Miami Condo Market Shows a Way to Solve Inventory Glut

Don’t look now, America, but Miami might actually be setting a positive example for the rest us.

Never mind how my hometown’s biodiversity features corruption, gaping income inequality, and octagenarians who floor their 30-foot sedans to make early-bird dinner specials. More recently, South Florida was a hotbed of subprime excess that gave rise to an absurd number of half-financed, quarter-occupied condo towers. That overdependence on glass, concrete, and teaser mortgages left the local economy devastated once housing collapsed.

A cautionary tale for the ages … or for all of five years.

No less an authority than the Federal Reserve Bank of Atlanta has issued a report (PDF) that highlights how Miami is successfully shedding its inventory overhang, so much so that the local real estate market is suddenly hungry for new condos. It brings to mind this recorded interview Mitt Romney gave to a newspaper in Nevada, which sits right beside Florida in terms of pain felt from the housing crisis. The lessons: allow investors—all walks of them—to buy distressed properties; fix them up and fill them with renters; let increasing rents and the natural push of demography drive increased property prices.

“The presence and health of birds,” the report begins, with a flourish of taxpayer-funded metaphorical license, “often signal the health of an environment. An abundance of waterfowl, for example, can signal that the surrounding wetlands are healthy. An unhealthy canary in a coal mine indicates the presence of toxic gases. One ‘bird’ that indicates the health of the real estate development industry is the construction crane, and it appears to be making a comeback [in Miami].”

Florida, like the bottoming national market for new homes, is benefitting from a growth in population. A headcount of nearly 20 million Floridians has the state on track to become the nation’s third-largest by 2013, when it’s expected to surpass New York. Next year is also when nearly all of the area condos developed during the bubble are on pace to sell out; as of the second quarter of 2012, just 3,400 units out of 49,000 condos created were unsold in South Florida’s seven largest coastal markets, according to Peter Zalewski, principal of Condo Vultures, a local brokerage and research firm that was quoted by the Atlanta Fed.

“South Florida’s newest condo boom-and-bust cycle is just getting started,” he says. “Developers are already rushing into the market to secure their sites.” Zalewski says he has tallied 70 proposed towers in South Florida, with nearly 10,500 condo units planned—18 percent of them already sold. “The only thing they’re waiting for,” he says, “is the return of condo construction financing, which is still elusive in South Florida.”

Zalewski says South Americans with strong currencies are prodding developers to overcome their financing hurdles by offering cash installments of 30 percent to 80 percent of a new condo’s contracted purchase price. And so nearly 20 construction cranes have been ordered to return to South Florida in short order.

As for all that inventory from the Great Miami Overbuild of 2005? The Atlanta Fed report notes how a re-prioritization of renting—by both new renters and condo owners who were previously fixated on flipping for gains—has helped fill a skyline full of empty boxes: “The past several years’ distressed housing market—including the limited access to financing—may have forced many residents (and visitors) into renting. The now-flourishing rental market may be helping to bolster condo development, as the sharp growth in rents may be causing some consumers to reconsider alternatives such as trading down to rent a cheaper multifamily unit or trading out to rent a single-family home or to pursue homeownership.”

Yes, much of this rebound is idiosyncratic to Miami, which is already one of the nation’s more idiosyncratic cities. “While it would be nice if the anticipation being felt in Miami could be translated to a rosier picture for the broader economy,” concedes the report, “factors such as international demand make the South Florida condo market not necessarily representative of the rest of the country.”

Still, the mere fact that a sense of fundamentals-driven investment can take hold in a market never quite known for sober capital allocation should give some a reason for hope.

Farzad is a Bloomberg Businessweek contributor.

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Could Private Equity Solve Pro Hockey's Problems?

(Corrects name of the company that took Bauer public in ninth paragraph.)

When private equity firms go shopping for a takeover, they look for certain qualities. Weak management. Underachieving revenue. Opportunities to expand by taking on debt. Problems that are driving down value, but could be solved by a fresh set of outside managers.

