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Is The Sky The Limit?

Fueled by a hot economy, high demand, and rising construction costs, the island’s real estate values in Puerto Rico have increased an average 10% annually, with some areas increasing 100%…and more. Where do we go from here?


August 31, 2000
Copyright © 2000 CARIBBEAN BUSINESS. All Rights Reserved.

No room to grow

Land is running out and demand for residential, commercial, and industrial real estate is at an all-time high–driving real estate values and prices into the stratosphere

During the last decade Puerto Rico real estate values have increased an average of 10% a year–with some areas increasing 100% or more. And there’s no indication this trend will end anytime soon.

Fueled by a robust economy, high demand, and rising construction costs due to scarcity of land, real estate values have increased to levels never before seen in Puerto Rico.

Although more evident in the densely populated metro area and its surrounding communities, the increase in real estate values has affected all areas in all markets–residential, commercial, and industrial:

  • A residence in Guaynabo’s Garden Hills sold for $28,000 in 1950, was worth $45,000 in 1964 and $310,000 in 1988. Today, that house could sell for more than $600,000.
  • Rent for prime office space in Hato Rey during the last four years has run at around $17 per square foot (psf). In the last year, what little office space that has become available is renting for rates ranging from $24 to more than $30 psf.
  • During the early 1980s, lots in Guaynabo’s Amelia Industrial Park were valued at $45 per square meter (psm). Two years ago it was at $100 psm, with one or two lots left. The same land now goes for $200 psm and up.

Land values in Ponce and Mayaguez also show substantial increase–something unheard of four years ago, according to industry sources.

According to industry experts, there are three main factors for the high demand of real estate in Puerto Rico and its consequent increase in value: a strong economy, affordable financing, and population growth.

Puerto Rico’s strong economy

The island’s economy has been strong in the last years, creating a propitious environment for construction projects.

The strong economy has not only allowed renters to become homeowners, but homeowners to purchase a second home–whether as a tax shelter or as an investment.

"The economic bonanza we have been experiencing is reflected in the number of primary and second-homes being developed in the areas of Dorado and Fajardo," said appraiser Gonzalo Ferrer. "These second homes sell for $500,000 and higher, while some primary homes in these areas surpass $1 million. And they are selling like hotcakes."

"When the economy is doing well, people have more disposable income, which explains the demand for expensive second homes in areas like Rio Grande, Dorado and Palmas del Mar in Humacao," agreed appraiser Rafael Bonnin of Robert McCloskey and Associates.

Historically, real estate in Puerto Rico has been used as an investment and savings tool. Due to its increase in value, purchase of real estate competes favorably against other forms of investment such as stocks and bonds.

Affordable financing

Interest rates have remained in the single digits, helping the real estate market remain strong.

In spite of the Federal Reserve’s six consecutive interest rate hikes since June 1999, financing has remained attractive and affordable. Farmer’s Home Administration (FHA) loans are running at 7.5%, while conventional 30-year loans are between 8% and 8.5%.

"When interest rates go up, the real estate market is affected, no question about it," stated Zoila Levis, new housing and commercial development president of Doral Financial Corp. "But recent interest rate hikes have not been significant enough to slow down the market or its increase in value. Today’s interest rates are still very attractive."

Population growth

U.S. Census Bureau 1999 population estimates for Puerto Rico showed a 10.4% growth between 1990 and 1999, when it reached 3.9 million–an increase of 323,544 residents. The 2000 Census is expected to place the island’s current population at about 4 million.

The greatest population gains were made in the municipalities of Juncos (42%), Canovanas (41%), Cidra (40.5%), and Toa Alta (40%).

Areas such as Aguas Buenas, Barceloneta, Cabo Rojo, Guayanilla, Hatillo, Morovis, Orocovis, and Trujillo Alto also experienced a significant population growth–as people tried to shorten commuting time.

In contrast, San Juan’s population remained flat, posting a 0.4% growth–indicating that people are relocating to more affordable, yet still accessible areas such as Toa Alta, Caguas, Gurabo, and Canovanas. Real estate values in San Juan remain high, especially in prime areas.

"During the 1950s, land in Condado sold for $7.00 psm and climbed to $200 psm during the 1980s. It now sells at $1,000 psm," said appraiser Robert McCloskey, president of Robert McCloskey and Associates.

The metro area expands

Infrastructure improvements have allowed developers to build past the boundaries of the metro area, branching out via three main corridors–Dorado and Arecibo to the west on PR-22, Gurabo and Juncos to the south on PR-30, Canovanas and Cidra to the east on PR-3.

These areas have experienced significant population growth in the past 10 years (See chart). They have also seen growth in the number of homes and commercial establishments as well.

"Highways out of the metro area are quickly followed by development–first residential, then commercial," said Bonnin. "This was the case for

PR-22 and PR-30, and was expected for PR-66 to the east."

Real estate values around these corridors will continue to increase, as land for development in and around the metro area either can’t be found or is too expensive to develop.

"In the 1970s, land around Dorado Beach and Cerromar was sold at $2.50 psm. Today, it’s worth $50 psm," said Ferrer.

Cost of construction up

"For a project to be profitable, developers must increase prices when costs increase," said appraiser Guillermo Mulet, also of Robert McCloskey and Associates. "Project viability is determined by how markets absorb costs. So far, the local market has absorbed higher costs due to high demand."

