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getting back to Normal (continued)

This is not to say that there will not be exciting opportunities in new preconstruction. The message is consider your options and evaluate your opportunities. Do not discount the value of precompletion and existing resales.

Construction Costs and Supply

New projects currently approved with Development Orders may be delayed from six months to two years--or in some cases "may not make economic sense to be built based on construction costs" according to a seasoned Developer. Condominium units that are under construction or "precompletion" condominiums or resales may be an outstanding value. All those interviewed for this article unanimously agreed that many of the "precompletion" and existing condominiums cannot be built for what people contracted or paid for them two to three years ago. Jimmy Lewis, who has developed on the Gulf coast for over 15 years, further pointed out that these costs do not even include the cost of land, design fees, bank fees, builder's risk, landscaping and parking structures.

This is good news for the both the experienced and the novice who purchased preconstruction over the past three years. Ron Sassano, an experienced developer involved with various Gulf coast projects states that people who purchased preconstruction at market rate in quality developments "got a hell of a buy" Especially with the increase of both condominium prices and construction costs

This is echoed in the November 9, 2005 Wall Street Journal article by Jennifer S. Forsyth which states that "rising cost of everything from land to diesel fuel to gypsum products is causing U.S. real-estate developers to delay or cancel construction of some office buildings."

The article later incorrectly states that rising costs are not effecting "residential construction because prices for condos have soared, making it far easier to pay the cost of building," a thought prevalent but false in the Emerald Coast market. A local developer states that sales prices increased "but costs were going up in parallel…[sales] prices have settled and costs are still going up and a lot of developers are pulling out… The Lenders and developers must maintain a margin between total cost and total sales to mitigate risk and provide a way of managing costs increases and slower sales while not impacting the quality or delivery of the development." A prominent General Contractor (GC) put things in perspective stating that "the problem with a condo product is that you can't fit it in a box like office space" because of the nuances of residential real estate and the economies of scale provided by high density versus low density development. This GC has seen an aggregate price increase of approximately 50% since hurricane Ivan hit in September of 2004. "When Ivan hit things went up overnight about 30 to 35% and from Katrina around 10 to 20% on top of Ivan." Currently, it is almost impossible for developers to determine their total costs and subsequently product pricing. "Historical data is thrown out the window" says the prominent GC, "a big problem is the level of sub-contract involvement… people are so pressed to cover so many jobs." Soliciting bids from a drywall 8-10 companies results in only "one or two prices because they are so overloaded with work" and these bids are only good for 30 days. This is referenced in the September 7, 2005 Wall Street Journal article stating that "Because of Katrina, you're going to see a major, major increase in costs over the next 12 to 24 months," says John Dunkerley, director of cost-management services for Phoenix-based construction-consulting firm PinnacleOne." Mr. Dunkerley also expects Hurricane Katrina to create labor shortages in other parts of the U.S. because workers may be able to get paid more for taking jobs in this devastated area. We are already experiencing this on the Gulf Coast.

Where Do We Go From Here

Currently approximately 5,500 to 6,000 condominiums are listed for sale in the Multiple Listing Services (MLS) spanning from Perdido Key to Panama City. If you will note on the recorded sales chart since 1994 the demand for new and resale units has been at approximately 3,000 total condo sales per year and consistently over 4,000 between 1997 and 2001 which is prior to the FP. In 2004 over 8,000 units closed. This represents over 25,000 condominium sales recorded through December, 2004. Coupled with a slowdown in construction starts and the strong historical sales over the past ten years we feel pricing has stabilized and anticipate normal growth. In 2002 closed resales exceeded 4,000 and rose to almost 7,000 in 2004. If we continue with this robust resales trend in conjunction with the decrease in the number of new developments, supply may level or possibly decrease, which will further increase prices.

"The market was not inflated it was undervalued" says Ron Sassano. "The market is catching up on the prices with places like Naples and Palm Beach. This area is relatively unknown. If you travel and tell people you live in Miami or Ft. Lauderdale, they will know where you live. Not necessarily so with the Destin area. It is still relatively new. Springtime you will see more end users closing the gap that has been created by investors." Basically if the area is still undiscovered there is much room for future growth. Millions of visitors travel to the Gulf Coast every year to enjoy the fishing, golfing, tennis, fine dining and beaches.

Baby boomers with discretionary income have a strong appetite for second homes while retirees are drawn to the southern climates and friendly atmosphere of the south. One of Florida's major developers pointed out that we have not yet tapped the northern tier or Europe. When the proposed Bay county International Airport is operational-currently scheduled to open the later part of 2008--with the possibility of direct flights from the Northeast and Europe it should be "Katie bar the door."

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