South Florida in 2023 saw the highest number of condominiums selling out to developers since the pandemic. More buyouts are in the pipeline, raising questions about the future of South Florida’s skyline.
Miami-Dade and Broward saw 18 such buyouts last year, the highest number since 2019 when both counties had a total of 23, according to data from the Florida Department of Business and Professional Regulation, which tracks condo terminations across the state. Condo buyouts or terminations occur when at least 80% of owners band together and vote to sell to a developer who plans to redevelop the property.
More condo communities want out, according to Peter Zalewski, the founder of the real estate consultancy firm Condo Vultures. He is currently working on a handful of terminations on behalf of condo associations and in talks with others working on deals. South Florida, Zalewski said, will likely have 35 buyouts in 2024.
It’s a result of the perfect storm hitting condo dwellers, primarily set off by the collapse of the Champlain Towers in Surfside. The collapse brought on a wave of new regulations for financial reserves and inspections. As a result, it’s becoming more expensive to live in a condominium and many residents — especially those on fixed incomes — can’t keep up.
“In the end you’re going to see the number go up, because of everything that happened with the collapse and insurance,” Zalewski said. “Some people don’t want to pull the trigger until the 11th hour. That’s what we’re looking at — a game of chicken by a few people on the outside who don’t want to terminate.”
While condo buyouts may be gaining steam, it’s a path filled with resistance. If more than 5% of residents oppose or hold out, developers will have a rocky road to acquisition. That’s what’s happening with Bay Park Towers in Edgewater, where discussions have been ongoing for three years. In 2021, local real estate agent and developer Vivian Dimond competed with an out-of-state developer to acquire most residences in this waterfront condominium and take over the building. She fell short of her goal, but planned to stay on to eventually gain control of the site.
Today, developers are more cautious of entering into situations like Bay Park Towers and any other condo terminations. Two factors are influencing developers’ behavior, said Joseph Hernandez, partner at the law firm Bilzin Sumberg. Hernandez often represents developers during these buyouts, and has about five in the works now.
First, he said, interest rates are higher today than they were a few years ago, making financing “twice as expensive.” A 30-year fixed rate for a mortgage from national mortgage lender Freddie Mac hovers at 6.94%, compared to 4.41% in March 2019. Second, commercial banks tightened their purse strings after federal regulators hounded industry players due to the closure of Silicon Valley Bank last year. Regulators asked all commercial banks to check if they were overexposed to any type of asset, and for many of them in Florida that meant too much real estate lending and a need to step back on many future deals.
With finances looming large, it would make sense for developers to be extra cautious about new projects, especially those that involve often tense buyouts. Still, some communities, it seems, are ripe for condo buyouts. The same four communities have remained popular for condo buyouts since 2019, including the city of Miami (21, including Coconut Grove), Miami Beach (13), Bay Harbor Islands (8), and Fort Lauderdale (8).
What might it mean for a neighborhood to have at least one aging building replaced with a new high-rise, much less 21 of them, like in the city of Miami? This trend spells one thing — change. Although it takes years to get projects off the ground and built, the skyline, density, and possibly even pool of residents able to live in these new buildings once they’re constructed will be different than it is today.
Aging buildings are often smaller, contain fewer residences, and, since it’s cheaper to purchase in older condominiums than in new construction, more socioeconomically diverse. Cities with double-digit condo buyouts, like Miami and Miami Beach, will inevitably look and feel different.
“Imagine all of those buildings being redevelopment over the next 10 years,” Hernandez said. “I see more condos. In some cases I see more hotels and resorts.”
The Champlain effect
Champlain Towers South changed the future of high-rise communities. The summer 2021 collapse of the 12-story, 39-year-old beachfront condominium in Surfside killed 98 people, shook all of Miami-Dade, and inspired statewide legislative change.
Today, the Florida legislature requires all condominiums to be inspected, up to code, and flush with reserves in case repairs are needed. Before Champlain, condo associations were not required to maintain a minimum amount of reserves. This change comes in light of early findings from the collapse, indicating Champlain Towers South desperately needed renovations but its owners had chosen to postpone them due to the cost and limited reserves. A formal investigation remains ongoing, expected to conclude this year.
Immediately after the collapse, real estate analysts and agents predicted a rush of condo terminations among South Florida’s aging buildings. Surprisingly, condo terminations actually fell: Miami-Dade and Broward had seven in 2022, down from 12 in 2021.
So, why is it just now we’re seeing condo terminations rise again? Zalewski said the ripple effects from legislation after the Champlain collapse took longer than expected since these deals take about a year to fully iron out and hold outs can derail plans.
“It’s just about getting over the finish line,” Zalewski said.
Condo terminations are on the rise beyond South Florida. Based in Virginia and often advising on cases both in the D.C. metro area as well as in South Florida, law firm Reed Smith’s Senior Counsel Robert Diamond said condo terminations are growing in Illinois, Virginia, New York, Maryland and Arizona. Florida, he said, takes the lead.
“This is happening where the buildings are 40 or 50 years old,” Diamond said. “If you’ve got a very old building, you’re likely to see terminations. I would say South Florida is at the front of that, because of the older buildings.”
Perfect storm
Champlain may be the biggest catalyst in the rising number of buyouts, but other factors are at play. Owners have plenty of reasons to jump ship, including rising insurance premiums with Florida seeing the highest rate of growth than any other state, a Fannie Mae blacklist of condos it refuses to back for loans, and a rising amount of condo inventory coming online, meaning aspiring sellers will have more competition.
All of this tells real estate lawyers Hernandez, Diamond and condo analyst Zalewski the same thing — more condo communities will take the bite and sell out.
“By the first quarter of next year a lot of these buildings are going to be under tremendous financial pressure,” Hernandez said. “For a lot of these buildings, the numbers are not going to make sense.”
This story was originally published March 06, 2024 2:36 PM.
