Almost everyone in Boca Raton and Delray Beach has a story about the pandemic-era South Florida real estate market that a Palm Beach Post reporter this summer called “unhinged.”
Last October, a house on the El Rio canal in southeast Boca Raton sold for $2.2 million. That was $600,000 more than any other sale in that upper-middle-class neighborhood.
Todd Weiss is an agent with Exit Realty Mizner in Boca Raton. He was working with a client on a condominium listed at $299,000. One morning, Weiss called the seller’s agent for an update. Overnight, the price had gone up $40,000.
According to Weiss, it was because the Florida Real Estate Commission projected that prices would rise another 10 percent. In an “unhinged” market, that’s all it took.
Twelve months ago, Boca Raton magazine published an assessment of the pandemic market that had gone from gloom—when so much shut down in March 2020—to boom. At deadline for this article, the boom was continuing, though headwinds were rising.
In May, the median home price in Palm Beach County was $615,000. The average price, which is closer to reality for Boca Raton and Delray Beach, had topped seven figures. Again.
It had been like that for almost two years. Much of it was luck. No hurricanes had hit. Buyers had ignored warnings about rising seas. Mortgage rates had been low. Technology had enabled distant buyers to take virtual tours.
In May, however, the Federal Reserve raised interest rates. The Fed did so again in June. Economists predict more increases as long as inflation remains so far above the Fed’s target of 2 percent. Mortgage rates that had averaged roughly 3 percent for most of 2021 were almost 6 percent in June.
Though home sales nationally were down year over year in late spring along with homebuilder confidence, South Florida experts remain uncertain about whether this market will reflect those trends. Some analysts said conditions were shifting back toward a balanced market. As Weiss points out, however, some people consider real estate to be a good investment for inflationary times.
Everyone agrees, though, that these have been crazy times. Weiss says homes were selling for “10 percent over asking price and in cash. That was the norm.” He had a bidding war for a $9,000 monthly apartment rental.
For all the benefit to sellers and Realtors, however, those countless individual anecdotes of windfalls have disrupted the local market in damaging ways—perhaps for a long time.
Many first-time and less-affluent homebuyers have no chance against out-of-staters who consider inflated prices here bargains compared to New York or Chicago. Weiss had a client who was divorced and just needed something small. He could find the man nothing even as far away as Lake Worth Beach.
So after two-plus feverish sales years, other numbers are becoming more important.
In February, the median monthly rent in Boca Raton was $2,813. In Delray Beach, it was $2,548. Economists calculate that people should pay no more than 30 percent of their income toward housing. At that rate, renters in Boca would need to earn about $113,000 a year to afford an apartment. In Delray Beach, they would need to make about $102,000. The average wage in South Florida is about $52,000.
The pandemic real estate boom has created an affordable housing crisis. The causes had been building for years: too little inventory, too little land, restrictive development approval processes, public opposition to development. As with so much else, however, the pandemic brought everything to a head.
Kelly Smallridge is executive director of the Business Development Board of Palm Beach County. In that role, she recruits companies to this area. Boca Raton has especially benefited from those new jobs.
In June, Smallridge participated in a panel discussion at the county’s convention center. Smallridge said lack of affordable housing is causing some businesses to reconsider a move. Not all her target companies pay the same high salaries as financial service firms that have come to the county in large numbers. One executive, Smallridge said, considered building an apartment for employees. The cost was too high.
Troy McLellan is executive director of the Greater Boca Raton Chamber of Commerce. More local companies, McLellan says, are recruiting employees with the promise of working remotely and not having to move. “I’m hearing more from employers,” he says, about the lack of affordable housing.
Ken Johnson is a widely respected real estate economist at Florida Atlantic University. In late April, he compared conditions now to the market before the 2008 Great Recession and the real estate crash.
Though it may seem hard to believe, Johnson says the housing market was “more overpriced” in 2007. It was overvalued by 79 percent. Many people were buying houses to flip, not to live in. In the current market of people moving to South Florida full-time or part-time, Johnson says, home prices were a comparatively low 27 percent overvalued as of early summer.
But that rush has closed off the housing market to many people and thus pushed rents, which rose very little during the first year of the pandemic, to what Johnson calls “all-time highs. That’s the big separation” from 2008. South Florida rents are up nearly 60 percent in the last year.
If out-of-state buyers with cash pushed up home prices, similar sources of new money have contributed to drive up rents. “Temporary COVID relocations,” Johnson says, brought people with “good incomes and savings who wanted to rent until they learned the market. The restrictions where they had lived looked draconian compared to Florida.”
Another key factor in the pandemic market is investment money. The real estate firm Redfin calculated that 27 percent of South Florida home sales between October and December of last year were to investors. Weiss says it’s happening “all over Boca.”
Large investors, which can be large corporations or wealthy individuals, also can outbid locals. Atlanta and Nashville are the most popular investor markets, according to Redfin, but South Florida also ranks high. Investors tend to prefer the same mid-priced homes that have become more out of reach during the boom. A Redfin economist said, “The local homebuyer is really in a pinch.”
The nonprofit news site Truthout reported that “Large corporations have a huge advantage in the market, as they have the ability to buy homes before they’re even listed for public view, to use algorithms to determine what homes would be a good investment, and to buy homes with cash. Real estate firms also get lower interest rates than regular homebuyers.”
It’s happening with apartments, not just homes. New owners want to maximize their investment. So rents go up, sometimes after improvements and sometimes just because landlords can do it in this market.
Neither Boca Raton nor Delray Beach caps annual rent increases. No state law limits how much landlords can raise prices. In March, Laura Stayshich saw her rent in Boca Raton double. “Landlords,” she says, “don’t seem to care that it’s another human being they are dealing with.”
