As Miami Apartment Projects Stall, Developers Pivot To Condos Instead

Miami underwent a pandemic-era development boom as low interest rates and the influx of new residents from other states made it relatively easy to get financing to build a multifamily project. That’s no longer the case. 

Apartment starts have stalled amid high interest rates, construction costs and insurance prices, leading developers that had announced multifamily projects before the current economic environment to swap out plans for rentals for condominiums. Three such pivots have been announced in the last month.

“Traditionally, it's the exact opposite. Traditionally, it’s much safer to build multifamily than condo,” said Jon Gitman, partner at Miami-based lender BridgeInvest. “But sitting here in today's market, with the cost inflation and the lack of clarity, if you can prove the project then it may, in fact, be safer to do condo development than multifamily.”

Miami-Dade County added more than 17,000 new apartments in 2023, according to Yardi Matrix, and an additional 22,700 apartments are under construction, according to CoStar data reported by The Real Deal. Rent growth has peaked after the pandemic drove huge leaps in pricing, helping spur the wave of development.   

As the surge of new supply comes online, the cost of operating a multifamily property has also shot up by around 8% nationally, dragging down net operating income by as much as 9% on average, Gitman said. South Florida’s explosive rise in insurance costs means operating expenses are even higher in the region. 

“Operational costs are higher, and when you're having a 300% increase in insurance, that's a huge hit to your bottom line,” said J.C. de Ona, division president for Southeast Florida at Centennial Bank. 

There’s little an apartment operator can do to contain those rising costs, and developers of new projects are reassessing their financial models and finding that the numbers no longer work. Condos, however, can always be repriced. 

“In the apartment businesses, everything's very fixed,” said Dan Kodsi, CEO of Royal Palm Cos. “On a condo deal, you can raise prices by 10% or 15%.”

His Miami-based development firm is reassessing plans at two planned apartment projects after looking at the current multifamily landscape. 

A parcel in Downtown Miami where Royal Palm was planning apartments is likely to instead shift to a micro-condo scheme targeting second-home buyers, he said. In Aventura, the firm owns a site that Kodsi isn’t confident can work as condos, so instead he’s planning to try to control costs by staying closer to the ground. 

“Doing high rises with structured parking today, with the cost of construction combined with interest rates, insurance and cap rates, you can't pencil them out, they're not going to work,” Kodsi said.

Switching to condos opens up a different financial structure with faster returns that lenders are still willing to entertain. Developers can rely on pre-sales with deposits that can approach as much as 50% of the unit value to raise some funds for construction and reduce the total debt they need to finance. 

The model de-leverages and reduces the risk of a project and allows developers to sell the dream of a new condo tower to individual users instead of a lender who might have a different perspective on the property’s value. 

“It really boils down to arbitrage in terms of what an individual user can value and pay for a residential housing unit, versus what a commercial real estate investor can pay for that same piece of real estate,” Gitman said. 

Related Group, one of South Florida’s most prolific developers, and New York-based GTIS Partners announced on April 11 that they were launching sales of Viceroy Brickell, The Residences. The 45-story project was originally planned to include 506 apartments at 77 SE Fifth St. in Miami’s financial district. 

Instead, Related brought in Viceroy Hotel Group to brand the tower before launching sales, with units priced from above $600K for a studio to more than $2.5M for a two-bedroom condo. 

Unlike the other projects that have opted to switch from apartments to condos, the Viceroy is already under construction after a Related affiliate secured $164M in construction financing from Truist Bank in 2022.  

Swapping from apartments to condos is relatively easy from a design standpoint. The structure remains the same, while appliances, finishes and amenities are upgraded to bring a property in line with a buyer’s expectations. 

Related brought in Viceroy Hotel Group to brand the property and help elevate its tower, creating what the developer described in a release launching sales at the tower as a “fully realized lifestyle offering, with high-tech and high-touch residential spaces complimented by luxurious hotel-grade amenities.”

Related Group declined to comment about why it converted its project to condos.

While Related had already gone vertical before making the switch to condos, developers who have yet to break ground on apartments are finding that there’s  little appetite among lenders to finance their construction.

“Institutional equity, which is often what you need to capitalize projects, is completely on the sidelines,” Gitman said. “It's very difficult, if not impossible, to find the capital to build new multifamily projects.”

Pre-sales and buyer deposits from condos not only help offset construction costs and reduce the overall debt load, but they serve as a proof of concept for lenders, de Ona said. Underwriting a project on the bank’s side involves calculating how many units need to be sold for the loan to perform, so a developer bringing a half-sold property for which buyers put down 30% of their unit's value greatly reduces the bank’s exposure. 

“What's our risk? Contract fallout,” de Ona said. “But with strong deposits and the market the way it is, fallout risk is really minimized.”

That’s the route that Miami-based Alta Developers is taking at Cassia, a 12-story project in Coral Gables that was originally slated to be apartments but is now planned to deliver 174 fully furnished condos designed for short-term rentals. 

Alta CEO Raimundo Onetto told TRD that Alta was looking to sell at least 40% of the units before looking for as much as $60M in construction financing for the project. The firm tapped Cervera Real Estate in April to sell the units, which start above $700K for a 662 SF one-bedroom condo. 

“The multifamily market is pretty tough today. With interest rates and costs, it’s very difficult to launch a multifamily project,” Onetto told TRD. “The condo projects keep selling and selling and selling.” 

Alta declined to comment to Bisnow about the decision to swap to condos. 

Alta is expecting its sales demographic to lean heavily into foreign buyers who want to use their units while they’re in Miami while renting them the rest of the year.

Meanwhile, Lefferts, a development firm with offices in Miami and New York, is targeting empty nesters who call Miami home at its 126-unit Palma Miami Beach Residences. The building launched sales last month after originally being proposed as apartments in 2021. 

Mendy Chudaitov, the firm’s head, said the decision to switch to condos was driven less by the need for financing than it was by the strong demand the firm has seen for its first North Beach project, a 22-story tower called 72 Park. 

He’s targeting local buyers who are looking for a home near the beach but may not be interested in spending millions of dollars for a unit. 

“The reason why we chose to take this product condominium was simply because the demand was so over the top successful on our first project, it was a no-brainer,” Chudaitov said. “It was the local demand that brought me to do it. Simple as that.”

Units at The Palma, at 600 71st St. in North Beach, will be sold fully furnished, ranging from 405 SF to 1,342 SF and starting around $650K. Chudaitov said demand for units had been “very strong” since he launched sales, but he declined to say how many units were under contract. 

The trio of projects that recently launched sales after first being proposed as apartments all have units that start below $800K, a slice of the condo market that de Ona said has been unaddressed by the wave of ultra-luxury towers that have broken ground in Miami over the last two years. 

Condo sales have remained relatively resilient in Miami, even as the pandemic-era wave of new arrivals slows, giving developers optimism that their projects will find buyers. 

“I've met with some big developers and I ask them how their pipeline is and they all have told me the same thing: ‘I would love for it to be more robust, I would love for it to be selling quicker, but I'm happy that they're still selling,’” de Ona said.