Condos as far as the eye can see: condo development went into hyperdrive in the first six or so years of this decade. Nowhere was this more obvious than in South Florida. Today there is a glut of unsold condos in Miami and other once-supercharged markets around the country.

In the third quarter of 2007, Chicago-based Corus Bankshares Inc., a bank holding company, had earnings of $35.5 million, down 31 percent from $51.5 million in the third quarter of 2006. This precipitous drop can be traced to the nation's ailing residential condominium market, which is dramatically overbuilt. Corus' loan portfolio consists almost exclusively of construction and con-version loans for residential condominiums. [??] Although Corus has made loans in different regions of the country, one of its most active locations is Miami-Dade County, Florida, where, as of September 2007, there were 54,000 condominiums planned and proposed and 38,000 under construction--the latter figure including condominiums completed in the first nine months of 2007. The total of these two numbers, or 92,000, is higher than the number of condominiums built in the last 10 years in the county. [??] While Miami-Dade may represent an extreme example of condominium glut, there were no condominium markets identified as "good" by market experts as of the end of 2007. [??] In all top 15 condominium markets, according to Phoenix-based Marcus & Millichap Research Services and San Francisco-based DataQuick Information Systems, for the 90 days ending Sept. 30, 2007, compared with the same period in 2006, sales velocity was down. In Boston, which topped the list, it was only down by 2.2 percent, while Cleveland, which was No. 2, had a decline in sales velocity of 5.2 percent. And these were the winners.

[ILLUSTRATION OMITTED]

[ILLUSTRATION OMITTED]

Meanwhile, South Florida is not the only place where condo development got out of control. Las Vegas; Orlando, Florida; Chicago; and San Diego all have a glut of units.

In Las Vegas, which has different market dynamics from Miami-Dade and which is smaller, almost 44,000 condominium units were in the planning or construction phase as of September 2007. Most of the new condominiums are on the famous Las Vegas strip, and are part of resort complexes that have hotel rooms, casinos, restaurants and other amenities.

As of early December, there was $30 billion worth of construction projects going on along the Las Vegas strip, says Alicia Malone, public relations specialist for the Las Vegas Convention and Visitors Authority.

"The properties associated with hotels and casinos" are still doing well, says Shelli Lowe, managing director of the Las Vegas office of New York-based Integra Realty Resources, while others, mostly conversions projects, are not.

In the last two years, 18 condominium projects out of a total of 87 have been canceled in Las Vegas--including the 502-unit Icon project, planned by the Related Companies Inc., New York, and the $3 billion hotel/condominium/casino development called Las Ramblas, planned by Las Vegas-based Centra Properties and Related Las Vegas (the Las Vegas development arm of the Related Companies). Las Ramblas was canceled in 2006, but the partners landed on their feet, says Tio DiFederico, appraiser with Integra Realty Resources in Las Vegas. After paying $75 million for the land in June 2004, Related sold it for $200 million in June 2006. The land resold again in 2007 for $275 million, he says.

It is trickier to figure out which projects have been canceled in South Florida. In fact, some developments that are not going forward are described by their developers as simply being "on hold," says Bruno Picasso, director of market research at Miami-based Integra Realty Resources/South Florida. Developers do this so as not to panic the buyers of units in their other projects, he says.

There are a few projects in South Florida, which, if not outright canceled, have been indefinitely suspended. At the end of October, Donald Trump told the Palm Beach Post that he was close to canceling a 23-story waterfront condominium called Trump Tower Palm Beach, planned for West Palm Beach, although the real estate mogul did not respond to inquiries on the status of the development at the end of November.

Jorge Perez, chairman and chief executive officer of the Related Group, Miami, had enlisted Trump as his partner in the project, at the same time changing the project's name from Icon Palm Beach to the current Trump Tower Palm Beach. Also in October, Trump suspended a condo hotel known as the Trump Las Olas Beach Resort in Fort Lauderdale.

