Condo developers in Miami have re-discovered the condo-hotel, and buyers are eating it up. But they may be disappointed with their returns once their units are completed.
Developers and their sales teams promise the best of both worlds: buyers can use the condos when they’re in town, and generate income when they’re not. Many buyers are foreign, from Latin America and elsewhere. Also, the price points are more affordable because the units are much smaller; some start at $300,000, and about 400 square feet.
As a result of strong presales, developers continued to launch new projects, even during the slow summer season. In some cases, they are converting what were planned apartment or traditional condo developments into short-term rental condo projects. Related Group, Fortune International Group, PMG, Alta Developers, Merrimac Ventures and Royal Palm Companies are among the developers with these projects.
About a month after launching sales of the planned 22-story, 372-unit One West Twelve Residences nearby in Overtown, developers PMG, Michael Simkins’ Lion Development Group and Alex Karakhanian’s Lndmrk Development said the project was already about 50 percent presold, which is quick compared to some condo projects that take a year to match that pace.
Last month, the Galbut family began selling 14 Roc, a planned 32-story, 283-unit short-term rental condo in Miami’s Arts & Entertainment District. The Galbuts kicked sales off after delivering the Gale Miami Hotel & Residences downtown, which is about 60 percent sold.
Once these buildings are delivered, the huge increase in supply could put pressure on rental rates, hurting investors’ bottom line. Their success will rely on the project’s location, design, price point and management, brokers and developers suggest.
“It’s going to be a bit of a bloodbath of competition,” said Craig Studnicky, CEO of Aventura-based brokerage firm ISG World.
Real value?
About half, roughly 11,000 units across 36 projects, of the preconstruction pipeline of new condos from Miami’s Coconut Grove to Hillsboro Beach in Broward County will allow owners to rent them out on a short-term basis, according to the latest ISG World Miami Report. Many are concentrated in Miami’s urban core.
Studnicky said agents are overpromising the daily rental rates buyers could secure — by up to 50 percent. The brokers selling these projects are relying on hotel statistics, which Studnicky and others say is not an accurate comparison. That will become apparent for these owners if they decide to sell.
“The forecasted income and occupancy rates are overstated and the management expenses are understated,” he said. “All of that results in very little to zero NOI and that’s why they don’t appreciate [in value].”
Prospective buyers of income-producing properties typically demand net operating income and other financial performance information. Condo-hotels historically don’t hold their value, Studnicky said. Of the condo resales in 2023, only 2 percent were condo-hotel units, according to ISG.
Roman Pedan, CEO of Kasa, which provides tech for and operates hotel-style accommodations in apartment buildings and former hotels agreed. One of the biggest risks is that developers “oversell the amount of income the buyers will make.”
“It creates frustration by the buyers after the sale,” he said. “And after that the resale value is a little more tricky.”
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Marcia Kaufman, CEO of Bayport Funding, said financing the purchase of condo units in buildings with fewer full-time resident owners is riskier.
“All investors will save their primary residences first and let go of their investments,” she said. “It makes the building a lot less stable.”
My building is better than yours
Not all of the short-term rental friendly projects are condo-hotels, and developers are working to differentiate their buildings from the competition. Some towers include a hotel component or central manager/operator with condos that can be rented out with few to no restrictions, while others allow owners to rent their units out themselves on whatever platform they’d like.
“Some of them feel like it’s a free-for-all. The amenities are overrun with people,” said Pedan of Kasa. “It doesn’t feel like a great experience for the resident or the nightly renter.”
Ricardo Dunin, who redeveloped the Mutiny in the Grove and what was then the Sonesta condo-hotels in the 1990s, said he is working to avoid the condo-hotel mistakes of the past. Within the last year and a half, his Oak Capital teamed up with the Peruvian firm Edifica to launch sales of two short-term rental-friendly Domus-branded condo projects in Brickell, which is just south of downtown Miami.
“We didn’t want to label ourselves as condo-hotels, because I think the so-called condo-hotels will fail. Like a taxi that smells badly and you don’t feel safe,” he said, comparing ride-shares to cabs. They’re calling them FLATS — short for flexible apartments for temporary stays.
Dunin said he’s able to price units below the competition, which includes the nearby Mercedes-Benz-branded condo and Ora by Casa Tua projects because he is not building “aspirational amenities.”
“Condo developers build things they think buyers will like but later nobody uses,” he said. “We eliminated [these] amenities, areas that are built to help sell units but are not necessary for our hotel, avoiding passing the cost to the buyers.”
Some agents say there’s more demand for higher-end short-term rental condos that can compete with existing condo-hotels like the W Hotel, Setai Miami Beach and 1 Hotel & Homes. These buyers are less concerned with a big return on investment, but are looking for units priced below $2 million.
“Latin American buyers love this short-term rental product,” said Compass agent Mike Martirena. A larger concentration of investors continue to hail from Colombia, according to the Miami Association of Realtors.
Foreign investors also like that they can pay in installments because these projects are in the planning or construction phase.
Ivan Chorney, who leads the Ivan & Mike Team with Martirena, said that the concentration of projects in downtown Miami will push buyers to projects in other neighborhoods.
Nick Falcone, co-managing principal of the vacation rental company Rentyl Resorts, said more than 10 towers at Miami Worldcenter will have some kind of short-term rental component.
The projects with smaller units, priced below $1 million and that offer structured rental programs will succeed.
“The ones that don’t do those things, there’s a very strong chance those owners will not be netting positive cash flow,” he said.
Developments are popping up everywhere. Construction lenders continue to provide loans for condo projects because the developers can tap into the buyers’ deposits, reducing the lenders’ risk, said Kaufman of Bayport Funding.
In Edgewater, which is just north of downtown, Hearst Magazines’ Elle brand teamed up with Vertical Developments and Urban Network Capital Group to launch sales of Elle Residences, where owners will be able to rent their units out on a short-term basis.
Earlier this year, Rilea Group launched sales of the Rider at Wynwood, a 146-unit building that’s set to rise near the planned Brightline station in Wynwood. Rilea President Diego Ojeda said Wynwood is a “completely different” market than downtown. He also said the Rider will stand out because tourists will want to stay near the train station.
In theory, the investors who purchase these short-term rental condos will be able to use the income they generate to at least cover the maintenance and other expenses.
Units at the Rider are priced from the $600,000s and go up to $1.8 million. Like many of the projects in South Florida’s pipeline, units at the Rider will be delivered fully furnished.
Still, Studnicky of ISG said he won’t sell condo-hotels, which he compared to time-shares.
“It’s not the wisest place to put your money,” he said. “You’d be better off buying Amazon or Tesla stock.”
