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The run-up in Florida’s residential sector over the past several years has kept Jack McCabe quite busy. The chief executive officer of McCabe Research & Consulting LLC is considered one of the top experts in the state’s multifamily market. The Deerfield Beach-based firm provides data on both condominium and rental properties for everyone from institutional investors and developers to lenders, brokers and appraisers. Now that the for-sale market is cooling down and the focus is shifting to rental properties, McCabe continues to have his hands full. In an interview that originally appeared in Real Estate Florida, Real Estate Media’s newest regional publication, the executive discussed the changes that have taken place in the state’s multifamily sector, what’s occurring now and what to expect. (Sule Aygoren Carranza is managing editor of Real Estate Forum and editor of Multi Housing forum.)

REFla: The residential market has had quite a run over the past few years. What’s happening now?

McCabe: The speculative activity that drove the condo marketplace between 2001 and 2005 ended at the start of 2006. Since that time, we have seen a severe decline in sales volume and a growing inventory of condominium as well as single-family homes. We’re also starting to see mounting foreclosures. Florida has become a microcosm for what we’re going to see in many markets around the US because the boom really started here. And as such, the correction cycle is starting here too. Due to the high volume of speculative activity and the amount of artificial price appreciation, we could see recessionary pressures beginning in 2008.

REFla: How much of a threat is the condo sector to the multifamily market, in terms of oversupply?

McCabe: There’s been a rash of conversions. In Miami-Dade, Broward and Palm Beach counties, almost 63,000 apartment units were taken out of the inventory since the start of 2004. A number of those condo projects are reverting back to apartments because the speculators are no longer there. And some of those speculators that did buy units are unable to flip them, so they’re renting them. That’s created a large shadow rental market, which is placing pressure on apartment complexes. We’re seeing one and two months of free rent and other concessions in some places. Unsold condo units and even single-family homes are renting at $1,500 to $2,000 a month.

On the flip side, some of the larger apartment developers have their acquisition people back in Florida because land prices are coming down. It’s our belief that once the condo projects that are currently under way get completed, we’re probably not going to see nearly as many of them for years to come.

REFla: Will the demand be there to absorb these extra units?

McCabe: Prices have gotten out of hand and in some places the cost of renting is less than half of the cost to own. With the pressure of foreclosures over the next few years due to relaxed lending practices, a lot of people who became homeowners in the past couple of years are going to be returning to the renter pool. That’s why rental demand will be there. Renting is a smart and cost-effective decision, at least until for-sale prices come down. Now, once they come down far enough to where it makes sense to buy these units–and I think that’s going to happen in the next 12 to 18 months–the condo prices are going to be consistently lower than what they were previously.

REFla: Will job losses in the residential sector have much of an impact, or will population growth be enough to counter those cutbacks and absorb units?

McCabe: The report of a thousand people a day moving to Florida is a myth. I’m still trying to figure out who created that, but it’s the biggest joke because it just simply isn’t happening. Right now, instead of companies and people entering Florida, we’re seeing them leave the state.

It’s going to be a tough time for the next three years. You’ll hear people say there’ll be a recovery by the end of this year or next. Well, that’s a bunch of baloney, and anybody who buys into that thinking is fooling himself. It took us five years to get to this point. We’ve created a much larger inventory than we’ve historically been able to absorb. It’s going to take years to absorb it. It’s simple mathematics. I think it’s going to be 2010 before we see enough of a change in prices, taxes and insurance for people to start buying again.

REFla: You’ve warned that the condo sector could face severe litigation issues. How so?

McCabe: The love fest is over. Prices are coming down and people are losing money. There’s going to be a lot of finger-pointing, and sue-happy America is going to create a tremendous amount of litigation. We’re already seeing some attorneys here advertising to condominium preconstruction contract holders that they can help them get out of their agreements. I think we’re going to see realtors, lenders, title companies and developers getting sued. We’re going to see developers suing speculators to force them to close on their units. Smart developers are placing reserves to deal with what they should see as the future cost of litigation due to material defects and buyers trying to walk away from their contracts. There are actually seminars for attorneys right now about how to go after predatory lenders and how to sue developers. It’s becoming a large cottage business.

REFla: What do you anticipate for the multifamily sector over the next few years?

McCabe: A lot of people may find this hard to believe, but in spite of all this I am still the biggest believer in the long-term prospects for Florida real estate. We’ve had excessive, unhealthy and unrestrained amounts of development, as well as lending, buying and borrowing. We’re just going to have to deal with it. Once we do–as it happened in the ’70s, the late ’80s and early ’90s–we will see prices appreciate, because the basic fundamentals are there for the long term.

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