Foreclosures a key indicator

One key indicator of how well--or ill--a residential condominium market is doing is the number of foreclosures. As of November, several buildings on Miami's posh Brickell Avenue were on the list of the top-five condominiums to be hit by foreclosures in Miami-Dade County. And the project with the most foreclosures of all was the Club at Brickell Bay, according to Condo Vultures Realty LLC, Bal Harbour, Florida, a real estate consulting firm. As of Dec. 4, there were 65 units in foreclosure at the development, representing more than 10 percent of its 643 units.

Although South Florida may have way more condominiums than any region needs, things aren't as bad as many people say, according to Michael Cannon, managing director at Integra Realty Resources/South Florida.

"The crisis [in the condominium market] is property-specific," and the foreclosure rate in South Florida has been exaggerated by some of the reporting entities, he says.

There were $21 billion in sales of single-family homes and $10.8 billion in sales of condominiums--representing 92,000 transactions--in South Florida in the first nine months of 2007, says Cannon. There were about the same number of transactions, or 93,000, in same period in 1997, when the dollar volume was $12.7 billion, he says. Although there has been notable price escalation over the last 10 years, the average price per property has remained flat for the last nine quarters at about $345,000, says Cannon. Since there has been no drop in prices yet, there is no recession, he opines.

In the first 10 months of 2007 in Miami-Dade, there were 20,457 mortgage foreclosure filings, a number that includes residential and business filings, compared with 9,826 in all of 2006, says Cannon. The spike in foreclosures, the bulk of which are assumed to be residential, started in 2007, he says.

The irony about the Miami-Dade market is that if condominium developers had to rely just on a growing local population to sell units, they would be in a lot worse trouble than they are. While the population of the county has grown by 208,513 or 9.3 percent from 2000 to 2007, according to the Bureau of Economic and Business Research at the University of Florida in Gainesville, Florida, the average median family income for the county was about $45,200 in 2007, according to the county's Web site. It is not, by and large, the local residents who are purchasing most of the new condominiums in the county--the bulk of which are luxury units--but second-home buyers and speculators.

The national picture

At the national level, it is hard to get a handle on the exact number of unsold condominiums in the market today, although the National Association of Home Builders (NAHB), Washington, D.C., keeps track of condominium starts. In 2006, according to the NAHB, about 45 percent of the multifamily starts were intended to be condominiums (although some of these units may have ended up as rentals).

Out of 336,000 starts, 151,000 were intended for sale compared with 185,000 intended to be rentals. By comparison, an average of about 25 percent of multifamily starts were intended as condominiums from 1974 through 2006, says Bernard Markstein, senior economist at NAHB. The 45 percent--an all-time high--may be indicative of a market that has too many condominiums, he says. Compare that all-time high with just 17 percent in 1975 and 1976. However, Markstein concedes it is hard to know what is a normal mix of condominiums and rentals.

According to the National Association of Realtors[R], Chicago, as of Oct. 31, 2007, there were 653,000 existing multifamily units for sale (on an annualized basis), the equivalent of a 13.1-month supply compared with 570,000 as of Oct. 31, 2006, a 9.1-month supply. A six-month supply is considered optimal.

From the end of 1999 until about 2006, the supply of existing condominiums was in the four-and-a-half- to five-month range, according to NAR. While a tally of existing condominiums for sale does not take into account most brand-new units, it does account for some units that have been sold, but may not be occupied, often because they were bought for investment by an owner intending to flip them.

"In the U.S., the number of condominiums for sale is high, but not unprecedented," says Walter Molony, senior public affairs specialist for the NAR. "In 1982, the inventory of single-family homes, relative to demand and, anecdotally, the relative supply of condominiums was higher than today," he says. (NAR didn't measure monthly inventories of condominiums until 1999. Before that, it only reported sales and prices of condominiums on a quarterly basis, says Molony.) And further exacerbating the glut in 1982 was the fact that the 30-year, fixed-rate mortgage (FRM) averaged 16 percent, he says. Overall home sales, including condominiums, were about one-third of what they are today.

