Cover Story: South Florida office market heats up with new development
Posted on 10/19/2017After five years of near stagnation, the South Florida office market is finally showing signs it's rebounding, with several new office buildings opening this year and others in the works.
Growing rents and dwindling office space are fueling construction. Millions of square feet are proposed, mostly in hot submarkets that have drawn multiple projects.
It's not exactly an office boom, but it's a plethora of activity compared to the flatlining of office construction that followed the Great Recession.
"Over the last 10 years, we haven't seen [enough] new office demand for us to be in a position to build new office," Stiles Corp. President Scott MacLaren said. "Now we have seen supply and demand move to a point that demands [building]."
The growth couldn't come at a better time, as local companies look for more options to expand, and the new technologically advanced office spaces could help lure new companies to the region.
Construction firms could also use a shot in the arm from these office projects, as residential development has slowed.
Through the first eight months of 2017, residential construction starts in South Florida dipped 29 percent to $3.43 billion, mostly because of a slowdown in the condo market, according to Dodge Data & Analytics. Nonresidential construction starts, which include multiple types of commercial real estate, were up 36 percent to $3.8 billion.
Office values rise
Office rents are up because, with so little new construction for a long time, vacant space has declined, said David Wigoda, senior VP with CBRE's Capital Markets group. That gives landlords more leverage.
Over the past three years, many trophy office buildings in South Florida have traded for record prices — a combined $5.08 billion in deals since 2015, according to CBRE. When investors acquire a building, they typically increase rents to justify their purchase price, Wigoda said.
"South Florida has elevated itself to such a global city that our trophy 'Class A' one-of-a-kind buildings will continue to trade for these record-high prices," he said.
The annual net absorption of office space has been steady, not spectacular, yet the higher rents in certain submarkets have made new development attractive, said Tere Blanca, president and CEO of Blanca Commercial Real Estate. She noted that South Florida has recorded consistent job growth in the financial and professional sectors that inhabit office buildings.
"All the metrics show it is the right time to deliver new product that is well-designed and differentiated from other buildings," Blanca said. "If we don't have new buildings, how can we attract companies here?"
South Florida had 1.08 million square feet of office space under construction in the second quarter, according to CBRE. Some of those buildings are opening soon.
In downtown Miami, All Aboard Florida is close to receiving a temporary certificate of occupancy on the 96,000-square-foot Three MiamiCentral, and the 196,000-square-foot Two MiamiCentral is already topped off, Blanca said. The buildings are part of the development around the Brightline passenger rail station that will include apartments, retail and restaurants. Blanca said the two offices are 55 to 60 percent leased.
The lure of working near public transportation and a food hall were big selling points, Blanca said.
With a view of Miami International Airport, the 250,000-square-foot 800 Waterford office building opened this summer and is 25 percent leased, said Brad Simpkins, senior director of Southeast investments at TH Real Estate, which developed the building with Allianz Real Estate of America. They already own most of the Waterford office park, so the developers knew tenants wanted to expand.
Simpkins said 800 Waterford is on pace to be fully stabilized, with enough occupancy to support positive cash flow, within 12 months of opening.
Preleasing has been slower in Palm Beach Gardens, where the speculative 63,500-square-foot Gardens Innovation Center was recently completed. Broker Neil Merin, chairman of NAI/Merin Hunter Codman, said the building has no leases, but now that companies can tour the finished space, he's seen more interest.
"Unless people can see something, they won't lease it," Merin said.
Merin's client self-funded Gardens Innovation Center without waiting for preleases, but many developers aren't willing to put so much of their money on the line, and prefer to combine equity with a construction loan. If a developer can't obtain a solid percentage of preleases, obtaining construction financing is nearly impossible.
Andrew Easton, VP of Easton Group, said his firm is seeking to prelease about half of the 160,000-square-foot office building it has the rights to construct at Northwest 102nd Avenue and Northwest 19th Street in Doral before moving forward. After about a year of looking, still no deals.
"There are not a lot of 80,000-square-foot tenants in South Florida," Easton said. "The average tenant is 3,500 to 5,000 square feet. That's why this is still a piece of dirt."
Competition could help tenants
The office development is coming at a time when many tenants up for lease renewal are facing significantly higher rents.
During the bottom of the market in 2012, landlords were cutting favorable deals for tenants to keep space occupied, but many of those leases are expiring, and those same tenants will face "sticker shock" as their rates increase by double digits, Merin said. Many tenants will seek ways to save on costs, such as having a more efficient layout to reduce the size of their leased space.
Goodman said it's very expensive for tenants to relocate their offices because of buildout costs, so that might prevent them from leaving. In order to lure new tenants, office developers would have to offer generous tenant improvements budgets, and existing buildings might do the same to retain tenants, he said.
