal, the chairman of Miami-based developer Cymbal DLT, said a third of the properties in his firm’s development pipeline would seek to take advantage of the tax breaks — others questioned whether it would be enough to overcome the high cost of development.

“I candidly don’t know if the benefit from the property tax abatement is going to outweigh the income restrictions that need to be put in place in the current macroeconomic environment,” Gago said.

Other speakers at the event pointed out that even if a developer is able to make a project profitable by adding more floors or units, they still need to identify a lender willing to pay for construction.

“How are these projects going to get financed?” asked Ian Bruce Eichner, CEO of the New York-based development firm the Continuum Co. “You’re talking about giving bonuses to density, but that’s only a part of the question. The real question is: Where’s the debt going to come from?”

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