Rising construction costs have directly affected real estate prices. And construction costs are at an all-time high, in part, due to large infrastructure projects such as the Urban Train and the NorthCoast Superaqueduct.

These large infrastructure projects–aimed to meet the island’s growing needs–have caused a shortage of available skilled workers, resulting in increased construction costs.

But construction costs are only part of the equation. Project viability can get out of hand from the high cost of land, especially in areas like Condado and Hato Rey. In Condado, constructing very upscale projects priced at $500,000 to $1 million per unit is probably the only way developers can profit.

Running out of space

"One limitation living on a small island presents is running out of space," said Ferrer, a 30-year real estate appraisal veteran. "The less space available, the greater its value, and the higher its cost."

As a consequence, new metro-area residential construction is largely comprised of walk-up units, while single-family homes are being built along corridors branching out of San Juan–where land is still available.

"What we are seeing in the metro area is an intensification of the residential use–more walk ups, more multistory buildings–because there is no more land available to build large subdivisions," said Ferrer.

That is already happening in Caguas according to Ferrer, where possibly the last subdivisions in the area are being built. And values are going up.

"In Caguas, most of the land that could be used for urban development has been exhausted. All that is left is the mountains," said Ferrer.

In Ferrer’s opinion, Caguas is the island’s most important urban center after San Juan. He estimates the 2000 Census will show Caguas to be more populated than Ponce. Due to its close proximity to San Juan, values in Caguas and surrounding areas should continue to increase, Ferrer said.

Another high-demand area showing consistent increase in value is Guaynabo. Average price for a middle-income, single-family home there in the late 1980s was in the $100,000s. Now, it is in the $250,000 range.

"Guaynabo has always been exclusive. The first upscale subdivisions were built there," said Appraisers Institute of Puerto Rico President Jose A. Orta Carmona. "Since then, it has continued to gain prestige, having good facilities, services, and location."

Although some contend there is still vacant and unused agricultural land available for development along the coast, the fact is that most of that land is prone to flooding.

"In Puerto Rico there’s a lot of agricultural land that is not going to increase in value because it is flood-prone and can’t be developed," said Ferrer. "That land will remain agricultural and will have a minimal increase in value."

One example of such land lies between Carolina and Rio Grande.

"That land is subject to flooding–rated zone 1–so you can’t do anything there," stated Ferrer. "That’s why urban expansion toward the east stops at the Loiza River."

Other flood-prone areas in Puerto Rico are Puerto Nuevo, Humacao, Naguabo, and Dorado near La Plata River, according to Ferrer. One option is channeling rivers, but the cost of this is prohibitive, Ferrer noted.

Value of construction permits up

While strong demand has pushed real estate values up, help is on the way.

Experts anticipate real estate prices will level off once the onslaught of construction projects in the pipeline is completed and on the market.

How much is there in the pipeline? According to the Puerto Rico Planning Board, the total value of private construction permits–the value of future construction approved for development–for fiscal year (FY) 2000 reached an unprecedented $1.7 billion, a remarkable $507.9 million or 42.6% increase over the previous year.

The value of private residential construction in FY 2000 experienced an increase of $256.9 million or 41.1% over the previous year, for a total of $881.9 million.

Meanwhile, the value of private commercial construction (office and commercial space) in FY 2000 was $251 million–a $102.6 million or 100.5% increase over the previous year.

And the value of private industrial construction (manufacturing, warehousing, distribution) for FY 2000 reached $95.2 million, a $42.8 million or 81.7% increase over the previous year.

But the number of projects in the pipeline (see chart) could slow down the increase in values experienced by the market so far. An increase in supply could have a stabilizing effect on market values–and that could be the case for the office and commercial real estate markets.


1999 U.S. Census Population estimates for Puerto Rico

Municipality July 1, 1999 Estimate April 1, 1990 Census % Change 1990-1999
Juncos 43,591 30,612 42.4%
Canovanas 51,925 36,816 41.0
Cidra 50,019 35,601 40.5
Toa Alta 61,579 44,101 39.6
Morovis 34,014 25,288 34.5
Guayanilla 28,538 21,581 32.2
Barceloneta 27,524 20,947 31.4
Trujillo Alto 78,442 61,120 28.3
Cabo Rojo 49,368 38,521 28.2
Hatillo 40,897 32,703 25.1
Orocovis 25,155 21,158 18.9
Rincon 14,317 12,213 17.2
Dorado 35,104 30,759 14.1
Guaynabo 104,936 92,886 13.0
Aguadilla 67,050 59,335 13.0
Rio Grande 24,917 22,843 9.1
Caguas 145,193 133,447 8.8
Ponce 193,640 187,749 3.1
San Juan 439,604 437,745 0.4
Mayaguez 100,463 100,371 0.1
Source: U.S. Census Bureau


1999 average sale prices — new construction (in thousands)

Area Apartments Homes Villas
Bayamon $115,000 $152,000
Caguas $96,000 $204,000
Carolina $104,000 $204,000
Dorado $180,000 $390,000 $413,000
Fajardo $115,000 $150,000
Guaynabo $190,000 $258,000
Humacao $323,000 $233,000 $400,000
Rio Piedras $128,000 n/a
San Juan $308,000 $243,000
Trujillo Alto $114,000 $275,000
Source: Puerto Rico Planning Board

This Caribbean Business article appears courtesy of Casiano Communications.
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