Wednesday, November 16, 2022

Peak AirBnB. Buzzkill?

Hurricane Nicole pushed a lot of sand around and the dune plants were covered in a thick layer of blown sand after the storm while the actual erosion was minimal. Unfortunately my porch was similarly coated. There have been a few articles written speculating on why Cocoa Beach and Cape Canaveral were spared the erosion both north and south of us. Credit has been given to our periodic beach renourishment. While that certainly helped I think there is another greater factor. 

Every local surfer knows that during big winter north swells the Cape shadows Cape Canaveral and Cocoa Beach from that swell. It can be double-overhead in Satellite Beach while the Pier is waist high at the same time. The north wind and waves as Nicole was approaching that was chewing up oceanfront structures in Volusia County and Satellite Beach was way less impactful in Cocoa Beach because of that shadow and that saved us from damaging erosion. This is not the first time I've seen this phenomenon here.

Having written about the Cocoa Beach real estate market for eighteen years now, I am often asked about my thoughts on the state of the market. Ever-increasing selling prices of properties are usually the main subject of these discussions. People like to mentally tabulate their net worth gains whether they're thinking of selling a property or not. These discussions have increasingly included speculation about a slowdown or pull back and what might be the trigger. I'll take a stab at that.

I believe we have reached and passed the peak in prices for most property types. There are certain unique properties that are less affected by macro market conditions and may continue to appreciate but for most I think we've hit the wall for the current cycle. Condos are certainly not among those unaffected types. Appreciation has been strong since the bottom in prices around 2010. Many condos bought between 2010 and 2015 that sold this year closed for two to three times the purchase price. When I narrow my focus to properties closed in the last six months that were purchased after 2018 I'm seeing examples of as much as 48% annual appreciation. While the annualized number is remarkably high, the bulk of those gains accumulated during the crazy runup in prices this year. The high prices are what prompted many of these sellers to sell even though they only purchased a year or two ago.

It's not surprising to see properties bought a decade ago during the post-crash bottom sell for three times the purchase price but it is concerning to see properties bought less than two years ago sell for almost double the purchase price. Weekly rental condos have been among the most rapidly appreciating types. There has been quite a lot of media attention this year alluding to the wealth to be made owning vacation rental properties. While short-term rentals can generate quite strong cash flows, the reality is that those who paid this year's prices and who must hire management will be netting quite a bit less than the get-rich podcasts may have promised. I think we'll look back on 2022 as peak AirBnB. Earlier this year there were feeding frenzies of buyers with every new vacation rental listing. Multiple offers first day on the market were expected and most units sold over asking price. We had multiple sales of weekly units without garages closing for over $700 per square foot. These prices are unjustifiable in my opinion. We saw short-term rental rates skyrocket during the pandemic and while they may remain at these elevated levels, I don't see much room for increases. The increased competition in our area has taken away rental pricing power and reduced occupancy for all but the most desirable properties. New owners are finding that a nice but not great unit is not enjoying the same occupancy the rental history may have showed and the 20% to 35% short-term management fee is taking a big bite out of what does come in. We have yet to feel the impact of the new structural inspection and reserve requirements as well as the expected increases in master wind and flood policies. These will force increases in condo fees which will be substantial for some older complexes. The vacation rental condos are predominately cash deals so fortunately higher mortgage rates have not had much impact on them.

The prospective buyers for other types of condos and single family homes are, however, affected by those much higher mortgage rates and are facing similar uncertainty about insurance. Many have decided to call off their search and wait to see what happens. A smaller pool of buyers is not positive for prices. Those buyers who feel that they may have missed their opportunity may get a shot in the coming months and years at lower prices if they are willing to make peace with the uncertainty of overhead moving forward. 

And that is my Debbie Downer evaluation of the state of the Cocoa Beach and Cape Canaveral real estate market in November of 2022. Perhaps next year I will be proven wrong. I would welcome that. Wherever the prices go, Cocoa Beach remains a special place in Florida and we were reminded early this morning of one of our unique attractions when we were finally rewarded with the launch of Artemis 1 around 1:30 AM. It was a beauty as it ascended towards a bright half moon hanging over the ocean welcoming the Orion spacecraft on it's first lunar visit. We are headed back to the moon after a long break.

