Little Boxes

Miami’s waterfront single home properties have become synonymous with modern, and often boxy new construction. While it may seem that these homes are the sole product of design trends - the reality behind their prevalence is a bit more complex.

401 E Rivo Alto Drive, Miami Beach, FL. C/O luxury-home.net

Why?

As the desirability of Miami grew during the pandemic due to lax Covid restrictions and the lack of City and State income tax, homeowners have faced other financial burdens via heightened overhead costs to maintain their homes. Amongst the most prevalent of these costs are soaring property taxes and insurance premiums (at times, insurance premiums in Miami can be 4x the national average - and even higher for waterfront properties).

Despite heightened premiums, the biggest challenge for homeowners is often surrounding the procurement of coverage itself. In a move to manage risk exposure, many major insurers such as State Farm, Allstate, and Liberty Mutual have elected to put a stop to writing new policies in the South Florida market. While many insurance providers cite heightened risk associated with the prevalence of hurricanes and increasingly expensive rebuild costs, another huge factor in their decision was the prevalence frivolous or fraudulent lawsuits in the South Florida market, with a lack of proper regulation on the insurance industry apparent in the state.

Citizens

With this drastic change in the state’s insurance landscape, many homebuyers have been forced to turn to Citizens for coverage. Citizens, created by the Florida Legislature in August 2002 as a not-for-profit, tax-exempt government entity, provides property insurance to Florida homeowners unable to find private market coverage. However, with so many homeowners relying on Citizens, concerns have been raised about its solvency and ability to pay claims in the event of a large-scale natural disaster. In fact, the board of Citizens has acknowledged that the premiums it currently charges are insufficient to cover the level of risk it has taken on. If one or more major hurricanes were to strike South Florida’s Atlantic Coast, it could deplete Citizens’ reserves and lead to emergency assessments not only on its policyholders but also on other insurance customers across the state. According to the Insurance Information Institute (III), this could result in an additional 45% charge for current Citizens policyholders. Even those without Citizens policies could face a 2% assessment on all their insurance premiums, including home and auto, if the financial impact is severe enough.

In addition to concerns about Citizens' solvency, the insurer is only able to cover homes with a replacement cost (building value) of $1 million or less, which excludes many luxury properties. If a home cannot be insured through the private market, its replacement cost exceeds $1 million, and the seller of a home is not willing to finance the buyer, the sale of the home would be impossible. With this in mind, a significant portion of would-be buyers would be exed out of the equation - rendering the home only purchasable by cash.

Satellite Image of Hurricane Andrew, 1992. C/o Miami Condo Investments

Resale

So, how does this connect to the surge in newly constructed, modern homes in Miami's luxury market? Newer buildings, due to updated construction standards and architectural advancements, are often viewed by insurance providers as better able to withstand natural disasters such as high winds and flooding. In contrast, older homes—typically featuring more diverse architectural styles—are often considered high-risk by insurers, making it difficult to obtain coverage. Even though many older homes have withstood severe storms, such as Hurricane Andrew in 1992, they are still seen as less secure investments by insurance companies compared to newer constructions.

From an investor’s perspective, a cash buyer is always preferred. However, when buyers seeking financing are unable to purchase due to insurance limitations, sellers are forced to miss potential sales opportunities. To mitigate this risk, many investors choose to buy older properties, tear them down, and build modern homes instead of gut-renovating. This approach not only expands the potential buyer pool but also results in lower insurance premiums for the new structure. Additionally, for primary homeowners, newly constructed buildings typically carry lighter insurance premiums, making reconstruction a more cost-effective option than gut renovation on an older home.