A bellwether project

Anthony Solomon looked at the same numbers on existing condos in Naples as everyone else, and he came to the same conclusion as everyone else. But he acted before most others.

“There's basically no supply,” reasoned Solomon, executive vice president of The Ronto Group.

A year ago, a partnership of Naples-based Ronto and Greenwich, Conn.-based Wheelock Street Capital acquired a prime 19-acre parcel in downtown Naples, steps from tony Fifth Avenue for $21.5 million. That's where they plan to build 300 condos and 150,000 square feet of commercial space in a development called Naples Square.

The size, scope and high-profile location make Naples Square a bellwether for the region because there hasn't been such a significant condo project since 2008. While dozens of condos are rising in Miami, the southwest coast of Florida has stayed relatively quiet on the condo-development front.

Construction won't start on Naples Square until this summer, but Solomon says Ronto has more than 50 reservations for condos at prices averaging $400 per square foot. “We've exceeded our expectations for the season,” says Solomon, who notes that he's been able to increase prices on some units by as much as 10%.

In total, the project could cost $140 million to build. Solomon says Ronto is working on a deal with BCBE Construction, a Naples commercial builder that was active in condo development during the real estate boom last decade.

Private equity fuels deal
Commercial banks have been out of the speculative real estate financing business since the downturn, but private equity firms such as Wheelock Street Capital have stepped in to fill the void.

“We'd had our eye on the property for a while,” says Solomon, whose family-owned company Ronto has successfully developed residential tracts in Southwest Florida over the years.

To invest in projects such as Naples Square, Wheelock Street created so-called “opportunity funds,” a moniker that identifies a fund as a high-risk, high-reward of double-digit returns for wealthy individual investors and institutions.

But while the project may be ambitious, it has a lot of advantages. “The recovery really started in Old Naples,” says Solomon. More than any other area on the Gulf Coast, the older parts of Naples near downtown retained their values better during the downturn and recovered faster. “It seemed to be the most immune,” Solomon says. “Old Naples is still the hottest market.”
After decades in the real estate business, Solomon says the pendulum always swings back from big swings up or down. “You always revert to the mean,” he says.

But for condo development to work, the location has to be right, too. “It has to come back in the right fashion and in the right place,” says Solomon. “There's no point building this on the east trail,” he says, referring to U.S. 41 east of Naples.

Indeed, Naples Square is within walking distance to the upscale shops and restaurants on Fifth Avenue, where you would be hard pressed to find new condos with higher ceilings, modern bathrooms and larger rooms.

Still, Naples Square will have its own shops and restaurants and it has hired brokerage firm Madison Marquette to find tenants. “We want things that are complementary,” Solomon says.

And because of the way it's designed around four buildings, Naples Square doesn't have to be built all at once. “It's manageable because you can do it in phases,” Solomon says. “You don't want to flood the market.”

Not from Kansas anymore
Solomon says Naples is no longer a market dominated by buyers from the Midwest who want to retire to the area. Instead, he says many buyers hail from the Northeast, the Mid-Atlantic and the Ontario area of Canada.

Another area buyers are coming from: Miami. “The east coast is very crowded,” Solomon says.

Most buyers want to pay cash for their condos, and Solomon says no one intends to flip the condos after they buy them. “We've only had one inquiry about financing,” Solomon says. “We're not particularly rate-sensitive.”

Buyers today aren't afraid of condos like they were during the real estate downturn. “We're fortunate to have found that they're not gun shy,” Solomon says.

FIND ME A CONDO
If you're looking for a high-end condo in Naples, you might want to befriend the locals.

That's because some existing condos in desirable locations sell before they're listed. “I had an opportunity to show one in Bay Colony, but it never hit the market,” says Cheryl Turner, a broker associate at Premier Sotheby's International Realty in Naples. “Someone made an offer before it came on the market, for over $6 million.”

If you're a buyer, you need to move fast.

“The absorption rate is incredible,” says Dustin Beard, broker associate with John R. Wood Properties in Naples. “The months of supply is as low as it was in the heyday in 2005.”

Indeed, there's less than a six-month supply of existing condos on the market as of the end of February based on current sales, according to data from the Naples Area Board of Realtors.

February's inventory is down 20% from one year ago and the average number of days a condo is listed for sale is half of what it was one year ago.

Naturally, under these conditions prices are rising. For the year ending February 28, the median price of an existing condo in Naples rose to $205,000, up 15.8% from the same period ending in February 2013.
Turner says the spread between the bid price and the asking prices for condos was about 7% to 8% a year ago. Now it's 5%, and that could shrink further.

There are pockets of very strong demand. “I would say the beachfront condo market is as hot as any market right now in Southwest Florida,” says Beard. “If it's over $2 million, that market is extremely hot.”

That should prompt more developers to scope out the area, possibly to tear down older buildings and build new ones. “You'll see down the road the old buildings will be bought on Gulf Shore Boulevard,” Turner says. “I think there's probably negotiations going on for these things now.”