Growing Pains Weigh On Miami’s Ascension As A Global Capital

The dust is settling after the pandemic upended work life, logistics, retail strategies, migration patterns and more. 

In Miami — one of the biggest winners of new business, people and capital during the coronavirus era — commercial real estate professionals are doubling down, convinced that the city’s rapid growth was more of a turning point than a flash in the pan. 

The city is poised to soar as a global capital of culture and commerce, speakers said at Bisnow’s annual Miami State of the Market conference. But they also acknowledged that gaping potholes along the runway to new heights could make for a turbulent takeoff.

“There is enormous demand,” said Daniel Lebensohn, co-CEO of Fort Lauderdale-based investment firm BH3 Management. 

Relaxed pandemic-era restrictions drew lots of transplants a few years ago, but they continue to arrive today, in part because of Florida’s low taxes.

“Every time I start to think negatively, I look at the reality of places from which people are migrating,” Lebensohn said. “California is an example, New York is an example. Someone who has serious income there, let's just take the million-dollar mark, all they have to do is become a resident domiciled in Florida and they already just made $140K.”

By the end of 2022, Miami counted 38,000 millionaires among its population, up 75% from a decade prior, according to a report from Henley & Partners. There were 160 residents worth more than $100M and 12 worth at least a billion dollars, and that was before Amazon founder Jeff Bezos moved to an enclave in Miami Beach known as the Billionaire Bunker. 

Speakers at the event, held Sept. 25 at the Waterford Business District near Miami International Airport, said the foreign buyers who have historically underpinned Miami’s condo market continue to be major players, buying more spaces than they did before the pandemic. 

But another new cohort of wealthy buyers is flocking to the city from abroad and from domestic cities like New York and Los Angeles. Their arrival has pushed developers to build world-class properties that were previously lacking in Miami.

“Ten years ago, the people who lived in our communities were very different from today,” said Brian Duff, vice president of sales at FirstService Residential.

Today’s buyers “could be living in Milan, they could be living in Rio, they could be living in Dubai as well as in Miami.”

“They have a different level of comparison for what their expectations are, and that changes the demographics completely,” he said. “That also changes their expectations of the community.” 

A wave of luxury and often branded condo projects has cropped up to target the burgeoning buyer profile. Many have found success, with billions of dollars in construction loans issued in recent years for projects with multimillion-dollar units that are usually at least 40% presold before a shovel hits the ground. 

Besides demand, there is another reason developers are building more luxury condos than modestly priced homes: Development in the city is so expensive that those are the only buildings that make financial sense.

“We've seen so many projects that just don't pencil,” said Ignacio Diaz, co-owner of luxury residential developer Group P6. “The construction cost and the interest rates, those are the two things that absolutely kill you.”

The Federal Reserve has begun cutting interest rates, and panelists said construction costs have begun to moderate. But construction debt remains expensive, and materials costs are settling in at elevated rates.

Insurance costs also weigh heavily on balance sheets. Premiums shot up after Hurricane Ian struck the state in late 2022, and it wasn’t until the end of last year’s hurricane season that brokers and developers started to see relief from double-digit price hikes.  

The impacts of Hurricane Helene last month are still being assessed, but CoreLogic estimates total insured losses at as much as $17.5B. Meanwhile, a once-in-a-century storm is bearing down on Tampa, threatening billions more in damage. Insurance claims from those storms could once again provide fuel to raise premiums.

Lenders are also uncertain about where the economy is headed, which has kept many from broadening their loan portfolios. Private lenders are stepping in to fill the void left by banks, which have pulled back in the face of intense regulatory scrutiny over their real estate loans. 

But the added capital sources aren’t enough to overcome lending hesitancy in the face of an opaque macroeconomic picture, along with a looming presidential election, speakers said. It takes a strong project and an even stronger relationship with a lender to secure a loan today. 

“When I look at clients, we've talked a lot about deal structure and pricing, but I'm looking at character too,” said Jose Cueto, CEO of Grove Bank & Trust. “I know who I lent money to, I know their kids' names, I know what their finances look like. And I don't really take too many chances.” 

