SOUTHEAST SNAPSHOT, DECEMBER 2007

Miami Office Market

After years of treading troubled financial waters resulting from the supply of commercial office space exceeding demand, Miami-Dade County landlords are now enjoying market conditions which have turned in their favor. Led by the urban submarkets of Downtown/Brickell Avenue, Coral Gables and Coconut Grove, office building tenants are finding that rental rates to renew leases or relocate have risen dramatically, in some cases by more than 50 percent during the last 24 to 36 months. Area landlord representatives point to steady, but not spectacular demand, primarily from local-area tenants that are growing organically and need expansion space, much of which already priced at a premium. Many landlords are simply running out of space to lease.

Vacancy rates in almost every submarket hover in or near single-digit territory, with few significant large blocks of space available. Full-service rental rates for Class A space in Miami now routinely exceed $40 per square foot, while transactions closed just a few short years ago were at rental rates in the range of $25 to $29 per square foot. In fact, asking rates have broached $50 per square foot for prime space in some local trophy assets with aggressive new owners.

Further compounding the problem has been the shrinking “for-lease” inventory with the conversion of a number of quality assets to office condominiums. Tenants not wishing to buy their now office-condo space are forced to relocate. At the same time, West Miami-Dade County, which is traditionally a value move for businesses, also has diminished supply, though recent absorption has slowed and overall rental rate growth has not been as pronounced. Those tenants that are poorly leveraged without credible alternatives in the marketplace are bearing the brunt of this new reality.

Those of us not old enough to remember the consequences of the last office market boom and bust cycle of the mid-1980’s need to only observe the present state of Miami’s residential condominium market to realize what could occur. There, an initial under-supply opened a window of opportunity for development; however, what ensued was rather overdevelopment that ultimately severely depressed pricing. The question is: will this trend repeat itself in the commercial sector?

In Miami’s central business district there are currently three Class A projects, Met 2, Brickell Financial Centre and 1450 Brickell Avenue, totaling almost 2 million square feet under construction in the Downtown and Brickell submarkets. This will add nearly 20 percent more space to Miami’s office inventory and almost 35 percent to the market’s Class A office stock. Projects are also slated for Coral Gables, West Dade and the Biscayne Boulevard corridor. Estimated delivery for the preponderance of these projects is late 2009/early 2010.

While there is undoubtedly pent-up demand, just how much is uncertain. Only time will tell. At first, we will most likely see a flight to quality as tenants that have spent 20 or so years in now obsolete office buildings elect to relocate to new more efficient state-of-the- art space. Rents will likely soften as landlords of these new buildings compete to attract tenants with generous concession packages and periods of rent abatement. Once the dust settles, we will have a better understanding if this large amount of new supply delivered in such a short timeframe will result in feverish competition that will drive rental rates down. If history repeats itself, the overbuilding will provide office users with new real estate opportunities.

The solution in the past has been steady population growth accompanied by job creation. The Sunshine State has historically experienced net population gains annually, with migration from both domestic locations and from abroad. Traditionally, the state’s relatively affordable cost of living coupled with its warm climate has fueled population growth.

But what about today?  The attributes that previously drew people to Florida have been overshadowed by high housing prices (which have recently softened), the state’s insurance woes, traffic congestion, and high property taxes, not to mention a long- challenged public school system. The United States Bureau of Labor Statistics shows the cost of living in Miami was up more than 9 percent in the last 2 years alone.

Keeping residents in Florida is a challenge as well. A migration to the Carolinas and Tennessee, states that are heralding an easier life, is a trend we have been seeing of late. Will this continue?  The financial success of hundreds of millions of dollars of office building investment is betting that it won’t. Indeed, like the residential condominium conundrum, the market will once again play itself out in Miami. This confluence of circumstances should swing the occupancy cost pendulum back squarely in the tenant’s favor in the near to mid term future.

— Robert G. Orban is senior vice president and co-branch manager with Studley’s South Florida office.

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