The post-reality of the collapse of Champlain Towers South in Surfside is hitting owners of condo units in older buildings in South Florida where it hurts the most: their wallets.
Owning older condos has become quite expensive, especially in coastal areas with greater climate risks and more wear on buildings. This could create opportunities for investors to purchase condos at a discount to redevelop. However, a recent court ruling has made condo terminations much more difficult.
“It wasn’t enough that we had probably the single biggest condo disaster with Surfside. The impact of all these legislative changes will potentially make a lot of people homeless; they will have to leave their condos,” Sunny Isles Beach Mayor Larisa Svechin said. “This is going to explode, starting with South Florida, and it will move its way up the coast.”
Just over three years have passed since the deadly collapse in Surfside. And state legislation now mandates more comprehensive inspections for most buildings that are at least 30 years old by the end of this year. Plus, condo associations must complete structural integrity reserve studies (SIRS) and may no longer waive setting up financial reserves for future repairs starting Dec. 31.
Experts say many buildings have fallen behind on repairs, and it’s going to be costly to catch up. That has led to dramatic increases in association fees and eye-popping special assessments, so many owners want out.
Condo Backlog Looms Across South Florida
According to the first quarter report from brokerage ISG World, listings for condo units in South Florida doubled, year over year, to 18,704 – with 78% of those at least 40 years old.
But ISG CEO Craig Studnicky said the vast majority of condo buyers now look for newer buildings to avoid the headaches of special assessments and fee hikes. Lenders are also concerned about the financial stability of condo associations, and may not approve purchase loans in those buildings.
“Forget it; buyers don’t want the older stuff,” Studnicky said. “They are uncomfortable moving into older buildings now.”
Florida has more than 1.5 million individual condo units, and nearly two-thirds of them are at least 30 years old. About half of those units are in South Florida.
This past winter season – typically the best time for condo sales – was the slowest in South Florida since the Great Recession in 2008, said Condo Vultures head Peter Zalewski, who has tracked the condo market for decades. For investors, the rule of thumb is that the monthly rent equals 1% of the purchase price to generate a decent return. But add on a large special assessment and association fees for older condos, and that goal is hard to achieve, Zalewski said. The only solution is sellers lowering their prices.
“A lot of people in older buildings are in denial,” Zalewski said. “A lot of older buildings need a 20%, 30% or even 50% decrease in value to match the market rents. So, why would you buy it with the special assessments and insurance when you can rent it for less?”
Rising Cost Burdens Impact Older South Florida Condos
Many older condos are badly under-reserved, so they are due for sticker shock, said Greg Batista, head of Fort Lauderdale-based G. Batista Engineering & Construction. He expects to see lots of restoration work in the coming years.
For instance, if a roof’s useful life is five more years and repairs will cost $2 million, the association must collect one-fifth of that cost annually to prepare for the job, he said. But some buildings will require immediate repairs to pass their 30- or 40-year recertification process, Batista added.
“The people who will be most impacted are those who live on a fixed income like Social Security,” Batista said. ‘They bought their units 20 or 30 years ago, and the fees are catching up to them.”
Lawmakers have provided financial resources to help. The state’s new budget includes $30 million in funds to help condo associations statewide make structures less vulnerable to storm damage. Given the vast need, that money is just a drop in the bucket.
The most expensive items for condos to reserve for are exterior structural repairs, often running into the millions of dollars, said Doug Weinstein, senior VP of operations in the Dania Beach office of AKAM. It manages 60 local condo associations, and some have properly reserved for those repairs – but many have not.
“Ever since the Surfside collapse, you have engineers being much more critical of buildings,” Weinstein said. “There’s a shortage of engineering firms and qualified contractors to do the actual restoration work. That, of course, will drive up prices. Another driver of maintenance fees are insurance premiums, which have skyrocketed by 40% to 100% in recent years.”
Oscar Seikaly, CEO of Miami Lakes-based NSI Insurance Group, said insurance costs for condo associations have increased dramatically since the Surfside tragedy because lenders want associations to insure the full cost of replacing a building. Additionally, reinsurance providers aim to limit their exposure to coastal buildings in South Florida, and it’s increasingly difficult for them to calculate risk due to global warming and stronger storms.
“Insurance companies are not standing in line to insure buildings from the 1960s because residents likely didn’t do what they needed to do to keep it up to date,” Seikaly said. “The only company willing to insure them would charge them a lot and have very high deductibles.”