"Ever notice that people who have an hour to waste usually try to spend it with someone who does not?" - Bernard Meltzer

Wednesday, October 19, 2022

Slowdown

Inventory of residential real estate for sale in Cocoa Beach and Cape Canaveral has increased more than 150% since April this year but the pace of increase has slowed in the last couple of months. I'm not seeing much softening of selling prices but new contract activity has slowed significantly. Closings lag contracts by several weeks so the impact of this slowdown will become apparent next month. If the slowdown continues, sellers will be forced to temper their optimism if they hope to attract attention from a dwindling number of buyers. While Ian's impact locally was very limited, I think it's reasonable to assume some reduced buyer enthusiasm from the media coverage of Ian's damage and impact on the future cost of insurance for Florida properties. We had a couple of false slowdown alarms earlier this year so we may be back off to the races by Christmas. I do not expect selling prices nor pace of sales to maintain their vigor but I have been wrong before. Participants are encouraged to weigh the available evidence before jumping into this market.

There were sixty closed sales of condos and townhomes in our two cities in the month of September. Prices ranged from $1,585,000 for a remodeled 22 year old oceanfront corner 3/3 at Solana Shores to $129,400 for a 64 year old, 338 square foot 1/1 a block from the ocean in south Cocoa Beach. Median selling price for condos was $385,000 with a median dollar per square foot of $333. Three years ago only the nicest, remodeled direct ocean units with garages were bringing over $300/sf. In September there were 17 sales of condos for more than $400/sf.

There were 14 closed sales of single family homes in September. Prices ranged from $2 MM for an oceanfront Cocoa Beach home on a double lot to $415,00 for a small, fixer-upper in north Cocoa Beach probably destined to join the swelling ranks of AirBnB properties locally. If the conversion of single family homes to vacation rentals continues much longer Cocoa Beach schools are going to be without a source of students. This is a growing problem without an obvious solution. Municipalities in Florida are prohibited from banning vacation rentals. The City of Cocoa Beach has been discussing strategies for dealing with the issue but there doesn't seen to be an easy fix.

I have recently heard a couple of stories of new homeowners being surprised that their property tax bill was significantly higher than the previous owner's. They had expected, because the seller was homesteaded at a low rate, that they could homestead and continue to enjoy that artificially low rate. That's not how it works. Once a homesteaded property is sold, the taxable value is increased to current levels and taxed accordingly. When the new homeowner homesteads that property they get a reduction in taxes from that new, higher level and, more importantly, a cap on the annual increase in taxable value. Do not expect to pay the same low property taxes as the long-time, homesteaded seller even if homesteaded again post sale.

"It's hard to accept the truth when the lies were exactly what you wanted to hear." _unknown


Saturday, September 24, 2022

Closings in Hurricane Season

 

Anyone who has a closing on a Florida property next week is probably going to be delayed unless they can close with no insurance. Citizens and most other Florida property insurers will not bind a new policy when a named storm is within "the box" which is approximately the entire area shown above or when we have a tropical storm watch or warning. The box is simply a  huge area of the map in which no named storm can exist at the time of binding a new policy. As of this morning, we have a storm, Ian, in the central Caribbean and as of this writing is just south of the box but will be in it momentarily. The map displayed is not exact but a close approximation of the "box". Any Florida closing scheduled for next week that involves a new policy for property insurance is likely not going to happen even if the storm is hitting Louisiana and not directly impacting or threatening us. Make plans accordingly.

"Why take by force what the gullible and guileless will volunteer?" _Sal Bayat

Saturday, September 03, 2022

Consider the Bunny

This market isn't finished yet despite the tripling of inventory since spring. This morning of the second attempt to fly the Artemis 1 mission to the moon, there are 114 existing condos and townhomes for sale in Cocoa Beach and Cape Canaveral plus another four pre-construction offerings. There are 31 single family homes for sale with only one asking less than $525,000.

