12/01/08

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Can Panama City avoid a building bust?

Jose Manuel Bern of Empresas Bern, one of Panama City's busiest developers.

At the recent opening of a sales center in Panama City, dozens of real estate professionals drank wine and cocktails and gushed over the model for the Plaza Costa del Este, a towering new luxury hotel/condo scheduled to be completed along the city's waterfront in 2010.

Despite the drumbeat of grim real estate news from elsewhere in the world, visitors at the launch party insisted that the real estate situation in Panama City, home to just over a million residents, was different — and that the city's construction boom was built on a bedrock of solid fundamentals, including an economy growing at about 7 percent a year, an influx of companies opening outposts and a wave of retired and semi-retired American homebuyers.

According to Emporis, a firm that tracks construction, Panama City is presently undergoing the biggest skyscraper building boom in the world outside of the Persian Gulf and China. The city is emerging as an important banking hub and a magnet for foreign second-home buyers.

While only about 1,500 condo units have come online in the last several years, a whopping 50,000 units are being marketed and about 10,000 units are presently under construction. Some 70 towers are presently under construction.

Prices for new apartments in Panama City have rocketed upwards, from about $110 per square foot in 2005 to between $400 and $450 per square foot this year. Some units along Balboa Avenue and Punta Pacifica, streets abutting the ocean, can command prices above $500 per square foot.

Despite the signs of speculation, local real estate people insist that Panama City's boom is unlike the showy boom, and even more spectacular bust, of condos in south Florida.

"Miami had so much available that the market turned, and there were too many keys on the street. I think the boom in Panama is sustainable, and I'm not being optimistic; I'm being realistic," said Jose Manuel Bern, the sales manager and heir apparent to Empresas Bern, a Panamanian company with about 1,200 units under construction.

Yet not all observers are so optimistic. Many find strong parallels with yesterday's giddy exuberance of Miami.

"Panama City is a market that's entirely driven by speculation, so we're telling our clients to wait on the sidelines until the first units come online and prices start to come down," said Paul McBride, CEO of Prima Panama, a real estate marketing firm. "There isn't enough market growth to justify the present level of growth."

One way to gauge a market's health is by the number of speculative buyers placing deposits on units. Optimists, like Bern, say only about 15 percent of the units sold are bought by speculators. Others, like McBride, place the number around 30 to 40 percent.

Still, real estate professionals seem undaunted by troubles in the global economy. Many developers continue to pitch new projects, sometimes taking their sales pitches on the road to places like New York and Toronto, where Panama is pitched as a kind of politically stable and financially affordable tropical paradise.

"Many North American retirees quickly realize upon coming to Panama that they can live like a king here on their otherwise medium-scale budgets. This is true of many other places in the world, but in Panama, retirees find American-style infrastructure, services and a growing community to integrate into," said Jacob Ehrler, a former Corcoran sales associate who now lives in Panama.

Yet increasingly, people are expressing doubts that Panama City's real estate bull market can continue.

"Panama may be in for a rude surprise. Unless a wave of foreigners arrive to soak up the growing supply of new apartment and office blocks, there is going to be a major correction in the Panamanian housing market," said Walter Molano, head of research at BCP securities, a Greenwich, Conn.-based investment bank with ties to Latin America.

"Right now, this is a market that is feeding on itself. We're at the point in Panama City where even the taxi drivers are promoting real estate projects," said McBride.

For their part, developers are counting on more than large numbers of elderly North Americans to sustain Panama City's boom. The planned expansion of the Panama Canal as well as new branch offices of multinationals are expected to boost demand.

"Panama is the story of the little country that could…it is a small boutique country that has a lot to offer," Bern said. "I don't have enough product available to keep up. When someone comes in and needs a place immediately, I don't know if I can have it ready."

Andrew O'Reilly is a freelance reporter based in Panama City.