It's All in Your Perspective

I have been following with great interest the discussion regarding the so called "Heartland Expressway" a proposed new corridor running from I-4 NE of Lakeland through Osceola, Polk. Highlands, Hardee, Desoto and Lee Counties. This is one of those ideas which is so good that it may not happen!

As a market analyst engaged in market studies, highest and best use studies and feasibility analysis this project has all of the ingredients to make an interesting and compelling study. In my field the lexicon identifies "Linkages" which are primarily thought of as being roadways linking people and jobs and services. Linkages can also include public transportation, utilities and communication corridors as well.

The last article in May provided an overview of the project and news that the proposal was met with opposition and disinterest on the part of the new governor of Florida. To be sure the St. Petersburg Times stories leading up to the latest article not very subtly attempt to attach a "stink" to the project due the fact that there are large landowners who would benefit from the project. It all sounds very "John D. McDonald-ish" when you paint a picture of the rich land baron creating ill-gotten gains. In spite of the slant of the articles and using my own consulting practice as a resource as well as first-hand knowledge of previous successful projects the whole story has not been told. This area of Florida is where the great ranches, farms and landholdings of the past formed a vital part of our economy for many years. The plan seems to call for a conscious and overt effort to provide both the necessary linkages to control growth as well as accumulate public interest lands for conservation purposes.

Governor Crist calls the roadway "a road to nowhere"; precisely governor and that's the sensibility of it. As a life-long Florida resident I have seen many of the traditional growth areas attempt to control growth by not providing services and then finally when growth pressure occurs anyway a much steeper price is paid to provide the same services after the fact. Even more importantly is the question "Where else would you put a corridor"? Although Florida's traditional growth volume and patterns are changing we will continue to grow. We will grow where there is land and "Linkages" from where people live to where they shop and work and go to school. Building the road ahead of time is not a radical concept, look at the Veteran's Expressway in Tampa and the controlled community planning that followed and closer to the Heartland, the Polk Parkway. In both instances these are toll roads paying for their own cost impact and at the same time providing a much needed linkage in already congested areas (especially in the case of the Veteran's Expressway). The Polk Parkway provided me with a consulting assignment for the FDOT several years ago when they were attempting to negotiate the acquisition of sufficient land to widen an existing roadway at the Parkway and were met by reluctance on the part of the landowner. My assignment was to provide a marketability study of the larger parcel from which the acquisition would be made and determine the (at the time) highest and best use.

The study revealed that although the road had initially been controversial it accomplished the goals set for the project in opening up new lands in south Lakeland and Polk County for new and much needed family housing and new schools and services. The road provides access to the two main work centers for Polk residents, Tampa and Orlando. Central Lakeland at or near I-4 was (and is) congested and there were few parcels of land left to build on in northerly Polk due to environmental reasons.

Florida historically has too few north-south linkages and arteries but an abundance of east-west corridors crossing the peninsula. The call for additional widening of I-75 as well as I-95 and the congestion on the aging Florida Turnpike point to a need for relief by providing new growth centers and corridors instead of throwing money at a losing battle to stay abreast of traffic needs to already overcrowded areas of urban sprawl.

Apartments-to-condos-apartments

My recent posting titled "The Real Estate Law of Gravity" provides some of the context for the conclusions here.

A recent Tampa Tribune article detailed the current problems associated with a "late-in-the-market" apartment-to-condo conversion. While not rising to the level of an "I told you so" moment this type of project problem has happened before in our market. Unfortunately there are some very difficult situations that can occur as a result of a stalled or failed conversion and it seems as if this project has, is or will experience most of them. The developer already knows that they likely paid too much, too late for the property and were forced to set a price based on investment cost and not necessarily on market price or value. The advantage of conversions is usually timing in that filing condominium documents, making cosmetic changes and putting a marketing team in place is much less time consuming than finding land, getting approvals and building from scratch. As long as the price fits, the market is not oversupplied and the investor-flipper buyers are still there, it works!

It's a simple but often overlooked process that can be employed; instead of paying "whatever it takes" to buy land or in this case an apartment building, and then building all costs and profit on top to create a price there is a moe sensible alternative. If the developer calculates the selling price of units first and then deducts, all costs including profit and marketing, it becomes apparent what can be paid for the underlying property (land or apartments).

The issues are that if the conversion stalls anytime before sellout and especially early on with just a portion sold when the market flattens or declines the developer and the unit buyers both have a dilemma which will extend to the lender at some point. Once conversion takes place there are ongoing shared expenses, condo fees, indicidual taxes per unit as well as insurance. Marketing and carrying costs continue and any significant delay can eat up all of the potential anticipated profits. At some point when the flipper-investor can't get their price and the developer can't sell anymore there is an ugly stalemate. By that time the lender may be involved and will be concerned but not excited about taking over the problems and letting the developer off the hook. The few unit owners are stuck without assurance of services promised and the effects of having overpaid now that their unit cannot sell for wha tthey paid. This could drag on until "someone" comes along and is able through market conditions convince all parties to sell out and move on. The "price" paid is likely to make enough sense that the project can once again function in its intended role until there is once again an apprent "demand" for conversion.

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.