In the month of August 63 MLS-listed condo and townhome units closed with a median selling price of just over $400,000. Over half of the sold units commanded over $300 per square foot. A couple of years ago only the very nicest direct ocean units were selling for more than $300/sf. In August ten units in buildings not even on the ocean and without garages closed for more than $300/sf. Over half of the condo sales were cash deals and weekly rental units were still closing at the top of the $/sf range. Twenty five units sold in seven days or less with six of them selling before hitting the market. Highest price sale of the month was $1,200,000 for a 4th floor, 15 year old 3/2 beauty at The Meridian in north Cocoa Beach. Lowest price was $165,000 for a clean little, 56 year old, 2nd floor 1/1 in Cape Canaveral a couple of blocks from the ocean.

There were 15 single family homes closed in Cocoa Beach in August and two in Cape Canaveral. Five of the sold houses closed at prices above one million. The starting price for a fixer-upper, non-waterfront house is now about $500,000 thanks to AirBnB mania. The idea of making big money renting to vacationers is fueling demand for the 50+ year old houses close to the beach and is causing problems in our once-peaceful neighborhoods. The City of Cocoa Beach has been discussing new fees and penalties for noise complaints from the growing number of single family vacation rentals. They are a little tardy on taking action but the measures they are discussing will hopefully help preserve the family nature of our neighborhoods.

Hopefully we'll get to see the Artemis mission fly today after many delays and issues with the vehicle. Labor Day weekend is traditionally one of the busiest weekends of the year here but today will probably break all previous records with hundreds of thousands of people coming to see the launch added to the NKF surf contest crowd and passengers coming and going from four cruise ships in port. Yours truly will be hunkered down for the duration. Enjoy the beautiful weather and expect mind-numbing traffic.

"Consider the example of the monkey -- who, the higher he climbs, the more he shows his behind." _St. Bonaventure, the 13th-century Franciscan philosopher speaking about power and wealth


Sunday, August 14, 2022

The Clock is Ticking

Condo owners take notice. The first deadline required by the new Florida condo legislation is less than five months away on Jan. 1, 2023. Condo associations with buildings of three stories or more must file a report with the State by the end of this year. This new mandatory report is simple and can be done online. The registration form can be found here. The required information on the form is listed below.

718.501(3)(a), F.S./Senate Bill SB4D requires all condominium and cooperative associations with buildings 3 stories or higher to report the following information to the Division of Florida Condominium, Timeshares and Mobile Homes on or before January 1, 2023.

  • The number of buildings on the condominium property that are three (3) stories or higher in height.
  • The total number of units in all such buildings
  • The addresses of all such buildings.
  • The counties in which all such buildings are located.

The next deadline for the association is Jan. 1, 2024 by which time the milestone inspection and structural integrity reserve study must be completed. Considering that there are a limited number of engineers and architects who can perform the milestone structural study, it would be prudent for associations to be making steps now to arrange and schedule the inspections. Once inspections have been done, a structural integrity reserve study must be done. The amount being contributed to the structural integrity reserves can't be an arbitrary amount as many associations in our area do for the traditional reserves but must be 100% of the estimated repair costs by the time of the expected repairs. This reserve study will best be done by a specialist in reserve studies.

Compliance is mandatory and, as specifically spelled out in the Statute, Board members may be considered to have violated their fiduciary duty if the association does not comply. I have heard an opinion from a Florida condo association attorney that condos whose by-laws limit fee increases above a certain amount or percentage will likely not be protected should they use this as an excuse to not raise the fees enough to fully fund the structural integrity reserves. The same attorney opined that, as written, the law might be interpreted to include buildings of less than three stories to be required to maintain 100% funded structural reserves even though they are not required to do a milestone inspection or structural reserve study. The law as written is hazy but it would be prudent for owners in buildings less than three stories to consider beginning to reserve for upcoming concrete and other structural maintenance. The days of shoestring monthly fees offset by big special assessments for repairs not included in the budget are coming to an end. It is the new paradigm for Florida condos and the bottom line is that by 2025, monthly fees should be closer to what is actually needed to maintain a condo building. I'll repeat what I've been saying for a while now, condo fees are going up and in many cases are going up substantially. 

