Hoist the cranes

Executive Summary
Company. WCI Communities Industry. Residential real estate Key. Condo developers are responding to rising demand and falling supply to fuel sales of new towers.

Raise the construction cranes.

After a seven-year drought, WCI Communities, one of the leading developers of condominium towers during the boom, recently announced plans to build a tower in Bonita Springs.

Altaira at The Colony Golf & Bay Club in Bonita Springs will be a 21-story tower with 76 condos measuring 3,000 to 3,300 square feet. Prices haven't been established yet, but will likely start in the low millions. The building is scheduled to be completed in 2017.

While the announcement is further evidence of the residential real estate market recovery in Southwest Florida, it's particularly sweet for WCI. That's because the housing downturn led by the condo collapse sent it into bankruptcy reorganization in 2009.

At the peak in 2005, WCI had 29 condo towers under construction and notched more than $1 billion in new-condo sales, about 50% of the company's total revenues that year, according to securities filings.

“It's in the DNA of the company,” says Paul Erhardt, WCI's senior vice president of homebuilding and community development, who joined the company at the height of the boom.

But by early 2007, the real estate economy had turned so quickly that speculative buyers reneged on their contracts to close on the condos and forfeited their deposits. WCI scaled back its construction, but it was impossible to finish building the remaining condos fast enough to avoid the collapse.

During the first half of 2007, WCI had 11 condo towers under construction. But by then sales had fallen 82% from $434 million in the first half of 2006 to $76 million in the first half of 2007. The situation became so dire that there was even a website unaffiliated with the company called wci-cancellations.com devoted to the builder's misfortunes.

But with no construction of condo towers since 2007 in Southwest Florida, demand is now outstripping the supply of existing condos. Buyers today are spending millions snapping up existing condos and renovating them to more modern standards.

Naples-based Ronto Group was the first company to announce a new condo tower in the region at Bonita Bay, close to where WCI will build its first tower. Ronto plans to build Seaglass, a 27-story tower with 120 condos priced between $1 million and $3 million each.

More towers are likely to appear on the Gulf Coast horizon. “We are looking for strategic tower locations,” says Dwight Thomas, WCI vice president of the tower division. “There aren't that many existing tower sites.”

Positive signs
Data from Realtor associations in Collier and Lee counties show a marked improvement in the condo market. “I think the distressed market is pretty much done,” says Erhardt.

For example, there were 25% fewer condo listings in the Fort Myers area in October compared with the same month in 2013. Heading into the busy season, there's less than a six-month supply of condos for sale at October's relatively slow sales pace, according to the Realtor Association of Greater Fort Myers and the Beach.

In Naples, Realtors helped sell 36 existing condos for more than $1 million each in October, more than double the number they helped sell in the same month in 2013, according to the Naples Area Board of Realtors.

“We've been watching the resales,” says Erhardt. For example, in The Colony, only 3% of the existing condos are for sale. “Prices are firm and increasing,” he says.

WCI has already built condos during the recovery in upscale Naples neighborhoods such as Tiburon, but the company preferred to build low-rise buildings with six to eight condos each. It was a less risky approach than a tower, but the success confirmed “there was pent-up demand for new,” says Thomas.

Ronto Group also has benefited from the recovery in the existing-condo market. In partnership with Connecticut-based Wheelock Street Capital, Ronto started construction on Naples Square, a 300-condo project split among four buildings in downtown Naples. And the Seaglass project at Bonita Bay already has 20 reservations for contracts totaling $30 million.

Not the east coast
As cautious as developers have been on the West Coast, a new condo boom is underway across Alligator Alley in Southeast Florida. Developers are currently building 70 condo towers in the Fort Lauderdale-Miami area, with another 141 towers taking reservations, according to market tracker Crane Spotters.

But most of the buyers in the Miami-Fort Lauderdale area are Latin Americans seeking to move their money out of their unstable economies and invest in U.S. property. Such so-called “flight capital” has spurred much of the new development in Southeast Florida.

Developers in the Miami-Fort Lauderdale area demand and get buyers to put 30% to 50% of the purchase price as nonrefundable down payments, then they collect “progress payments” as the building nears completion.

Both Erhardt and Solomon say they won't have to be so demanding on the West Coast. They'll charge 30% as a down payment and collect the remainder at closing.

Besides, WCI and Ronto executives expect most of their buyers to pay cash, benefiting from the stock market rebound. Many of them are Midwesterners and Northeasterners who are retiring to the area or seasonal residents, not speculators out to flip properties or investors from South America.

“This market has always been able to absorb a few towers being delivered,” says Anthony Solomon, executive vice president with Ronto. “If you believe in reversion to the mean, we believe that you should achieve that again.”