Maybe its the sun, spice and salsa that is heating up Miami's metropolis, but users of office space are continuing to follow their burning desire for this commercial real estate market. What's on the menu? For starters, an impressive trend over the last five years of declining vacancy and extremely strong absorption, all of which is being accompanied by rising rental rates. Between the third quarters of 1995 and 2000, Miami absorbed over 4.1 million square feet million square feet of space - a strong performance considering nearly 2.4 million square feet of new construction was added and successfully absorbed, according to data provided by RealData Information Systems, Inc. Much to the delight of landlords, rental rates during the same period increased at an annual average rate of 3.8 percent, rising to the current average of $22.97 per square foot.

Strengthening Market Conditions

A blending of economic indicators is maintaining this prosperity. Florida as a whole led the Southeast in payroll employment, single and multifamily permits and personal income, according to the Federal Reserve Bank of Atlanta's EconSouth. Miami's services sector - the largest user of office space - is both contributing to and benefiting from this growth. Contributing factors include the increasing presence of firms with ties to Latin America and the Caribbean, a strong investment environment, a growing telecom industry and on-going gains in its tourism base. The results are positioning the city with the stamina to retain and attract users of office space under extremely competitive market conditions. Within South Florida's three counties, Miami-Dade has the largest office market, accounting for over half of the region's total 56 million square feet of inventory and 40 percent or 1 million square feet of its third quarter 2000 annual absorption. The county not only houses the majority (11.1 million square feet) of the region's Class A office product but also recorded its highest rental rate increase during the last 12 months at 3.7 percent.

Consulting groups related to new media and the new economy are an emerging user of this space, particularly with the growing correlation between consulting and the Internet, information technology and telecom industries. Firms are increasingly attracted to Miami's vast network of phone, voice and data traffic situated just off its coastline. "We see tremendous growth in all of South Florida's infrastructure capabilities which will continue to make it a leading market for both established and start-up companies," said Baird Lobree, president and CEO of Auxis, Inc., a management and technology consulting firm headquartered in South Florida. "I have also witnessed tremendous growth in this real estate market and foresee this trend continuing, largely due to the combined effect of proximity to Latin America and the competitive advantage of having technology infrastructure, professional services, goods and labor all together in one spot."

Timing is Everything

For 2000, market timing and staggered delivery of new product has aided Miami's occupancy. With an overall availability rate of 8.7 percent, down 3.4 percent from one year ago, strong leasing and absorption are fueling intense construction activity. The largest amount of construction reported in any South Florida individual submarket was in Dade County's Airport West and Brickell sectors at 1.0 million square feet and 965,000 square feet, respectively. This represents 39 percent of the entire region's new product currently under construction. Despite Miami's 2.9 million square feet of office space reported as under construction, only 320,000 square feet of new space was added during third quarter 2000.

Long recognized as the gateway for businesses with interests in Latin America, Group Espirito Santo (Portugal's largest, privately held bank) will be constructing their U.S. headquarters along Brickell Avenue. Brickell's Class A office product is only second to New York City in concentration of international banks and financial institutions. Not new to the area, Group Espirito Santo has had a presence on Brickell for over a decade, at the same site where their new Class A Espirito Santo Plaza development will be opened in 2003. "Given our interests, investments and client base in both Latin America and Europe, Brickell was the location of choice for our headquarters and a natural outgrowth of our desire to effectively service this growing market," said Bill Ross, President of EuroAtlantic Development, Inc., the bank's development arm.

Telecom Fever

Emerging as the market leader is real estate's newest sector: telecommunications properties and users. Miami is positioned at the forefront of this wave of the future. The city was recently ranked by America's Network as one of the top three telecom hubs in the country and among the top five telecom hubs in the world. The amount of interest and activity within this sector has grown exponentially. Within two years, Miami has seen a five-fold increase in the supply of telecom buildings with a near 10-fold increase in absorption.

Fueling this trend are two Network Access Points (NAPs) which include the BellSouth Miami Information Exchange, a four node NAP with one located in the Airport West market and the NAP of Americas, which will be operational within 15 months in Downtown Miami. The prime attraction here is the access, particularly as a convenient base from which to route Internet traffic to and from Latin America and the rest of the world. According to America's Network, the creation of a NAP in Miami is only the sixth of its kind in the U.S. The growth within this industry began a couple of years ago with two "telco hotels"; now there are 11 properties that market to telecom users.

The newest and perhaps most sophisticated telecom real estate product in the market is the Lightspeed Centers - telecom parks providing state-of-the-art facilities with the special amenities needed by this new and important breed of tenant. Recently the recipient of South Florida's Real Estate Deal of the Year and Technology Deal of the Year awards, Lightspeed @ Beacon Tradeport, located in the Airport West submarket, has a projected build-out of 3.0 million square feet, making it potentially the largest telecommunications facility in the country.

The project's developer, Michael Swerdlow, was right on the mark in anticipating the next wave of demand for space. Previously, retrofitted buildings in the central business districts of major cities served as the center of the fiber optic backbone. However, Miami had no such significant inventory to retrofit. "By building from the ground up, we can offer users the perfect facility - extreme security in terms of power outages, temperature control and hurricane protection." Equally important is the prime amenity of shared technology where carriers can interconnect and provide each other with services. "The key to this segment of the commercial real estate market is to secure the right site and be able to offer this unique infrastructure - and then quickly land a trophy tenant," says Swerdlow. This gets the ball rolling and blesses the project, assuring other potential users that it is a good safe pick. Lightspeed @ Beacon Tradeport will soon welcome three of the top names in telecommunications with 640,000 square feet combined.

Southern Hospitality

With just over 10 million people expected to visit Miami during 2000 who had an anticipated $13 billion impact on the local economy, tourism is serious business. In fact, in Miami Beach, tourism is the biggest generator of jobs - 47 percent of the city's 60,000 employees work in the hotel/food/ beverage industries. Miami Beach also commands the most interest by investors and developers for lodging properties. The majority of Miami's hotel investment sale transactions during 2000 occurred along the prime beach areas, which generally extend from South Beach north to Sunny Isles. Compared to 1999, the total number of transactions are actually down. Scott Stephens of Insignia/ESG's Hotel Partners notes, "The financial market tightening can be attributed to the current availability of this product and perceived risk of overbuilding. This has resulted in difficulty in getting debt for this investment sector." However, the roster of new hotels lined up for Miami's skyline would point to the other direction. At least seven new ultra luxury developments are slated for both suburban and CBD sectors and include building from the ground up as well as rehabbing of existing product.

From a rate structure, the highest sale prices have occurred in the South Beach market. To date, market conditions in the overall Miami Beach sector indicate moderate growth with increasing average room rates. The area attained an aggregate occupancy level of 67.4 percent in 2000, up slightly from 1999's 66.4 percent while room rates averaged $128.84 in November 2000, representing a significant increase from the previous year's average of $121.54. "While our tourism industry maintains its yearly increases, and the local economy is anticipated to remain strong, the ultra-luxury hotel market is somewhat untested in Miami," added Stephens.

William H. Holly is a managing director and member of Insignia/ESG's national Technology Practice Group. Derek Pinto of Insignia/ESG's Hotel Partners and John B. Cordrey, Ph.D., of The Beacon Council also contributed to this article.


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