Sellers of condo units are going to be required to furnish copies of the milestone inspections and structural integrity reserve study to buyers or, in lieu of, written notice that the association has not done them yet. I think it's reasonable to expect the new transparency about condition and higher fees to cool demand for condos. A substantial pull-back from current prices to reflect the increased carrying costs of condos would be a rational response to the new reality. Sellers who wait until the reserve study quantifies the additional reserve amounts will have waited too long. Anyone thinking of selling would be well-advised to consider doing it prior to the reserve study.

Buyers should pay close attention to the financials of condos they are considering and since none have done their newly required inspections and reserve studies yet, the physical appearance and condition of the building. New buyers of condos should expect today's fees, whatever they may be, to increase by the Jan. 1, 2025 deadline. There is no reason to be surprised by a big increase in fees by then. It's coming and just a matter of time.

"If we want something enough, our tolerance for risk goes up fast. When it’s midnight at the airport, you’ve been on the road for a week, and the line for licensed taxis home is 40 minutes long, the driver hanging around baggage claim looks increasingly trustworthy. Desire offers rationalizations instead of rationality:" __Prof Galloway

Sunday, July 24, 2022

Inventory Tsunami

Spotted this gopher tortoise cruising along the dune line at Cape Winds a few years ago. The variety of wildlife that lives in the narrow strip of dune between the beach and the buildings is surprising. We have a healthy population of swamp rabbits, black racers, corn snakes, tortoises, possums, racoons and the occasional bobcat and coyote squeaking out a life in that narrow strip.

Residential inventory is exploding in Cocoa Beach and Cape Canaveral. The number of existing condos for sale is up 50% since mid-May while the number of single-family homes on offer has more than doubled during the same period. As recently as April there were only 43 condo units and 12 single family homes for sale. The numbers this morning are 101 MLS-listed, existing condo units and 27 single family homes.

Thirty units have closed in the two cities since July 1 at prices between $2 MM and $125,000. Another 46 have accepted an offer since the month began. I would expect the inventory to continue growing as sales activity typically begins to slow as we approach the start of the new school year. Sellers are still pricing optimistically but I am seeing more price reductions as some of them respond to the reality check of an apathetic market. Over 40% of the existing listings have reduced their original asking price. Just a few months ago most new listings were enjoying multiple offers with many selling over asking price. Of the thirty closed units so far this month nineteen of the thirty sold for less than asking price. Sellers, take note; the market is different than it was two months ago and the new reality is more competition, fewer buyers and tighter conditions for condo loans. With the busy months of hurricane season fast approaching, the time to play chicken with the market is behind us. Anyone hoping to sell a residential property here would be well-advised to accept the market changes and make a plan to sell that works with the new reality. The strategy that worked well earlier this year when there was less inventory, lower interest rates and a less-stringent condo mortgage questionnaire is not the best plan moving forward. 

Buyers, enjoy your new status in the buy and sell dynamic. Those planning to get a mortgage need to understand what will make a condo complex fail the new mortgage condo questionnaire before they offer on a unit. If the complex is older with obvious deferred maintenance or it is primarily vacation rental units, a mortgage may be impossible. An experienced buyer's agent will have a good idea which ones those are.

"Bad artists always admire each other's work..."--Oscar Wilde

Sunday, July 17, 2022

New Reserve Requirements for Condo$

The anticipated changes addressing condo safety are now law. I have inserted the most impactful parts of the new law that will affect condo fees substantially in many buildings. The TL;DR summary: Procrastination regarding structural maintenance and funding of same is no longer an option for pennywise, pound foolish associations.

Condominium buildings 3 or more stories will now be required to have a “Milestone Inspection” within 30 years from date of occupancy, or, if the building is within 3 miles of the coastline (this covers all of Cocoa Beach), the inspection must occur within 25 years, and afterwards every 10 years. Existing condominiums built before July 1, 1992, will need to complete the initial milestone inspection by December 31, 2024

Phase 1 inspection requires the architect or engineer to perform a visual inspection of the properly and make an assessment of the building’s condition. If the phase 1 inspection reveals no signs of structural deterioration, then a phase 2 inspection is not required. A phase 2 inspection is required if structural deterioration is noted, the phase 2 inspection may require destructive testing.