In September and October 1982, there was a 13.8-month supply of existing single-family homes and, anecdotally, the condominium market was even more oversupplied, says Molony. "We were coming off a period called 'condomania,' when builders were building as many units as possible and converting rentals, because they were trying to meet a surging demand by baby boomers, which started in the late 1970s," he says. NAR started measuring condo sales quarterly in 1981.

Today, on a national basis, the supply of for-sale condominiums is the highest since NAR started keeping monthly records in 1999, says Molony. "But in Miami-Dade, the number of available condos is unprecedented--so much so that it skews the national data," he says.

On Nov. 21, 2007, NAR reported metropolitan area condo prices for 59 metropolitan statistical areas (MSAs) and, ironically, the median condo price in third-quarter 2007 was actually up 2 percent from the third quarter of 2006 at $226,900. Of the 59 metros, 41 showed increases, including six with double-digit gains, and 18 areas had price declines, which underscores that all real estate is local, says Molony.

"In the Miami/Fort Lauderdale/Miami Beach/Palm Beach MSA, prices were down only 2 percent in terms of median condo prices in third-quarter 2007, which was a surprise, but one of the factors [influencing price] could be foreigners," says Molony, who notes that this assumption is based on data from the NAR Profile of International Home-Buying Activity, a survey released on July 30, 2007.

Foreign buyers of U.S. real estate condominiums come mostly from Mexico, the United Kingdom, Canada, India and China, says Molony. In Florida, the biggest share of foreign buyers were from the U.K. and Canada, and 16 percent of all international buyers in the United States as a whole were from Latin America, according to the survey. These buyers like buying property in the United States, especially in Florida, because of the decline in the value of the dollar, says Molony.

In Miami-Dade County, the median price of a condominium rose 6.5 percent to $266,300 in October 2007 over 2006, while sales declined 14 percent, according to the Florida Association of Realtors[R], Orlando, Florida. One reason for this is that what is selling today is most likely to be the newer, more expensive luxury units.

In the Las Vegas MSA, the Nov. 21 NAR report showed that the median condo price was down by 8.2 percent compared with a year earlier. "But the asterisk here is that Las Vegas experienced the most rapid price growth of any market on record," says Molony.

In 2004, the median condo price in Las Vegas rose 42.8 percent, and in 2005 it rose another 24.1 percent, he says. From 2003 to 2005, the median condo price went from $108,600 to $192,400, but that number is skewed by the number of luxury units working their way into the mix, says Molony. Still, the biggest factor in condo price growth in this market was appreciation rather than a change in the housing stock in the sample being measured, he says.

Conversion market

The condo-conversion market was booming a couple of years ago, but it has dried up, and many units are going back into the rental market. In Miami-Dade County in 2004, there was $1.7 billion worth of apartments purchased for conversion. But in 2006, that number was down to $624 million.

In Las Vegas, in 2004, there was $629 million worth of apartments purchased for conversion compared with $265 million in 2006. Most of these units were mostly off of the strip. At the end of 2007, the conversions in Las Vegas "were not viable," says Ron Brock, president of Pierce-Eislen Inc., Scottsdale, Arizona an apartment market research firm.

In the United States as a whole, says Bob White, president of Real Capital Analytics (RCA), New York, "There are still some deals happening--about $1.8 billion worth of condo conversions as of the end of October--but it's a modest amount compared to 2005."

In Miami-Dade in the period of January 2006 through May 2006, there were 4,952 units converted and 500 reversions back to rental, whereas in Las Vegas there were 2,631 conversions and 488 reversions, according to RCA.

