Trumpeted Towers Trumped?

Yesterday’s article in the St. Pete Times updates the continuing saga of the as yet undeveloped Trump site in the “Channelside” area of Tampa. The announcement that the project will be scaled back comes as no surprise in the wake of numerous, previous holds and setbacks but especially in the context of a “market on hold”. The real question is not what specific number of units should be developed or even at what price range and in what configuration. The more compelling concern is who will buy the units if they were there and why?

The surprisingly downplayed aspect of the recent market run-up of nearly five years, especially in condominiums, was fueled more by available cheap money and “investor buyers” than potential resident users. In truth there is no way of knowing this until the units are completed and people either move in, walk away or sell. Until that time occurs we are reliant upon the marketing team and no indication from the public records, government or other reliable source to know what the breakdown between buyers and investors actually is.

In my on-line presentation found on my website entitled “how we got here” I discuss the obvious parallel between the “Day Traders” of the 1990’s and the “flippers” of the new millennium. In the case of the “Flippers” the intent is to purchase and resell without ever in some cases closing (understandably in condos) and finding the next “flipper”. This makes actual absorption and demand much more difficult to predict especially when the market was driven not by demand for housing but rather demand for money and big profits by becoming a “certified” real estate investor.

To that end the project by aligning itself with the willingly given endorsement and name of Mr. Trump the original developers apparently hoped that the assumed market perception of “luxury” and quality would make a difference in marketing and price expectations. Trump’s role was brilliant strategy to in essence license the cachet he believes is associated with the name. He is as we know more directly involved in a still under construction project on Wacker Drive in Chicago.

In 30 plus years of observing and analyzing real estate markets in Tampa-St. Pete, the west coast and all of Florida I have found that nothing is worse than a over-hyped project that falters in terms of rebuilding investor and buyer credibility. In addition now that the dust has at least begun to clear it is apparent that “smart” investor money has already moved on to other equity opportunities, evidence the stock market now in a decidedly bullish mood.

Property Tax Woes

A lower front page article in this mornings St. Pete Times discusses the on-going angst over property tax relief efforts at the State level. The self styled “Property Tax Crisis” described needs clarification as much as it needs relief. First and very importantly, the mission of the County Property Appraiser in each of Florida’s 67 counties is mandated to be valuing all properties at 100% of “market value” and reporting that valuation to the Florida Department of Revenue. The aforementioned “market value” is based on the very same data that appraisers have been using to provide those indications of “market value” for buyers and sellers. Although I received many phone calls of concern last year when the “TRIM” notices were sent in advance of tax bills my only advice to concerned owners is that in the near term there is little to do. As hard as it is to hear this it’s hard to have it both ways. You cannot expect to enjoy the fruits of escalating values without them being reflected in new property tax valuations. Further, once the property valuations have been made it is difficult to get them lowered now or in the near term. Curiously the same aberrant market conditions of an investor driven market have and will continue to lower “values” and truthfully neither extreme is truly representative of that definition. Going forward the likelihood of “Property Tax Rollback” is as much a function of the demands of local government and out of the domain of the state. In other words once the valuations are filed and accepted by the state, the property appraiser is through. With these unprecedented price increases in place the stage is set for county and city government and special taxing districts to set their budget based on expected revenues. The local government entities have shown reluctance so far to backing off of the opportunity to spend for heretofore unbudgeted items, some no doubt necessary and others maybe, well, “not so much”! What is likely a popular compromise is the ability to make a homestead exemption basis portable or at least re-instate at less than the new amount for an existing property owner. Otherwise the effect is felt in a portion of now unqualified buyers especially after adding in the uncertainty of insurance costs. However that is not the only answer to the problem, it is also the market which is in the process of adjusting as any market based upon supply demand (and all are) and will find a new price level necessary to attract buyers before the cycle at some point begins again. As noted earlier the property appraisers for each county will attempt to make strong arguments for the case that the downturns are the aberration not the overheated market results. There will be some serious battles between owners and property appraisers over the next several years and rightly so. The owner must be well prepared, unemotional and be well represented to appeal to the “special master” employed by each county as a mediator.

Development Pull Back-Clearwater Beach

An article in the St Pete Times yesterday continues a growing pattern of scaled back, delayed or withdrawn real estate development projects in the Tampa Bay area. This analyst's recent blogs have continued to examine market conditions dating back to early 2006 and even late 2005 with concerns about the nature and strength of market fundamentals and the growing inevitability of of market disarray.

According to the article developers announced that they are refunding deposits in the condo-hotel project but apparently not giving up the site. There are numerous potential pitfalls in this segment of the market cycle including the cost and availability of funds and the obvious truth that the investor-buyers who largely fueled this "boom" are no longer there. That leaves users, people who intend to live or actually use the real estate for its apparent purpose as the potential buyers and there are as we have suspected less of these than the former (flipper-investors). Ultimately "booms" end with either a whimper or a thud and in this case it may best be described as the whimper phenomenon. The developers who these days must allow lots of time and cost to just obtaining entitlements are betting just as hopefully as the individual investor that prices will keep increasing enough to justify the time, money and risk. The longer the cycle lasts the more costly it is to join the game as everyone wants a piece of the action and the costs of raw material, especially land soar upward. Developing is not a game for the faint of heart with the uncertainty that always exists and the survivors who do profit are those who have in done just that, survived.

My recent posting titled "The Real Estate Law of Gravity" provides some of the context for the conclusions here. Municipalities and local government are largely eager to support development and especially redevelopment to build tax base and the investment in approvals has certainly paid off well for the local governments whose budgets are brimming with new projects paid for the ad valorem taxes collected as a result of the incredible price increases (not necessarily value, but that is another blog subject). As widely quoted as the adage "location, location, location" may be location does not in the near term trump oversupply and uncertainty. It seems that the direct point to be made about this project at this time is the delicate factor exposed in the saying "timing is everything".