In addition to the association, the inspector's report must also be delivered to the local building official. The association must distribute a copy of the inspector-prepared summary to each unit owner regardless of the findings or recommendations in the report. Any repairs for structural deterioration must be commenced within 365 days after receiving such report or earlier as required by local authorities.

The required “Structural integrity reserve study” is the fly in the ointment for condo fees. For some well-maintained and newer buildings it will have little effect on fees but for buildings with deferred concrete repairs, the requirement to begin funding reserves immediately (or by December 31, 2024 )for a project in the near term will blow up monthly fees.


Associations have a little breathing room before December 31, 2024 but if they anticipate that the structural integrity report is going to find needed expensive concrete repairs it would be prudent to go ahead and boost fees by an arbitrary amount immediately to get a head start. I would expect some Boards to wait until the last minute to give some owners time to bail before fees go up. 

Interesting fact: the concrete used in older buildings is not the same as modern concrete. I have learned that concrete formulations began evolving rapidly in the 80s and continue to do so today. Newer buildings in almost all cases were constructed with better concrete than our older buildings especially those built before the 80s. Another issue to consider when looking to purchase a beach condo. Knowledge is power.

"It's hard to accept the truth when the lies were exactly what you wanted to hear." _unknown

Friday, July 08, 2022

Retrograde Burn Initiated

Inventory of existing condos and townhomes in Cocoa Beach and Cape Canaveral stands at 88 units this morning plus another four pre-construction units. Median asking price is $460,000. There are 29 existing single family homes offered with a historically high median asking price of $1,000,000. In addition, there are six yet-to-be-built homes offered for reservation in south Cocoa Beach.

Seven single family homes closed in the month of June at prices between $1,750,000 and $370,000, only one unit for less than $650,000. During the month 58 condos and townhomes closed at prices between $1,217,000 and $128,500 with a median selling price of $330,000.

New contract activity has slowed with only 40 condo units contracted in the last four weeks, over half in the first three weeks on the market. Nine single family homes have found a buyer during the same four week period. One notable statistic has been a shift in activity to lower priced units. Thirty of the 37 units contracted in the period were asking less than the current median asking price of $460,000. That illustrates a pretty wide gap between what's for sale and what's selling. Another shift is the number of buyers using a mortgage to purchase. Historically over half of our condo sales have been for cash. Since June 1, only 40% of condo sales were cash deals. That's surprising considering the rapid increase in mortgage rates this year. We had a welcome pull-back in rates this week with the average 30 yr fixed rate mortgage at 5.672% as of yesterday's survey.

My takeaway and observation is that there is a widening separation between buyers and sellers. Sellers in the higher price range above the median are enjoying less buyer interest except in the case of unique properties. Buyers getting a mortgage are looking at a monthly payment that is about 40% higher today than it would have been last year even after the big pull-back this week. Add in higher prices, condo fees and insurance and the climate for continued appreciation is not favorable. Those who are selling and not getting any activity need to ask themselves if this is a typical pause in a hot market or if something has changed and respond accordingly. What the neighbor got for their property in April may not be a realistic benchmark in a changing market. Buyers may still find themselves in multiple offer scenarios for desirable properties but now have the backstop of increasing inventory and cooling demand. The pressure to pay whatever it takes to win is not as applicable as it was two months ago. Best of luck to those looking to participate. Do your homework, know what's happening now with prices and inventory and adjust your strategy and expectations if the current conditions differ with your earlier expectations.

____________________________________________________________

Told you so - from a post I did in December 2014:

The Cocoa Beach Pier was sold to Westgate Resorts of Orlando who have begun total renovation of the 52 year old landmark. I expect big things and probably a challenge of the height and density limits for a new structure on the parking lot. That will be highly contentious if it happens.

And just reported: 

Cocoa Beach commissioners voted 4-1 Thursday to allow Westgate Resorts to build a six-story resort at Cocoa Beach Pier (above the maximum permitted building height of 45 feet) paving the way for the resort and parking garage off Meade Avenue.

"Against profitability, morality is overmatched." _Jay Busbee about LIV golf