"The competition is always good," Wigoda said. "When new buildings enter a market, if a landlord doesn't want to lose tenants, it will have to reinvest in its buildings."
Hot spots for office
Certain submarkets have attracted major office proposals, and some of them have already broken ground. Here's a look at the hottest areas:
Coconut Grove: The 78,000-square-foot Mary Street office building and a 44,000-square-foot office at 3484 Main Highway have already broken ground. Approvals were obtained for 73,000 square feet at One CocoWalk and 68,000 square feet in 27@Lincoln.
Tom Roth, a partner with Grass River Partners, which co-owns CocoWalk, said a new office there would create more daytime traffic for shops and restaurants. With vacancy rates of near 1 percent for Class A office space in Coconut Grove, Roth expects to generate strong rents.
The One CocoWalk office should start construction in the first quarter of 2018 and be completed in mid-2019. Roth said he's in serious negotiations with four large tenants that would mostly fill up the building.
"If you add up the four buildings [proposed in the neighborhood], it's not even close to the size of one building on Brickell," Roth said.
Terra Group President David Martin, who is also building several condos in Coconut Grove, said his Mary Street office building will allow residents to work close to home. His project is 40 to 50 percent leased.
Downtown Miami: Global developer Hines struck a deal with Miami Worldcenter to build a 45-story office tower, which would be the largest office tower completed downtown since 2010.
Michael Harrison, senior managing director with Hines, said the building would have 500,000 to 600,000 square feet of office, with retail on the ground floor and maybe a multifamily component. It would break ground around the third quarter of 2018 and open in 2021.
Hines selected the Miami Worldcenter site because it had great access to both highway and public transportation, proximity to museums and entertainment venues, and a complement of homes, retail and restaurants, Harrison said.
So far, Harrison said he's received requests for proposals for tenants of 50,000, 75,000 and 120,000 square feet.
Wynwood: Construction started on Wynwood Annex, with 47,000 square feet of office, while approvals were obtained for 79,548 square feet at
Cube Wynwood, 26,600 square feet at W House, and 23,618 square feet at DS Wynwood. The Gateway office building, between Wynwood and Midtown, would total 200,000 square feet.
Matthew W. Goodman, a managing director with JLL who specializes in tenant representation, said the new projects in Wynwood are asking for rates comparable to the most expensive buildings in downtown Miami — over $50 a square foot. Tenants are taking a wait-and-see attitude on Wynwood because it's a new market for Class A office, he said.
"They have to attract tenants that don't typically work in that area," Goodman said.
Coral Gables: The 49,379-square-foot 2020 Salzedo office was recently completed, and 57,700 square feet of office at Giralda Place is nearly done. The big impact could come from the Plaza at Coral Gables, which is seeking a redesign of the mixed-use project with 474,000 square feet of office.
Blanca, who represents Plaza developer Agave Ponce, said she's not actively leasing for it now, but the 8 percent vacancy rate for Coral Gables and the rents of over $41 a square foot make her confident in the project.
Fort Lauderdale: Stiles Corp. received approval to build 355,000 square feet of office at 225 E. Las Olas Blvd. on a site leased from Broward College — the city's first major new office building in nearly 10 years.
MacLaren said about 500,000 square feet of space has been filled in downtown Fort Lauderdale over the past five years. The rents of $50 a square foot are enough to financially justify development, and an influx of thousands of residential units in downtown has better positioned the area to attract a good workforce, he said.
MacLaren is confident Stiles can sign enough preleases to build in early 2018.
Comreal Fort Lauderdale broker Tim Talbot is concerned that new development could take tenants from existing buildings and leave large vacancies. The trend he's seen is downsizing by local tenants, including several major law firms.
"A new building would lead to higher vacancies and might bring the values down," Talbot said.
West Palm Beach: Approvals have been granted to mixed-use projects with office space of 200,000 square feet for One West Palm, 308,000 square feet for Transit Village and 121,000 square feet at the Cosmopolitan.
Billionaire Jeff Greene said he would personally fund One West Palm. The two 30-story towers, which would also have apartments, a hotel and a health club, are waiting on height approval from the FAA.
Greene said he hasn't started leasing yet because West Palm Beach isn't a preleasing market.
"Filling 200,000 square feet shouldn't be that hard," Greene said. "We are competing with a bunch of old buildings, most from the 1980s. The only new one is CityPlace tower, and it's only 15 stories tall and it's fully leased."
Not everyone thinks conditions are ripe for a new office tower in the city. Most tenants aren't ready to pay the high rents needed to justify a new office building in downtown West Palm Beach, Merin said.