How is the real estate market in Puerto Rico?
That is the most frequently asked question I receive from friends, colleagues and clients. In the past several months, domestic and international factors have created turmoil in financial markets leading to significant changes in real estate.
During this time, real estate prices have been on a decline across the U.S. High interest rates and a looming economic recession have triggered price cuts in most areas. However, welcome to Puerto Rico’s real estate market… although our local economy and stateside follow a similar correlation, extrapolating market analysis for real estate is not “one size fits all”. For instance, Act 22 decree requirements, low supply of luxury inventory, and construction costs all play a part in the current real estate market on the island..
For years, most luxury real estate market transactions on the island have been predominantly cash sales. Due to this pattern, I do not believe high interest rates will deter most buyers in an atypical market such as Dorado. Until developers catch up with demand, the options for new buyers are limited.
The question remains: How is the luxury real estate market in Dorado? Well, for one thing, it is very segmented. If we take a look at the sales in Dorado Beach East and Sabanera, the price per square foot has remained relatively constant. Is there a market crash? Not really, what has indeed changed significantly are aspirational prices. At one moment, there were around 30 homes priced at +$10M, but during the last months, we have seen many drop their prices to +$7M. Did the market really collapse 30% plus? I would suggest that most of those homes should have not been priced at those levels to begin with; had they been priced more accordingly, chances are they would have sold.
The other constant in the market is buyers willing to pay a premium for turnkey homes. Let us review some recent DBE sales: DBE Golfer #122 brought in a record sale of $6M, while in contrast, similar DBE Golfer #147 sold for only $4.1M. Why such a remarkable difference? The answer is very simple: the first was a turnkey spec home, while the latter was not. Disruption in the supply chain and a shortage in the labor force have made construction in Puerto Rico a challenge, causing exorbitant premiums for new or remodeled properties. As a homeowner looking to maximize your sale, it is essential to upgrade your property as buyers are not willing to pay for unrealized potential. Time and time again, we see outdated houses at turnkey pricing; that is an uphill battle and most probably keep adjusting downwards.
Have we entered into a buyers market? I think it is safe to say that buyers now have more leverage, but do not expect a firesale (especially on turnkey homes). As long as the demand for a rental market remains strong, homeowners have the option to generate revenue and withdraw property from sales inventory, causing fewer options for home buyers.
It appears that with all the uncertainty in the U.S. economy, some buyers will be more hesitant to pull the trigger. Nevertheless, decree requirements to purchase a home within two years of moving means that you are on the clock. This is not financial advice; there is enough data and resources available for both sellers and buyers to make educated decisions. The “Bears/Buyers’ ‘ will probably keep delaying their decision to buy as long as possible. Many sellers are only in the market because of the significant profit potential, and as that gap closes, some will opt to remove their homes from the marketplace.
All things considered, the current demand for luxury properties in Puerto Rico outweighs the current supply available. Until this trend changes, current pricing (based on comps) should remain relatively stable in the near future.