If affordability is a common problem with houses and apartments, common factors explain the problem. As planners and Realtors point out, prices and rents are rising because of Economics 101—supply and demand. There’s very little for sale.
Ideally, experts say, there should be a five-month supply of homes on the market. In South Florida, that’s been running closer to one month.
Given the region’s population growth, that can seem counterintuitive. But in Boca Raton and Delray Beach, anti-development sentiment has been part of local politics for decades.
Boca Raton took the drastic step in the 1970s of capping development at 40,000 units and overall population at 100,000. Though successive court rulings eventually found the cap unconstitutional, the effect was almost the same. Four-plus decades after the city gave up the legal fight, Boca Raton has roughly 100,000 people.
Similarly, Delray Beach officials still tout their “village by the sea,” even though the city’s population has grown by roughly 50 percent since 1990, to roughly 67,000. As in Boca Raton, one political faction embraces development as good for the city while another bemoans it.
There also have been examples of prejudice against apartments as opposed to homes. In 2012, the hot issue was the Archstone project on East Palmetto Park Road. Residents of the Golden Triangle neighborhood just north of the site opposed Archstone.
Then-Mayor Susan Whelchel blamed some of that sentiment on the belief that rentals would lower property values. The city council approved Archstone, now called Palmetto Promenade, and home values in the Golden Triangle have continued to rise.
In 2019, the Delray Beach City Commission approved a plan for the former Office Depot headquarters site on Congress Avenue. Redevelopment of the corridor had been a city priority. The consortium that bought the 42-acre site wanted to market what could be roughly 1,000 apartments to young families.
Yet Mayor Shelly Petrolia, who has criticized what she considers overdevelopment, voted no. That attitude seemed to have shifted in January of last year. Menin Development pitched a project to convert retail space on Linton Boulevard to a mixed-use project that would add 300 apartments. Menin’s representative, former Commissioner Jordana Jarjura, said Delray Beach’s biggest need is “more housing.”
The planning and zoning board, often divided between the city’s political factions, agreed. So did the city commission, unanimously. Last April, there also was no controversy when a developer proposed converting the closed Sherwood Park golf course to single-family homes. Even the neighbors approved.
In Boca Raton, the debate over Archstone began a period of strong community opposition to development as the city emerged from the Great Recession. The BocaWatch website, now shut down, stoked that opposition.
Residents questioned whether people actually were living in the new downtown rental projects. They were. Residents claimed that new development caused school overcrowding. In fact, the larger cause was young families buying homes from empty-nesters.
In 2015, the city council approved Penn-Florida’s plan for University Village, an 80-acre mixed-use project north of Florida Atlantic University on the largest open site remaining in Boca Raton. Scott Singer, then on the council and now mayor, read a 10-minute statement criticizing the project, which he said would create a “sovereign nation” in the middle of Boca Raton. According to the preliminary site plan, University Village would have 800 apartments.
Anti-development sentiment in the last decade also killed a proposal by landowners for redevelopment of the Midtown neighborhood that would have added housing where rules didn’t allow it. Crocker Partners, then the main landowner in Midtown, now is pitching a plan that would add housing to the Boca Raton Innovation Campus. Councilwoman Andrea O’Rourke, one of the strongest Midtown critics, says Crocker is doing a better job with the former IBM headquarters.
As noted, though, the crisis isn’t just too little housing; it’s too little affordable housing. Successive county commissions have helped to create that crisis.
In projects of 10 or more homes, builders were supposed to provide an affordable housing component. But rules allowed developers to opt out by paying a fee for each affordable housing unit. Many did so because profit from higher prices more than offset the buyout fees. Commissioners have placed on the November ballot a $200 million affordable housing referendum.
The Legislature also deserves blame. In 1992, Tallahassee passed the Sadowski Affordable Housing Act. Developers pay a fee on every unit, with the revenue going into a fund to help first-time homebuyers.
Yet since 1999, when Republicans took power, the Legislature has taken $2.3 billion from that fund to pay for other projects and balance the budget. Advocates believe that money could have created 177,000 affordable housing units.
Given all those underlying conditions, the pandemic migration turned housing costs from a problem into a crisis. So where does South Florida go from here? Johnson is optimistic and pessimistic.
The region, Johnson says, “is already into the change,” meaning inbound corporate migration. That could turn South Florida into a region with many more high-paying jobs. It also will produce “a prolonged period of unaffordable housing.”
Many builders, Johnson recalls, went under during the Great Recession. Like so many parts of the supply chain, the building industry is wary of scaling up without more certainty that the pandemic is mostly past. That will keep inventory low.
Solving the crisis will take much more activism by government at all levels. It could mean limits on rent increases or other forms of tenant protection that West Palm Beach and Miami-Dade County have enacted. It could mean incentivizing property owners to convert less-used office space to housing. It could mean allowing more “micro-apartments.”
But many Boca Raton and Delray Beach residents benefit from rising home values. Will there be public pressure? A Boca Raton spokeswoman said in May that the city had received very few complaints about rising rents, all of which officials had referred to the Legal Aid Society.
South Florida has shown that the region can build plenty of upper-middle-class and above housing and can draw well-paid executives. We have not shown the same ability to help first responders and those at lower income levels.
If you’re sitting on tons of home equity, things might look great. But when you want to sell and stay in the area, where do you go in an “unhinged” market? How will we attract young people if they can’t afford a place to live, even with a roommate? How do we keep service workers?
For years, Johnson said, Boca Raton and Delray Beach tried to keep the cost of living low even as growth surged. Few people thought about the consequences. Now, he says, “We’re paying the bills.”