Miami Business Journal

Real Estate Marketing Expert Warns Builders of Problems Ahead
By Fred E. Fogarty
One of the nation’s leading housing marketing strategists has issued a warning to South Florida home builders, condominium converters and developers to step carefully in today’s housing market or they may wind up with deep and unsolvable financial problems similar to those that swept the building industry in 1975.
Jack P. Studnicky, president of JPS Associates, Inc., a Brickell Avenue based marketing organization that has a nationwide reputation for creative merchandising plans, concedes the building and real estate recession will probably develop from some new factors this time around.
“But even though we don’t have the tremendous over building problems of 1975, the current trends indicate that unless builders and developers are prepared to take immediate action on their present developments by disposing of inventory at bargain prices they very well may be headed for disaster,” Studnicky said.
The housing executive said the major factor today is mortgage rates, “and with rates where they are today it’s closeout time for developers.” He warned that the industry should stop depending on future hopes for high profits and to immediately develop marketing plans that face up to the problems ahead.
“The day has come to stop sitting on a product and waiting for a buyer to meet the present level of prices and mortgage rates. With these high costs the buyer just isn’t going to come.” Studnicky said.
But Studnicky said today’s housing problems are vastly different than the 1975 housing slump, although, they both offer the same potential disaster. “Today, the buying market is attempting to adjust to high prices and high interest rates, but in the meantime builders usually don’t have the staying power and must make every effort to get out from under heavy debt burdens. The carrying costs on unsold units not only eat up profits, but can kill a builder,” he commented.
In a widely ranging interview on the health of the housing industry, Studnicky underscored these potentially dangerous factors:
Mortgage rates aren’t expected to come down soon, but developers can lose all of their profit since they must pay construction financing costs that are often tied several points above prime.
The condominium conversion market has stagnated due to an oversupply of units and high mortgage rates.
Miami and South Florida crime is being heavily played in the national and international press and it’s beginning to affect housing sales as well as Miami Beach convention business.
International buyers are becoming wary of the market because they also are prone to high interest financing rates. Also, the new IRS capital gains provisions offer potentially dangerous disclosure problems to foreign investors.
An estimated 43 percent of the market has been captured by both foreign and domestic speculators, who have been a major factor in driving up prices. But speculators are now beginning to review their investments and could start dumping properties at bargain prices.

In view of these problems, Studnicky believes that builders should start making some rapid decisions and get out from under present debt burdens by immediately selling off inventory at bargain prices.
“I offered this same advice to a builder friend in 1975, but he told me that if he cut prices people would think he was going out of business. I replied to him. “What will they think when you do go out of business?” The builder ignored the warnings and today he’s still trying to dig out of some of his old financial problems.” Studnicky said.
The marketing executive said that today’s inventory of unsold units doesn’t pose the same problem as in 1975. He pointed out that recent surveys by Studnicky indicates a troublesome supply of high-priced units are on the market and that numerous condo conversion projects from Miami to Pompano Beach are standing half empty.
“The medium priced units are also in trouble,” he said, “and as an example, a Netherlands Antilles firm purchased a high-rise apartment in the Hallandale area early last year, but about six months after they started renting. Another company purchased six apartment buildings in the Harbour Island Causeway area, spent a fortune on their conversion, and has had only negligible sales to Americans. The project is surviving through a sales connection in France.” And recently major Canadian investors switched their condo conversion plans to rentals,” he added.
In other marketing studies, Studnicky said South Florida and Miami’s crime problems are also becoming a major deterrent in sales. As an example, he said Miami crime problems are directly affecting the Hollywood-Hallandale area which has been dependent on French Canadians for sales.
“The Canadian press is carrying headlines every time there are killings and dope-smuggling activities in Miami. One recent purchaser of a motel, which depended on the Quebec market, is close to bankruptcy as prior guests have returned home with tales of being afraid to go out at night,” he said.
Studnicky said other stories about South Florida including the burning of Liberty City, the reported 20,000 Cuban criminals who arrived here on the boat lift and the street shooting matches of Cocaine Cowboys are being played heavily in the international press.
“Besides the loss of tourism and potential residents, crime is also affecting another one of Miami’s major sources of income. Conventions, which require long range booking, are being cancelled and Miami Beach is being overlooked,” Studnicky commented.
Studnicky said the international market has had a profound effect on the South Florida development scene, accounting for about 60 percent of the sales.
“But first, the image of the Latin American buyer needs to be updated. It is a myth that he is a ripe prospect arriving with satchels of cash and is searching for a big deal. Naturally, there are a few cases of these cash incidents, but today’s South American buyer is a shrewd, wary individual, still seeking a safe haven for his investment. But he has foreign banking savvy and a reliable broker behind him and much to the surprise of many, finances and purchases with local mortgage financing,” Studnicky said.
The housing executive said that Latin buyer also is affected in the rise of interest rates combined with high prices. “And in many cases with luxury units doubling in price in 18 months, the Latin investor is getting turned off on any new purchases.”
Studnicky said that sales statistics developed in November by Studnicky indicated that over 40 percent of the developers surveyed reported that 70 percent of their sales were to foreign buyers. However, most noted a slowdown in the last half of 1980 with the exception of those developers who concentrated their sales on the Latin market.
Among the reasons given for the slowdown were: riots and crime; influx of Cuban refugees; watching elections; and too many investor/speculators holding too much product.
The major buying was from Colombia, followed closely by Venezuela and Argentina. Canada was in the median range with Latin American countries, and Mexico purchases were half that of Canada. The European countries were led by Great Britain with Germany a close second.
Studnicky said international business is the only bright spot in sales, “but it’s unfortunate that a shadow has been cast on that sales potential by the new capital gains tax laws.”
The real shocker is that the IRS law is retroactive to transactions after June 18, 1980. Also, a loophole has been closed in which buyers who were anticipating the new law, often transferred the real property from one company to another at an inflated value in order to avoid the capital gains tax.
“But the federal law now states that the new value of the property will not be accepted. Another clause that is distressing to the foreign buyer is the disclosure provision. The name of the corporation is no longer sufficient, but the names and addresses of the ultimate owners must be disclosed,” Studnicky said.
The tax rates, he said, range from 20 to 28 percent for individuals and 17 to 28 percent for corporations on long-term basis. Taxes on short-term gains would range up to 70 percent for individuals and 46 percent for corporations.
The role played by the speculator in South Florida real estate is probably the single most sensitive factor, Studnicky believes. “The speculator is the greatest contributing cause of the rise in cost of property, both in land speculation and the housing product,” the housing executive said.
He said the speculator not only drives up the price, but that he may unload at an inopportune time to the developer and when the market is volatile. “If the speculators begin to panic and unload it will be like pulling the plug and both the builder and banker will be drained,” he added.
The marketing executive also said that the housing industry brings the speculative problem on itself since many developers sell on a pre-construction basis with assignable contracts. “Assignable contracts are a cancer and any developer who sells on this basis knows he’s dealing with the scourge of the industry, but the practice is wide-spread,” Studnicky said.
Studnicky also believes developers should return to the basis of shelter not luxury, since there is a pent up demand for housing for Middle America in the form of retirement facilities at reasonable prices. And he points out the first time buyer is being ignored and should be offered a small energy efficient condominium instead of high-rise luxury units that carry big profits.
Studnicky believes the first real relief for homebuyers probably won’t surface until 1982 when developers will return to lower priced properties. “We’ll probably see a shake-out of speculators this year and the inflation pressures should diminish. And any developments, such as reasonable retirement housing that may be in the works today, will probably come on line at an opportune time when mortgage rates will at least be more palatable,” he concluded.

February 23, 1981