Friday, November 20, 2015
The very very rich, sea level rise & Miami Beach
by Gaius Publius
This painting sold in 2013 for $142 million (source). Are the very very wealthy driving an asset bubble? If so, how large a bubble?
This is a follow-up to this piece, "Can Miami Beach Survive Global Warming?" about Miami Beach, south Florida, and climate change. There we talked about the disconnect between the pace of development, high land valuations, and inevitable sea level rise.
That disconnect flies in the face of an inevitable collapse. But I don't mean physical collapse (though at some point, that too is inevitable). I mean economic collapse, something less deadly perhaps, but for many, still very painful.
While I didn't make the point there (I have elsewhere), please keep in mind that sometimes economic collapse — a collapse in prices — precedes the event that causes it. That is, because we are an anticipatory species, a species that can anticipate events, we also act on anticipation. Thus, it may well be true that, as soon as the seed is planted that "you're going to lose money buying in Miami Beach," it may well follow that anticipation makes the future immediately present.
And frankly, once prices for any product collapse, the stampede is on — simply because there's a stampede. Many prices do recover over time. The price of Florida real estate, for example, recovered after the disastrous collapse in the mid-1920s. The difference now, however, is this — once it's over for the economy of south Florida, there won't be a recovery until people see the sea stop rising. Meaning, never.
The very rich & the Miami Beach bubble
The problem in Miami Beach, unlike the general problem is south Florida, is that it's the playground of the very very wealthy, who have turned luxury condos and homes into the same kind of competitive "investments" that condos and homes in Manhattan and the very best parts of London have become. In other words, a massive asset bubble, the same kind of bubble that the fine art market has become, and one that only the very very wealthy can create:
A sale earlier this week of Post-War and contemporary art brought in more than $691 million, the largest haul in the history of the art market, according to the auction house Christie's.
The art market has heated up just as Wall Street has been setting records of its own. Stocks are holding near all-time highs. So there may be a spillover to the art market as the already wealthy grow now even richer. There are obvious spillovers into certain real estate markets as well.
The highlight was a painting [above] by Francis Bacon, "Three Studies of Lucian Freud," which went for over $142 million, the highest price ever for a piece of art sold at auction.
Over at Sotheby's (BID), a silk-screen painting by Andy Warhol sold Wednesday for $105 million.
Here's what that looks like in Miami Beach, from the same Vanity Fair article quoted previously (my emphasis):
[Harold Wanless, chairman of the Department of Geological Sciences at the University of Miami], who is among the scientists whose work is cited in Hansen’s paper, told me that he and Hansen take issue with the current models for projected sea-level rise—most of which top out at around six feet as the absolute worst-case scenario for 2100—because they don’t account for how rapidly the world’s glaciers and ice sheets are going to melt in the decades to come. “If you ever fly over Greenland, which I’ve done, it’s unbelievable,” he said. “The ice sheet is already melting from global warming, and now it’s also dirty on top, because of dust and soot blowing in from other parts of the world.” The darkened ice absorbs heat more quickly than clean, white ice, hastening its melt rate. Given such factors, Wanless said, he predicts that Miami Beach will experience something in the range of 10 to 30 feet of sea-level rise by the end of the century. I was so stunned by these numbers that I asked him to repeat them, to make sure I had heard him right. He did.
A pause to think. If that is true (I personally think it is, given the many non-linearities — and the history of negative surprises — in the climate prediction world), then it follows that people will figure this out way ahead of time. That's the anticipation I mentioned above.
But that's for later, for after prices start falling. In the present there's no end of optimism, even among the local scientists:
I received a more optimistic take on South Florida’s future from Ben Kirtman, a climate-modeling expert at the University of Miami’s Rosenstiel School of Marine and Atmospheric Science. While not shying away from dire climatic trends or from the extraordinary measures that will be required to contend with them, he sounded a lot like Mayor Levine, believing that there remains time for human ingenuity to save the day. “I want to see Miami Beach survive,” he said. “When we acknowledge a problem, we diagnose the problem, and then we start to develop really good technology to fix the problem. I believe in that.”
And that optimism, plus more than a little greed, is driving a very hot real estate market:
It’s this sort of determination that allows [Mayor] Levine to believe that the current boom of building and buying, far from being a crazy bet on what’s destined to become Waterworld, makes perfect sense. “If you can show me the first owner of real estate who’s panicky, who would like to sell cheap, please let me know—because I’d like to be the buyer,” he said. “And I have about 100,000 people right behind me.”
