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Front Page » Real Estate » Residential developers raise caution flag

Residential developers raise caution flag

Written by on October 30, 2013

If, as the saying goes, there’s a time for every purpose, then this is the season for caution.

Even though the real estate market is rebounding, industry leaders say savvy players should expect the inevitable downturn, and plan accordingly.

“Real estate is cyclical by its nature,” said Stuart Miller, CEO of Lennar Corp. “We know that, but we forget it… The more the good times roll, the more tenuous our memory becomes.”

One thing worth remembering: the fallout when speculators who had made only small pre-construction commitments backed out of these, taking their deposits with them. Another was the glut of supply left in their wake – an inventory surplus that some observers said would take up to a decade to absorb.

And that’s why restraint will be key this time around, despite the allure of rising sale prices and profit potential, a panel of top executives agreed Tuesday at the Urban Land Institute’s Miami Condo Market Symposium.

Measuring real demand and ensuring that construction doesn’t surpass it is a chief consideration, suggested Russell Galbut, managing principal of Crescent Heights, a luxury condominium developer with projects in New York, Los Angeles, Atlanta, Chicago and Miami.

“International investors will continue to be interested, but we tend to overbuild,” he said.

The trick, suggested Vector Group Ltd. CEO Howard Lorber, is to factor in the fluctuations but study the underlying economic indicators to develop a realistic strategy.

The wild highs of 2007 and 2008, for instance, built on a fragile lending system, were unsustainable and therefore “not economic reality,” he suggested. And neither were the lows that followed when the market hit rock bottom.

“Now we’re somewhere in between,” he said.

And it’s the time to avoid repeating the mistakes of the last cycle, when unprepared investors did some heady spending.

“We got to the point where hairdressers and dentists were becoming speculators, and doctors and lawyers were becoming developers,” said John Sumberg, managing partner of Bilzin Sumberg.

For developers, the suggestion was this: Watch the balance sheet.

“Timing is what people get wrong…,” Mr. Miller said. “The economists don’t get the timing right and there are no tea leaves. But the market is cyclical, and we have to be humbled by that.”