Cheap and Easy?

Cheap and Easy?

By David R. Corder

Associate Editor

Since the start of 2004, South Florida-based developers such as Jose Boschetti and Marty Caparros Jr. have converted about 40,000 apartment units into condominiums. That's around 108 separate rental properties in just the counties of Broward, Miami-Dade and Palm Beach.

Boschetti and Caparros alone, through their Miami Lakes-based Prestige Builders Partners LLC, have 10 current conversion projects under way, in addition to their single-family and commercial real estate ventures. Their company is ranked 15th on Hispanic Business magazine's list of top 500 Hispanic-owned businesses.

Despite their firm's growth, Prestige Builders more recently has encountered one of the increasing realities of South Florida real estate: intense competition for South Florida's dwindling supply of developable land.

"South Florida not only leads the nation in condo conversions, it probably leads the next two or three markets combined," says Jack McCabe, a Deerfield Beach-based multifamily industry consultant and researcher. "It's been prolific down here."

To cope with competition, many of those South Florida developers are looking northward for growth. They've targeted metropolitan markets such as Jacksonville, Orlando, the Tampa Bay area and secondary markets such as Sarasota and Manatee counties.

Last year, for instance, Boschetti and Caparros' company ventured into Sarasota in partnership with Coral Springs-based Transeastern Homes. The partnership transformed the Villagio apartments into the Villa D' Este at Villagio condos in Palmer Ranch. Just recently, the Prestige Builders-Transeastern partnership began work on two condo conversion projects in the Tampa area.

While such market flight is not new, recent sales of apartments and other commercial properties in the Tampa Bay area point to a new influx of capital and developers from Southeast Florida.

Two factors account for such flight, says Ezra Katz, a Miami real estate investment and merchant-banking entrepreneur. The chairman and CEO of the Aztec Group Inc. assisted a Miami investment group - headed by Henry Rodstein and Bernard Meyer - in the purchase last year of Sarasota's Coconut Bay Apartments. The Miami investors converted the 248 rental units there into The Palms condos.

"It's a natural evolution simply because transactions in Southeast Florida, first of all, are difficult to find and, secondarily, are grossly overpriced," Katz says, "It would make a great deal of sense that the well-capitalized groups would trend northward. We see that both in terms of the Tampa Bay market as well as the Orlando and the Jacksonville markets."

Says Kyle Burd, Tampa managing director for the Orlando office-investment firm Capital Partners Inc.: "It's sort of a South Florida cap-rate flight. People are chasing yield. However, it's getting to be a lot more difficult. That's kind of a good thing for the local owners who are selling in the market. It depends on which side of the table you are. If you're a seller, it's all rosy. If you're a buyer, it's a lot more difficult."

Earlier this year, Coral Springs-based Transeastern bolstered its Central Florida presence with the hiring of veteran Tampa developer Ben Murphey as director of its land-acquisition operations for the Orlando and Tampa Bay markets.

"Transeastern has been aggressive and enjoyed a meteoric rise in the Florida market," Murphey says. "As successful as they've been, the one area (it) can't neglect is land acquisition for future inventories. That's why they have to go with people who specialize in land acquisitions."

This is a new wrinkle in the Coral Springs' company's strategic vision for the Tampa Bay and Orlando markets. About four years ago, it purchased the 1,300 acres now home to the Live Oak Preserve residential community in North Tampa.

The firm's continued interest in new land reserves reflects the company's long-term confidence in markets such as the Tampa Bay area, Murphey says.

"We're enjoying one of the longer runs of prosperity in the homebuilding industry without a dip," he says. "It's volatile and can change at anytime. But given low interest rates and job growth in the Tampa market, we don't expect that to change anytime soon. Even if the market starts to weaken, we think Tampa will stay stronger longer than any other area in the country and will regain strength sooner than any other market."

This investment activity comes as market analysts warn investors to invest cautiously. Analysts at St. Petersburg's Raymond James & Associates Inc. reported in May that Florida's housing sales volume turned negative on a year-over-year basis.

And New York's FitchRatings recently warned investors to invest carefully in commercial mortgage-back securities (CMBS). Its analysts found that many banks now bundle condo loans for resale on the secondary securities market.

While the banks have reduced their exposure, the analysts note that mostly institutional investors now have absorbed the risks.

"Fitch is concerned that many markets are becoming overheated," the analysts wrote in the June 15 report. "Fitch believes that investors or speculative buyers are responsible for a large percentage of condo sales in certain markets, creating an over-inflated sense of demand."

That concerns Burd, too. For the most part, he says, savvy investors try to balance acquisitions on key indicators such as cap rates, yields after improvements, costs vs. replacement, internal rate of return over hold periods and leveraged costs.

"Now, we've got to the point where all that stuff doesn't matter," he says. "Some investors are looking only at cash-on-cash yield."

That means greater burdens for local investors amid this increased competition, says Tampa land acquisition specialist Bill Eshenbaugh.

Many investors from markets such as South Florida, California and the Northeast consider the Tampa Bay market ripe for the picking. It's a perception the market is "cheap and easy," he suggests.

"We don't think we are," Eshenbaugh adds. "But when you come from someplace else it may look that way."