South Florida Condo Market in Peril Amid a New Law and Rising Costs
The Miami, Florida, real estate market is one of the hottest in the US. The area’s popularity with both domestic and foreign relocators, a bourgeoning business sector, and a shortage of residential properties has seen prices continue to rise at impressive rates, virtually across the board. There is one area in which this market strength is not as strong, however, and that is the Miami condo market.
The situation affecting the condo real estate market in the Miami area is an interesting case study on the dangers of putting off inconvenient tasks and expenses until it’s too late. In 2021, the Champlain Towers South condo complex in the Surfside area collapsed, killing 98 people. An investigation revealed that critical repairs and updates had been put off by the condo association for years—and a quick assessment of the south Florida condo market as a whole revealed that the same was true in most cases. In response, the Condo Safety Act was signed into law in 2022. This act stipulated that any three-story or taller condo that was more than 30 years old (or more than 25 years old if they are within 3 miles of the coast) must be assessed, and any past due recertifications must be completed. (Previously, local laws required recertification after 40 years). In addition, reserve deficits must be filled, and stockpiles for future reserves must be established. In short, the days of deferring maintenance and failing to maintain reserves are over.
New law results in a glut of condos
This new law has had a dramatic and immediate effect on the condo market. In order to fund mandatory maintenance and renovations, they are forced to level special assessments on condo owners. Depending on the facilities’ needs, these special assessments can cost each owner in the tens and even hundreds of thousands of dollars—an unexpected and sudden expense that many cannot afford, and that drastically change the relative value of their equity. While many owners are allowed to pay the special assessments over a multi-year period, the increase in their monthly outlay (in addition to normal HOA fees) is making many condos too expensive to justify ownership.
As a result, a huge glut of condos aged 30 years and older have hit the south Florida market over the past two years, with 17,776 aged-out units available for sale in the second quarter 2024. (In comparison, there were only 2,487 new condo units on the market). Despite this glut of used condos for sale, virtually none are selling (1 percent of older units sold in the second quarter, compared to 90 percent of available new units). Miami-Dade County, in particular, is home to approximately half of all aged condos in need of recertification, and the market there has seen a major upheaval over the past 18 months, with the price of older condos decreasing 21 percent over the first half of 2024 (while the price of new condos increased 9 percent during the same period).
Older condos are no longer a worthwhile investment for many people
Even those who might be interested in buying condos that are 30 years or older are finding it difficult to do so for a number of reasons. First of all, condo associations aren’t likely to approve sales to buyers who aren’t willing to pay the special assessments upfront. At the same time, it is becoming increasingly difficult to get financing on these condos due to their rapidly decreasing market value. Finally, many of the condos are in need of numerous years of repairs, so there’s a chance that new buyers might be stuck with greater outlays than expected, particularly if the initial special assessment is inadequate to complete all updates.
This situation has created a dynamic where older condos are no longer worthwhile investments for many people, which has led to competitive price reductions between various properties. These falling prices are putting the remaining owners in a position where they can’t afford to keep their condos (due to the cost of the special assessments), but also can’t afford to sell them (assuming they could actually find buyers).
One creative solution that some condo associations have tried to pursue is buying out all of the owners in their system, then demolishing the existing structures and replacing them with new developments. In theory, this makes some sense, since land values have gotten so high in the area that new developments can be financially justified. However, this strategy has been made more difficult by a court decision in early 2024 that effectively requires developers to buy out 100 percent of all units in a condominium facility in order to demolish and redevelop the land. In a development with hundreds of units, it only takes one holdout to keep the deal from going forward, which means that, in practice, this approach is virtually impossible.
Conclusion
Prospective condo owners are being advised to approach potential purchases on a case-by-case basis, as not all condominiums are in the same situation. Some have kept up with their maintenance better than others, while others can generate enough rent that they can offset the combined costs of HOA fees and special assessments. As such, the situation in south Florida isn’t completely hopeless—but it is certainly one that should be approached carefully and with a comprehensive understanding of the recent law and each condo’s individual status.
