Perkins

Economic indicators during the year have been uneven and often conflicting, as are some of the more recent indicators for the Miami office market. The Federal Reserve Bank of Atlanta reports that labor statistics showed continued employment declines through the first half of 2003. The Fed notes, however, that there is considerable regional variation in labor market conditions, namely in Florida, where the economy was not only able to “eke out net employment growth even during the recession” but whose economic performance has outpaced most other areas of the country (EconSouth, Third Quarter 2003). Miami has both contributed to and benefited from this trend. The Beacon Council reports that the city’s economy is growing at a modest pace with the professional and business sectors — the largest users of office space — experiencing the greatest job growth.

While vacancy rates have declined since year-end, tenants are not yet expanding at any kind of acceptable rate for landlords, nor are businesses totally convinced in the line of optimistic hiring or even relocating. As such, the importance of renewing tenants cannot be underestimated — in a continuation of mid-year trends, renewing tenants have provided the majority of leasing activity, which has kept Miami relatively buoyant. Miami’s vacancy for the year is estimated at 15.6 percent — below the 18 percent rate estimated for the U.S. By 2006, vacancy in Miami is expected to decline by at least one percentage point to 14.5 percent, while a rate of 15.6 percent is forecast for the U.S. during the same period.

An analysis of market conditions points to Miami’s central business district (CBD) “hitting” the bottom of the availability cycle. While unannounced sublet spaces are anticipated over the next 12 months, huge sublease spaces vacated by failed banks have likely reached their peak. Recovery in the Brickell and Downtown Miami office sectors that comprise the CBD, however, is not as close as hoped for. Downsizing remains a factor for nearly every tenant industry in the CBD, with the exception of law firms. On the supply side, two new buildings (on Brickell) to be delivered at year’s end will result in a 7.5 percent increase in the CBD’s Class A inventory. Vacancy among competitive trophy towers, however, is expected to remain at or near current levels — estimated at 15 percent. Rental rates are not anticipated to grow over the next 24 months.

Some parallel trends can also be found in the suburban sectors of the market. Occupancy in Miami Airport and Coral Gables has trended upward, but competitive pricing pressure from new and sublet availabilities remains at large. A few of the strongest believers in suburban market recovery, however, now include some of the most conservative and cautious institutional and REIT investors. TIAA-CREF, one of South Florida’s largest owners of real estate, is preparing for a 2005 opening of an unanchored, 250,000-square-foot Class A tower — to be the 11th in its 2.3 million-square-foot Waterford Park. Texas-based REIT Crescent Real Estate Equities Company recently expanded its Miami portfolio with the purchase of the landmark, 210,000-square-foot BAC-Colonnade office tower.

Positive job growth statistics were posted at the end of the third quarter for Florida and South Florida. The state reached its 19th month of job growth while the U.S. Small Business Administration said it created nearly “10,500 jobs in South Florida over the last fiscal year.” This bodes well for Miami as small businesses dominate its economy. In another noteworthy trend, Miami experienced the largest population increase since 1980, according to new Bureau of Labor Census estimates. To date, population growth in Downtown Miami has already exceeded the low-end projections for the year 2020. The amount of residential development planned and currently underway in and surrounding the city’s CBD will deliver a considerably increased population base — who will hopefully want to work closer to their homes.

— Jay Perkins, Jones Lang LaSalle

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