In 2021, deductibles for a South Florida condo association hovered at about $300,000, but now that’s around $3 million, he said. That premium is often collected from the association’s reserves, or through a special assessment on unit owners. And the insurance company won’t pay its portion of the claim until the association pays the deductible.
“The minute you get storm activity, you will see a lot of these issues come to light,” Seikaly said. “Buildings could stay damaged longer after storms.”
South Florida Neighborhoods With Older Condos Face Community Hardships
It’s hard to advise investors to buy condo units in older buildings near the beach, because with all of the extra fees and special assessments, the returns often don’t pencil out, said Alex Algarin, an agent with Compass in Miami Beach. The buildings that will struggle with higher costs are boutique condos with fewer units, he said, as it’s more challenging to spread those costs among dozens of owners, as opposed to hundreds.
“I would never direct someone to buy in an older building – unless they have deep pockets,” Algarin said.
The trend will accelerate the gentrification of Miami Beach as those who can’t afford the condo costs are forced to sell and move. It’s a great opportunity for cash-rich buyers to snag older units at a discount, but Miami Beach could lose many of its middle-class residents, he said.
“This changes the profile of the people walking around Miami Beach,” Algarin said. “The barrier to entry on Miami Beach just keeps going up.”
Many owners in older condos are dropping their prices to escape paying large assessments – some of them by six figures, said Greg Main-Baillie, executive managing director of project management and real estate development services throughout Florida for Colliers. He’s seen values cut in half in some condos due to looming assessments.
“We are seeing the first wave of buildings getting hit with these assessments, and they’re starting to freak out,” Main-Baillie said.
There’s likely to be stronger demand from buyers for older condos in attractive neighborhoods like downtown Miami, Coconut Grove and Coral Gables because more buyers plan to actually live in the units, said Ron Shuffield, president and CEO of Berkshire Hathaway HomeServices EWM Realty in Miami. Many buyers understand the tradeoff for buying an older condo for a lower price is that the fees for repairs will be higher.
“There are many older condos that are wonderfully built and managed,” Shuffield said. “You aren’t going to tear down every building in Miami that was built 50 years ago.”
Still, there will be a high number of condo association failures in buildings where residents simply can’t afford the special assessments and higher fees, said real estate attorney Joseph M. Hernandez, a partner with Bilzin Sumberg in Miami. Some associations could have a receiver appointed to decide how to resolve the situation.
“The buildings are functionally obsolete and the costs to preserve the buildings are increasing, while the value of the units decrease,” Hernandez said. “Over the next five, 10 or 15 years, most of those older projects will disappear and there will be a tremendous displacement of people living in coastal areas.”
Program Offers South Florida Condo Owners With Exit Strategy
When the state passed its condo association rules, many experts predicted it would lead to more condo terminations, with developers buying out cash-strapped unit owners and redeveloping the sites. However, a court ruling has put a wrench into many of those plans.
On March 13, the 3rd District Court of Appeal in Miami ruled that an affiliate of Miami-based Two Roads Development could not terminate the Biscayne 21 Condominium in Edgewater because it failed to secure unanimous approval from the unit owners. Seven owners in the 191-unit building filed a lawsuit opposing the termination after the developer bought the remainder.
While this ruling is under appeal and it doesn’t apply to associations that never required unanimous consent, it’s had a chilling effect on termination deals. Even so, most condo associations require at least 95% approval.
“Many developers tell him they won’t attempt a condo buyout and termination due to the threat of litigation from a relatively small number of holdouts,” Hernandez said. “The real sad part is when we most need terminations to work efficiently, we have a legal decision that is putting a big roadblock in front of them.”
It’s a big challenge to get all condo owners on the same page, as these are people with different levels of sophistication and wealth, said Ellen Buckley, CEO of Miami-based developer Prospera Real Estate Collective. In some cases, developers purchase condos one by one until they obtain enough ownership to gain control of the association. But Buckley sees that strategy as too risky now. No developer wants to get stuck paying maintenance on condos without any near-term redevelopment prospects. She believes the financial pressure will eventually convince unit owners to sell.
While it often makes financial sense to sell an older unit to a developer for well above its market value, some elderly residents are not motivated by money and want to stay put, said Henry Pino, CEO of Miami-based Alta Development. That’s why he developed a program that offers some residents a unit of comparable size in his new building, instead of a cash payment. He hopes that will satisfy the potential holdouts in areas such as Brickell. One condo association he’s talking to had a $10 million special assessment for only 66 units.
“This storm is just starting to happen now,” Pino said.
Source: SFBJ