Sometimes it is hard to classify an apartment as a rental or a condominium, says Brock. Developers are so anxious to get someone in their units, that "in Orlando and Tampa, [Florida], in a condo conversion you can move in with a lease/purchase [agreement] for as little as $100 or $200." The biggest problem with a conversion is that when it is part way through the process, it is neither a condo nor an apartment, says Brock. "No lender will give you [the developer] a take-out loan. If you don't finish the conversion, you will probably give it back to the original lender," he says.

Bailing out is tricky

Developers are eager to sell their units so they won't have to default on their loans, says Greg Laskody, managing director at Coral Gables, Florida-based iCap Realty Advisors-Florida, a commercial real estate investment banker.

"On some of these early condo projects, the developers have tried to rent them out as an offset to ownership costs, but rent only covers 35 percent to 65 percent of those costs," whether they are related to a new or converted project, says Laskody. Among the obstacles to recovering investment costs, he says, are high property taxes and insurance, and the fact that many of these deals were done at cap rates of 4 percent and 5 percent, which means that the returns will be low if the property goes back to being a rental.

Uncertainty also makes it hard for a developer to come out of any condominum debacle. "No one knows how many buyers will walk from their deposits, what price a unit will sell for, whether or not it will sell or what rents should be in today's market," says Laskody.

What are lenders doing?

Banks, life insurance companies, private-money and hard-money sources will see a lot of loan requests today, says Laskody, but conduits are just sitting on the sidelines because of the problems with the commercial mortgage-backed securities (CMBS) market.

But for those who have construction loans, "It's not unusual for the lender to extend the loan and offer other concessions to keep the developer out of default and give them more time for the market to recover so they can sell their units," says White. "Lenders tend to be more flexible when they have a relationship and some confidence in the borrower."

Banks, including some of the largest players such as Charlotte, North Carolina-based Wachovia Corporation and Charlotte, North Carolina-based Bank of America, are still lending to condominium developers, says Ken Thomas, a banking analyst based in Miami, although Thomas says their underwriting standards are much tighter today than early in 2007.

For those no longer actively lending, it is not hard to see why. As of third-quarter 2007, the delinquency rate for condominium construction loans--loans that are 30 days or more overdue--was 5.9 percent compared with year-end 2005 when it was 1.4 percent, according to Foresight Analytics LLC, Oakland, California, which uses data from the Federal Deposit Insurance Corporation (FDIC).

Banks and other conventional lenders have become more finicky of late, says Laskody. Sometimes lenders may walk away even if they have made a loan commitment, he claims. Lenders tell their client, "We know we made a deal, but the market has changed," and many times the lender and borrower go through arbitration in an effort to resolve the matter, he says.

But the real winners in today's condominium market are hedge funds, which are picking up the pieces in a number of projects. "The hedge funds have an increased interest in stepping in to work out deals at bargain prices," says Matthew Anderson, partner with Foresight Analytics. "But they are being highly selective in what they do; they are not a general safety net," he says.

"They will step in and pay cash at an attractive price in cases where the downside risk is zero or very low. Because they have paid so little, even if they do hold on to the property, they will still get an attractive return," he says.

In Tampa, Florida, the Trump Tower Tampa got a financial commitment from a hedge fund, Red Bridge Capital, East Meadow, New York, so that the development could go forward. The developer (Trump only licensed his name to the actual developer), Tampa-based SimDag RoBEL LLC, could not get off the ground after more than two years--partially because of problems with stability of the soil supporting the building, rather than a bad market, according to David Hooks, the Clearwater, Florida-based spokeman for SimDag RoBEL.

Redesigning the foundation threw off the delivery schedule, says Hooks. However, because of the delays, the developer is now trying to sell units in a down market. But Hooks is confident that the developer will be able to secure $75 million in contracts by March 31, 2008. That is the deadline set by the hedge fund, Red Bridge Capital, to get enough buyers to give Red Bridge Capital the confidence that its money will be well-spent.

Hortense Leon is a freelance writer based in Miami. She is a regular correspondent for the Florida Real Estate Journal. She can be reached at [e-mail].