Sound like any professional sports you know?

Private equity firms like to buy distressed properties, and right now the National Hockey League—fourth of the four pro sports, nonentity on SportsCenter, and days away from its second work stoppage in seven years—is as distressed as it gets. Fans have long fantasized about new league management (booing Commissioner Gary Bettman has become a tradition at the Stanley Cup ceremony), and the idea of private equity swooping in to the rescue is actually not as far-fetched as it sounds. In early 2005, with players and owners at an extra-bleak moment of a season-ending labor dispute, Bain Capital made a surprise offer to buy out the entire league for $3.5 billion.

Three men—Stephen Pagliuca of Bain, and Robert Caporale and Randy Vataha of Game Plan LLC, a sports consultancy—made the pitch to a meeting of the NHL’s board of governors at a New York hotel that spring. By buying out all 30 teams and combining them into a modified single entity, they argued, they could streamline operations, boost TV revenue, and negotiate down player salaries from a position of absolute strength.

“They actually clapped at the end of the presentation,” Caporale says. “Which was interesting, because part of the presentation, the part that my colleagues asked me to give, was the one where we said, ‘You’re running this business all wrong.’”

The bid failed after a number of owners made it clear they were unwilling to part with their franchises—which, to some, hold far more emotional value than real worth. Still, the episode offers a useful window into how private equity operates: spotting troubled entities, using leverage to buy them out, and renovating the business. Then, and again today, the NHL is a surprisingly good fit.

“This certainly fits all the characteristics of what a distressed asset is,” says Tobias Moskowitz, author of Scorecasting and a finance professor at the University of Chicago’s Booth School of Business, where students are fond of blowing off exam steam on the ice.

With more capital, the NHL could use the National Basketball Association’s template for expanding into Europe and other markets, Moskowitz says, and outside managers could drive a harder bargain on player salaries. Not surprisingly, salaries are the league’s highest cost, but at 57 percent of league revenue they are also higher than those of the National Football League (47 percent) and the NBA (about 50 percent). Meanwhile, “the NHL certainly has cash flows that it will spin off almost immediately. You’ve got merchandising, you’ve got ticket revenue. So I think that would make this very attractive.”

Private equity is no stranger to hockey. Phil Falcone, the founder of Harbinger Capital Partners, skated for Harvard before playing professionally in Sweden, and today owns a minority stake in the Minnesota Wild franchise. The St. Louis Blues were until recently owned by TowerBrook Capital Partners, a private equity firm with offices in London, New York, and San Francisco. Providence Equity Partners, a Rhode Island firm, considered a bid for the Toronto Maple Leafs last fall, Bloomberg reported. And Kohlberg & Co. took equipment giant Bauer (BAU), whose skates are worn by two out of three players, public in January 2011 after three years of ownership.

Susan Chaplinsky, who teaches private equity at the University of Virginia’s business school, says a buyout firm that found itself in control of the NHL would be able to wring value out of everything from selling off assets to buying goods—peanuts, pucks—at scale.

One aspect, though, might pose a challenge to the usual private equity way of doing business. “In an airline industry, I can see a private equity shop going in and taking out or reconfiguring the contracts for the bag handlers,” Chaplinsky says. “You can replace them with technology, or with other workers. But if you go in and redo the contract for Sidney Crosby, is he going to play as well? The problem is, although there’s a lot of seemingly physical assets around this, in the stadiums and all that, at the heart of this there’s one huge intangible asset, which is the players.”

Valuing the NHL fairly remains a challenge. In 2005, Bain upped its offer to $4 billion, Bloomberg reported, before the deal fell through. Since then, attendance is up. “Revenues are higher,” Caporale says. “They’ve grown every year. There’s a new TV contract. The owners certainly believe it’s worth more, and to a certain extent I may agree with them.”

Does this mean another private equity effort could be under way?

“We’re thinking about it,” says Caporale. “Thinking only.”

Summers covers Wall Street and finance for Bloomberg Businessweek.

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