Miami condo market faces moment of truth in 2008

By Jim Loney

MIAMI (Reuters) - Workers are painting, patching stucco and peeling protective plastic from gleaming panes of balcony glass at a new 1,000-unit condo called The Plaza, two towers that rise 43 and 56 stories over Miami's bank district.

A mile to the north, the exotic stonework at a new 500-unit downtown tower known as 50 Biscayne has been polished and the first residents closed on their contracts this month.

Prices in Miami's condominium market -- a poster child of the real estate boom that swept much of the United States until 2005 -- seem to have held up relatively well to date.

But the opening of a raft of big complexes has analysts predicting the market -- fueled by a frenetic construction spree that saw cranes sprout like mushrooms on the skyline -- is edging toward a cliff.

Values may be poised for a wrenching tumble in the next year as thousands of units in the downtown and Brickell banking districts are readied for residents, analysts say.

As a result, the vultures are circling. Hedge funds and private equity pools are busy scouting locations where they can snap up dozens or hundreds of units at sharp discounts to hold as rentals for up to 10 years, until the market turns.

"Everybody thinks south Florida is on sale," said Peter Zalewski of real estate consultancy Condo Vultures, who is advising private equity buyers. "They're all coming to kick the tires."

Futures traders on the CME Group exchange are predicting Miami will be the worst U.S. regional housing market over the next four years with prices falling nearly 30 percent.

Experts have been predicting a fall for Florida condo prices since the market peaked in late 2005. In Miami, sales figures have been falling for months but prices have been resilient as sellers refuse to budge.

In August, for example, condo sales in Miami-Dade County dropped 44 percent while the median price rose 5 percent to $262,000, according to the Florida Association of Realtors.

But the number of condos on sale has climbed to 25,000, a 36-month supply, compared to six to 12 months in a healthy market.

Market analysts say vulture funds could move on a stone-cold market in the next year.

"We have $200 million to acquire distressed condo conversion projects in Florida," said Matthew Martinez, point-man for a Connecticut-based private equity fund. "We're looking at purchases of $7 million and up, all-cash."

Some analysts believe 2008 will be the turning point, when pre-construction buyers are forced to pony up the full purchase price or walk away from deposits, speculators feel the pain of holding too many properties and developers need to dump excess units at discounts of 30, 40 or even 50 percent.

"In May or so, the true blood is going to flow," Zalewski said. "Many of the hedge funds are looking for a minimum of 100 units in the same building."