Miami Developers Gravitating Toward the Middle

Miguel Angel Barbagallo, a real estate developer headquartered in Coral Way, turned his back on the gleaming, high-priced, high-rising buildings along the Miami shoreline.

Then he looked to the west.

Surveying the squat buildings and houses with barrel-tiled roofs in the modest, inland segments of the Miami real estate market, Barbagallo knows where his future lies.

“This is my market,” he told the Miami Herald.

As the South Florida housing market slows down, especially on the high end, there are more houses for sale than buyers who want them. But there’s still a severe shortage of mid-priced housing that doesn’t require buyers to live on the fringes of the region.

In turn, Florida developers are starting to shift gears from selling the lofty dreams and lavish lifestyles of expensive condos to the mundane — but still potentially lucrative — task of delivering ample middle-income housing.

“The private sector is suddenly saying, wait a minute, no one is serving the middle class, and that is where we need to be. In today’s market developers also may not have much choice,” Rafael Kapustin, President of Kapustin Corp., said.

Hell may not be freezing over, but you know the market is shifting when The Related Group, a Miami company ranking among the biggest luxury condo builders in the entire U.S., has started an affordable housing division.

A host of smaller Florida builders are also aggressively targeting the middle market. The Miller Group and AmeriBuilt Corp. recently announced a condo project in the Pembroke Park section of Broward County, with one-bedroom units starting at a reasonable $165,000. Restless Development, a New York City developer with a project in North Miami Beach, has begun marketing what it calls “affordable luxury.”

Paradoxical as that term might seem, it’s certainly what developers are after. Experts generally divide the South Florida housing market into three sectors:

1. Market-rate / High end
2. Middle-income / Workforce
3. Low income

The lines between the three sectors remain inexact, and the middle market occupies a broad area between the two extremes.

For Eli Dreszner, a principal at mFm Construction, that’s anywhere between $200,000 and $400,000. The Related Group, which built affordable housing when it was founded more than 25 years ago before it evolved into a luxury builder, describes mid-market housing as an even wider range, from the low $100,000s to high $300,000s.

The two main political parties in the U.S. may be poles apart with an ever-shrinking center, but when it comes to real estate, the race to the middle is nationwide and it is crazed. It comes largely because home prices have risen far faster than wages in recent years, resulting in large numbers of professionals and middle-income earners who are priced out.

A GROWING DEMAND

Oscar Rodriguez, head of Related Group’s affordable housing division, is one of many developers who believe increased volume will help compensate for lesser demand.

Real estate analyst Michael Cannon contends that if builders want to stay in the housing development business, they have to get into the market for affordable housing, which they should have been doing all along.

Still, identifying the so-called middle market and reaching it are proving to be entirely different propositions. Many builders say the costs of land, construction, insurance and borrowing money at higher interest rates are simply too high for them to deliver homes at relatively low prices.

THE DOWN PAYMENT HURDLE / BUYER INCENTIVES

Not to mention the fact that prospective buyers for new projects must, in most cases, typically make a 20 percent down payment, then wait two years for the condo to be built. Even if a unit is priced at $100,000, most middle- and lower-income buyers don’t have $20,000 to spend, then wait around two years. Especially as Florida home loan rates increase.

Another hurdle is the widespread corruption, waste and mismanagement of Miami-Dade County’s low-income housing programs reported by the Herald, raising questions about efforts to make a dent in affordable housing.

“There is a lot of demand there, but the problem is you can’t make any money doing it. You need some sort of subsidy because if you do conventional development there is no profit in the deals,” said Daniel Kodsi, president of RPC Holdings in Boca Raton.

City and county governments are now considering a variety of measures to encourage or mandate middle-income housing, and developers have differing opinions on how far government should go. Some builders, frustrated or impatient with government efforts, are going it alone simply by targeting neighborhoods long overlooked to get cheaper land prices.

Others insist they need government assistance because of high land and building costs. The help, they say, can come in various forms, such as waiving impact fees, opening up government land in urban areas for development or allowing developers to use city-owned parking instead of building costly garages.

Many South Florida developers also are toying with incentives and other proposals to help lower the affordability gap. Some lenders are agreeing to only 10 percent down payments, rather than the typical 20 percent. Some, like mFm, are making sales pitches directly to county and city workers, who in some cases get down payment help from their employers.

They require a 10 percent deposit but allow buyers to pay as little as 5 percent for their down payment up front, with a payment plan in place to make the rest before construction is complete.

“This is our niche. We started developing in this area because we found less competition. Now we are seeing more competitors all the time. But there is definitely enough space for a lot of competitors to come in. This is a big market,” Dreszner said.