The Florida Legislature has been trying to incentivize the development of more affordable housing through the Live Local Act, which took effect last July. The law provides tax breaks and density bonuses to developers in exchange for a commitment that at least 40% of a project’s units will be leased as affordable or workforce housing. 

Diego Ojeda, president at Rilea Group, told conference attendees that his firm was looking at how all of its projects could take advantage of the program.  

“It's a game-changer that allows you to look at deals that perhaps before wouldn't pencil or just didn't make sense, and now they're completely viable,” he said. 

He is far from alone. The law is seen as favorable to developers, and a flurry of proposals has been filed across South Florida, in part because the law takes a loose definition of affordable housing.  

The law’s tax breaks are tiered based on rental rates, but its workforce housing incentive has a cap of 120% of the area median income. That is $95,400 for a single person in Miami-Dade County, meaning a studio apartment could be leased for more than $2K per month and still be deemed affordable. 

“The numbers are still far from attainable for a lot of people,” BH3's Lebensohn said. “People need places that are affordable. They need to be in some proximity to where they're going to be working.” 

While proposals have poured in, only a handful of projects in South Florida have leveraged the law. Municipal governments have in many cases balked at the loss of development oversight, complaining that developers are putting forward proposals for projects that use the law’s height and density bonuses to skirt local regulations and remake entire neighborhoods.

The focus on luxury development and pushback against Live Local proposals is deepening the region’s affordability crisis, with one local housing advocacy organization estimating that Miami would need an additional 90,181 units priced below 80% of area median income to meet current demand.   

The nonprofit, Miami Homes For All, estimates there are 14,000 affordable units in the county’s development pipeline, but the apartments are collectively short $1.5B to be built.

“The one concern that I have for the next five to 10 years is where my kids are going to live, because it's going to be almost impossible for them to afford the city,” said Juan Esterripa, head of commercial banking at Amerant Bank.

Beyond affordability, the influx of new residents is straining Miami’s infrastructure. Access to quality schools is so limited that it’s killing deals and keeping some potential transplants from relocating. 

“I receive calls from all over New York and California with clients asking for solutions on where to place their kids,” said Tere Blanca, CEO of Blanca Commercial Real Estate.

“I want to move, but I don't have anywhere to place my kid” is a frequent refrain she hears.

Miami’s top private schools have waitlists that stretch into the hundreds, and billionaires are using their influence and wallets to win seats for their children. 

Speakers at the event stressed the need to build more schools. While there have been some announcements, including for a new 90K SF Mater Academy elementary school in the master-planned SoLé Mia, red tape and opposition to traffic-generating schools in some neighborhoods have stifled their development, speakers said. 

Miami was dealt another blow in March when Avenues: The World School canceled plans for an elite private school that would have cost $180M and accommodated up to 2,500 students. 

“The barriers are significant. It would take any education company at least three years to get through the process to be able to open doors to a school,” Blanca said, calling on local governments to streamline the process.

The influx of Americans, Europeans and Latin Americans is also straining Miami’s transit infrastructure. Traffic congestion in the city is so bad — Inrix ranks Miami as having the sixth-worst traffic in the country — that it is impacting office leasing decisions. 

The increased population not only adds more cars to the city's already-crowded highways, but rising rents in the urban core have also pushed many longtime residents to the city’s periphery and long commutes. 

Miami’s assortment of mass transit options includes commuter rail, bus routes and a monorail loop in the city center. But the system is underutilized and fails to reach a broad swath of the county.

Voters approved a referendum in August that called on the county to expand mass transit, and County Mayor Daniella Levine Cava has made public transit a key plank of her platform. 

In October, she pitched Secretary of Transportation Pete Buttigieg a plan to use federal dollars to expand the commuter rail north, but local budget pressures held her back from fully funding the plan this year. 

Her plans represent a long-term solution to a problem that is already a key issue for the city’s residents. While the congestion has grown from a nuisance to a deal-breaker in recent years, speakers at the event were clear-eyed that the problem would take time to solve.  

“We're plugging new toys into old infrastructure,” Lebensohn said. “We're plugging in these new high-rises and industrial buildings into old infrastructure. Invariably, there's going to be problems.”