The capstone — Miami Beach has status it doesn't want to surrender:
The real-estate figures bear him out. Peter Zalewski, the founder of CraneSpotters.com, a Web site and consulting service that monitors the high-end condominium market in South Florida, told me that, while the pre-2008 real-estate boom was actually bigger in terms of units sold, “from a price perspective, this is the biggest boom by far. It’s triple or quadruple anything we’ve ever seen.” To wit, two years ago, Alex Rodriguez sold his mansion on North Bay Road, for which he had paid $7.4 million in 2010, for $30 million. In June, Phil Collins paid $33 million for a home, also on North Bay Road, that had once belonged to Jennifer Lopez—and which Lopez had sold, 10 years ago, for $14 million.
Two of the foremost brokers in this super-luxury market are Jill Eber and Jill Hertzberg, a pair of glamorous, mediagenic Coldwell Banker agents who bill themselves as The Jills®, and who, three years ago, bagged themselves what was then, pre-Faena House, the county record for a single-family dwelling, selling a mansion at 3 Indian Creek to a Russian buyer for $47 million. I met with Hertzberg at her office, where even she expressed surprise at what people are paying for properties nowadays—not just in desirable South Beach but in areas like the one where the Edition and the Faena properties are (“They’re calling it ‘Mid-Beach,’ but no one had a name for it before,” she said) and in the quiet town of Surfside, just north of Miami Beach proper, where the developer Nadim Ashi and the architect Richard Meier are making over the Surf Club, that toffs’ haunt from the 1930s, as a Four Seasons-branded hotel-and-residential complex. It won’t be completed until next year, yet Hertzberg has already sold one of its penthouses for $35 million.
Many of The Jills’ well-off buyers are from overseas and pay for their purchases in cash. For her foreign customers, Hertzberg explained, Miami Beach is precisely the opposite of a risky investment; rather, it’s a safe harbor in which to park their money (and often their extended families) when things get volatile at home. There is even a colorful real-estate term for the cash spent in this fashion: flight capital. Selling super-luxury real estate, Hertzberg said, has provided her and Eber with a continuing education in political unrest around the globe. “Years ago, when they started having all the kidnappings in Bogotá, and newspeople and judges were getting killed, we started to have Colombians coming in,” she said. More recently, she noted, there has been an influx of customers from troubled Argentina. With Miami Beach offering beautiful views, a temperate climate, a stable national political system (well, relative to other countries), and properties that seem to only appreciate in value, sea-level rise is not foremost among the considerations of today’s eight-figure buyer. In fact, when I asked Hertzberg how many of The Jills’ clients have even raised the subject, the answer was precise: one. And that client still proceeded with his purchase.
Which isn’t to say, Hertzberg hastened to add, that her customers are oblivious or delusional. “I don’t want to belittle my clients, because I think they’re very sophisticated, world-traveled, and well read,” she said. “What it is, I think, is that they have confidence that the city will figure it out.”
Zalewski, the condominium analyst, takes a more cynical view. “Rising sea levels are in the back of everyone’s minds, but it’s all about immediate gratification,” he said. “I would wager that less than 10 percent of these purchases are long-term investments. It’s more like ‘I will buy into that position, I will hold for three, five, seven years, and then I will exit that position.’ I like to say that in New York you trade stocks, in Chicago you trade commodities, and in South Florida you trade condos.”
It’s an index of Miami Beach’s ascendant cultural status that it now sits alongside New York, London, St. Barth’s, Portofino, and Aspen on the circuit of the International Set—as the site of a “third, fourth, or fifth home,” in Zalewski’s words, that will sit unoccupied for the better part of the year.
Money chasing money chasing status and money. $30 million, $33 million, $47 million for one condo, one home — there are other markets like these but not many. Yet these men and women aren't the only property owners in Miami Beach or mainland Miami. They're just the trend-setters.
So what happens?
So what happens when trend-setting money flies off in a swarm?
There was a horrible collapse in real estate prices in Florida in the mid 1920s, a presage of the 1929 collapse that caused the Great Depression. I'm not predicting the second — a new great depression — but the first, a price collapse in Miami Beach that will last generations, is certain. Even if the ripples of that fall encompass only the rest of south Florida, the crisis may look to the nation like a wake-up call. I hope.
(A version of this piece appeared at Down With Tyranny. GP article archive here.)
Gaius Publius 11/20/2015 07:30:00 AM