The Law of Real Estate Gravity-Part 1

Are we seeing aftershocks or tremors in the Tampa Bay real estate markets and sub-markets? Actually it is probably both with daily stories emerging about the effects of the rapidly deteriorating prospects for planned developments. From an analyst's standpoint this is part of a logical series of events marking yet another (but nevertheless unique) real estate cycle in Florida. We have seen a nearly unprecedented "up" portion of this latest cycle lasting in some cases nearly five years. The inevitable "Law of Real Estate Gravity" ultimately rules and markets move from being out of equilibrium in terms of excess demand toward level and then declining conditions in terms of prices and volume. It is a simple concept in all markets even beyond real estate; when prices rise and even skyrocket the market participation increases as latecomers join the frenzy and act to increase supply. The next result, a slowing in sales is predictable as is a leveling of prices. Declining prices always seems to catch some by surprise but the results are plainly evident when the now "tooled up" market starts adding massive amounts of supply. At present many are ready to declare the busted bubble healed and are optimistic about near-term recovery prospects. It is not entirely a pessimist's point of view to declare "not so fast"!

The cycle is not new nor unique to Florida but some of the elements present here are worrisome in terms of near term recovery prospects. The first of these is the nature of "users versus investors" in the purchase of the end product. The seemingly global consciousness that compelled so many who were either ill or misinformed to "invest in real estate, they are not making any more" accounts for the expectation of profit by flipping, always sure that there would be a "greater fool" to purchase their investment. At some point the music stops (see this website feature-"how we got here" for more details) and there are no more players.

Additonal factors at work in Florida, particularly south and central Florida include the hangover form the devastation of the recent multiple hurricane seasons, the property tax increases that require us to "pay the piper" and wildly increasing insurance costs. Add to that the growing reality of development density, crime, clogged highways, drought, pollution and water concerns and we now have a recipe for a change in habits and preferences. It is believed by some that there is a migration whiplash taking place where move-ins from the north have increasingly become move-backs from the south. The Florida dream life may be a bit frayed at the edges.

Finally, the beneath the surface rumblings are the future shock of possible dramatic increases in mortgage failures, foreclosures and bankruptcies. The additional hangover from too much borrowing of cheap money against the "sure thing" of value increases is already catching some short and putting even more pressure on a market where resistance to price decline is both understandable and inevitable. Borrowing to buy "things" and unexpected real estate ownership cost increases leave some with a real dilemma. Where do we go next? All markets eventually heal themselves and Florida has a track record of recovery for over a 100 years; this time may be as different in the recovery process as it was was in the run-up of prices. There are questions to be sorted out and other "shoes" waiting to fall.

A New Project NOW?

The announcement of exciting and ambitious plans for development of the now vacant Tropicana Block with an impressive mixed-use development prompts several important thoughts as well as questions. It is clear that the City of St. Petersburg has a vested interest in encouraging tax-base building development and with the impressive developer’s track record is eager to line up in support of the proposed development. It is equally clear that there is much promise in this historically well located and desirable downtown location. Truly quality project concepts and locations can overcome obstacles other possible development proposals cannot get past. There is evidence of this in the aftermath of the apparent investor driven downtown market boom fueled by much speculation, abundant capital and pro-development municipal encouragement. The approval for development of many more projects than are currently being built is near term evidence that fundamental market components are still lacking.

St. Petersburg’s history of development and Winter residency shows demand for residential and commercial development especially during parts of three decades beginning in the Florida golden era of the 1920’s and extending into the two decades following. In large part what we now know as “downtown” was built up and prospering through the 1950’s. There was little land for development and the area was widely known and desirable. Urban decay resulted because of a shifting of residential patterns and like many other older Tampa Bay area towns the result was in some cases benign neglect. This phenomenon while marked with some significant historic building losses also had the positive effect of dampening any significant enthusiasm for demolition and renewal and thus saving a number of treasured buildings.

Southeast Market Analysts recently updated a 2-year old market analysis report of the Downtown St. Petersburg Condominium market with interesting results. Significant and successful development marked the early phase of the recent 4-5 year “boom-let” most especially water-view and east-northeast urban core locations. All markets of this type have sub-markets defined by existing uses, infrastructure and potential and the area described was the best of the submarkets. Numerous projects announced, both large and small were approved but never funded and in many cases, never started. Those that were funded with “pre-sales” did start and the secondary submarket locations will face a test of the will of non-user-resident investors to close and wait for a future opportunity to sell or walk away and wait for another day.

The latest uncertainties of the market conditions affect the consumer buyer who has the least information available as well as the more informed developers. The same fundamental demand factors dictate market potential now as they have for the last 5-years (and frankly always have). Condominium sales success depends upon current and forecasted future growth of qualified buyers, either users or investors. To be sure, for a time there will be fewer investor risk-takers especially at higher price points and until some amount of confidence and semblance of order is restored to the “Market”. This is now the classic “Field of Dreams” dilemma; “if you build it will they come”? Current forecasts of residential population growth do not support the premise that there are sufficient qualified buyers for nearly 600 condominium units, this could change as well, but the recent boom as noted was fueled less by future residents than investor-flippers.

There is something of a “chicken-egg” relationship as well in this proposed project and others; residential demand depending upon the market segment and price responds to the availability of the services available including but not limited to adequate fire, police, sanitation, and the softer infrastructure of parks, landscaping, social amenities and shopping. This proposed development location offers many if not all of these things at the present time. On the other hand commercial development, restaurants and shopping require critical mass of residency. Current retail vacancies suggest that there is insufficient residential base to support what space is already there but that can and will change. The good news is that all of this has happened before in this area in the style of the era and good locations eventually return to success first.