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There is no doubt about the state of the condominium business in Florida right now. It’s in trouble. Big trouble.
And, if the predictions of a stronger than average hurricane season prove right — or even close to right — it could get much worse.
So says Greg Main-Baillie, a project manager who works with condominium associations shoring up the structure of buildings for the commercial real estate firm Colliers.
Main-Baillie has been in the construction and development business for 20 years and says what’s causing the problems is a complicated mix of issues that are tied to new state laws aimed at making condominium buildings safe in the wake of the collapse of the 12-story Champlain Tower South in Surfside June 24, 2021.
The law requires milestone inspections for condominium buildings more than 30 years old and that condominium associations have enough money in reserves to repair structural problems that may arise and to take care of deferred maintenance.
The process is not easy nor inexpensive.
What’s happening, Main-Baillie says, is that these requirements for maintenance, repairs and financial stability are placing a burden on condo owners. That’s because to fund needed repairs, they are facing steep assessments at the same time as their association fees are rising so condo boards can keep the required amount of money in reserves.
“The biggest swath of condos developed were actually prior to 1990,” he says.
“So there's probably more than 900,000-odd condos throughout the state that are all over that 30-year age group that will all have varying needs in order to comply with the mandate, which ultimately I believe will affect insurance premiums and the expense associated with living in that condo rolling forward over the next 12 to 24 months.”
This mashup is leaving many condominiums owners unable to afford to live in their homes and with little choice but to sell their units at a drastically reduced price and entering a housing market they can’t afford, Main-Baillie says.
And a bad hurricane season will only make all those problems worse.
The Business Observer spoke with Main-Baillie a few days before the start of the 2024 hurricane season to discuss the current state of the condo market, its future and what role a difficult storm season may play.
(The National Oceanic and Atmospheric Administration is calling for between 17 and 25 total named storms this season, with four to seven of those reaching category three and higher.)
Asked what advice he would give the owner of a condominium in Florida today, Main-Baillie mimed a person running away, fleeing the scene. “If you’re an existing owner, you just have to get what you can or batten down the hatches.”
The conversation has been edited for space and clarity.
If you yourself go on to Realtor.com and look at the listing prices, you can see that they're significantly discounted. Almost up to $150,000 in some cases on a two-bedroom, two-bathroom. And as we know, there is already an assessment upwards of $100,000 against that unit. So, the person is obviously trying to offload it to offset the assessment value. And then you look at the HOA fees for that same unit are in ($250,000) range which is almost what the mortgage would cost. That’s one of the first examples. I think if you start investigating, you're probably going to find more.
I don't think there is an alternative. You have to establish a minimal benchmark. Commercial buildings are typically maintained purely because of the nature of the asset, right? Your commercial real estate holder typically is trading on cap rate, so they're incentivized to maintain the building and/or upgrade the building in order to up the lease rates to gain a better cap rate sale at the end of the investment. And that comes with maintenance of the common areas, maintenance of the building, maintenance of the roof and parking facilities. You and I are exposed to that exact same condition when we go and buy a single-family home. We need an inspection — the roof straps are looked at, the roofing is looked at, the impact windows are looked at, the structure is looked at — before they'll allow us to go out and get a loan.
But the same thing doesn't happen in a condo. When you buy your condo, you're only looking at the four walls and what you own. Your inspection doesn't bring to light any of the issues — what the assessment might be, or what needs repair and how badly beyond repair it is. That's why condos are what I would determine a very risky buy at this point in time until those items are defined. And that's why this legislation is requiring transparency.
The state, in my personal opinion, has needed this benchmark for buildings of age, i.e. 30 years and older, for a lot longer than since the bill was passed. And I think the first 24 months regardless of whether we get hit by hurricanes are going to be extremely difficult. If we get hit by a hurricane, it'll just make the experience a little bit more unpleasant. But ideally, the state is moving us toward a position over the next 12 to 24 months that our buildings will be more resilient to storms, floods, things of that nature. Most of the buildings will be caught up or heading for a redevelopment or some sort or maybe in receivership because the constituents don't have the credit to be able to fund the assessment and can't get insurance. So, I think you’ll definitely see buildings that are either making it or not making it.
I think it's naturally going to cause a migration. You know, if you've got folks that can't afford to live in the place they've got to go and find somewhere else. And as we are already hearing, in the current economic environment, buying is not an option and renting as well. What do you do if you've lost your original purchase, that two-bedroom, two-bathroom condo that was affordable five years ago for $300,000? What are you doing now if you've got to sell it at a $100,000 hit and you're barely breaking even? It’s a quandary for a lot of the fixed income folks in our state.
There's going to be a need for work to be done, for roofing to be done, for windows to be done. Unfortunately, it's going to expose weaknesses in some buildings that will need to be addressed immediately at that point. The buildings that have insurance coverage should be able to facilitate the necessary repairs if they're well-funded enough. If anything is required out of assessment, I think that's where you're going to start seeing people personally get affected more than just displacement from their unit.
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