Packed House
Ask most people what caused the real estate boom of the past few years, and you’re likely to get a three-word answer: low interest rates. And, they’re right. With the cost of money at historically low levels, Americans have leveraged themselves to the hilt to purchase homes that were previously unattainable. But there are more sources of demand than that, specifically the large amount of capital chasing condos.
“A lot of this money came out of the stock market after the tech wreck,” Patterson says. “They got out of the market and had money that they didn’t know what to do with. Today there aren’t a lot of viable alternatives for them in terms of investments.” Fortunately, Patterson expects investors to be around for awhile. “Unless there’s a new tech-type boom, I don’t see the investors walking away,” he says.
Those most likely to stick out a shift in interest rates or a new hot-investment sector are the long-term holders–people who want a steady stream of long-term, rental income before they cash out and enjoy their appreciation. “In some cases, during a downturn, your investor is a stronger buyer than the end user,” says Richard Lamondin, president of Cornerstone Premier Communities, a condo developer in Coral Gables, Fla. “He has a longer-term horizon. If the market goes down in two or three years, he wasn’t going to sell anyway.”
But investors don’t want to continue to operate rentals at a loss every month. And, this is what will happen to many who buy and leverage condos at current market prices and expect to make money at today’s rent levels. “The investors aren’t getting the rents they need to support their debt service,” says Conrad Egan, president and CEO of the National Housing Conference.
In the long run, this could mean a number of condo units back up for-sale. “How much longer are they willing to do that [operate at a loss]?” Egan asks. “If the appreciation slows down, they’re going to try to get out and it will be hard for them to get out.”
In Miami, many of these investors are foreign. But these South Americans and Europeans aren’t renting out their condos. They just want second homes when they visit the States and a spot for their money that’s safe from the turmoil of their home markets. “We have a lot of off-shore investors looking for places to spread their risk and invest,” says Kim Kirschner, CEO of Kirschner Realty Inter-national, a Hollywood, Fla.-based company that does third-party condo sales. “When the Argentine crisis happened, a lot of Argentines who had been using [their U.S. condos] as a second home suddenly became end users.”
There’s also a purely economic driver behind foreign investment in American condos. With the dollar so weak against the euro, many Europeans are putting their money in American real estate. In fact, Tom Bozzuto, CEO of The Bozzuto Group, an apartment and condo developer in Greenbelt, Md., is surprised that some foreign investors haven’t set their sights beyond South Florida. “America is on sale right now,” he says. “If I were in Italy or Germany and could come to America and buy properties, I would.”
But other people share Patterson’s concerns about the dependability of some of these foreign investors. “A lot of the demand for condos in Southern California and South Florida is [due to] the weak dollar,” says Christopher A. Wimmer, a chartered financial analyst and assistant vice president for real estate finance at Moody’s. “If you have a strengthening dollar and increase in interest rates, you may have foreign investors pulling out of these markets.”
