Don’t expect to see office projects rising en masse on the South Florida skyline this year.
Lenders have little appetite for that sector now that residential projects are selling at a record pace and multifamily units across the region are trading at prices 14 percent to 27 percent above 2012 levels.
The big money’s betting on large mixed-used projects shored up by hundreds of residences, ensuring that investors like Tibor Hollo can command $340 million to finance Panorama Tower, a Brickell Avenue apartment house touted as the tallest residential building on the eastern seaboard south of New York.
But new office developments might soon be in play.
In Sunny Isles Beach, Gil Dezer, one of the region’s biggest developers, is biding his time on a half-acre lot between Collins Avenue and Atlantic Boulevard across the street from the Trump International Beach Resort.
For Dezer, it’s a question of timing and location.
If it were a waterfront site, there would be no question in this market of its best use as a residential site. But the land at 18080 Collins Ave. is not on the water, which leaves Dezer flirting with the idea of using cash for an office tower to replace the Alamo car rental currently in place. The question is how to justify the move for a property that likely won’t attract large national tenants.
“The deal must make sense,” Dezer said. “We’re here for the long haul. We’re not going anywhere. If it’s not today, it can be done some other time.”
Penciling Out Projects
What makes sense now are residential projects, especially multifamily developments.
In Miami, the average apartment sale price rose 27 percent since 2012, while Fort Lauderdale and West Palm Beach saw 13 percent and 14 percent spikes, respectively, according to Marcus & Millichap’s 2015 national apartment report.
Rising demand for multifamily sites pushed up land prices, edging out developers even as office vacancy tightened and rents rose across South Florida. In Fort Lauderdale, for instance, multifamily developers plan to bring 4,000 apartments to market in 2015. Office builders will deliver 120,000 square feet this year compared with 405,000 square feet last year.
With limited new options, Marcus & Millichap analysts expect average office rents in Fort Lauderdale to rise 3.2 percent to $24.74 per square foot in 2015, building on the previous year’s 5.3 percent increase. Vacancy should slide about 110 basis points to 15.4 percent as tenants account for an additional 1 million square feet by December, according to a brokerage analysis.
But even with the positive indicators, fewer new offices will come online this year.
In 2014, developers created 405,000 square feet of office space in the submarket. This year, that number will plunge about 70 percent to 120,000 square feet.
The office construction pipeline also shrunk in Miami-Dade County, where developers are on track to deliver 400,000 square feet, a fraction of the combined 2.7 million square feet built in the last five years.
“It’s a stark contrast, but rents are going up so high that developers are starting to pencil out office development,” said CBRE Inc. senior vice president Diana Parker. “Will they get there by the end of this year? Probably not. But in 2016, a developer will have to pull the trigger to meet that demand in 2018.”
Last To Rebound
While office has taken a back seat to residential products, it seems poised for a resurgence as employment rates rise and businesses gravitate to residential and retail hubs.
“The change in the last six months has been significant,” said Michael Erickson, senior vice president in CBRE Inc.’s Boca Raton brokerage.
Base rent on Class A space moved from $20 to $25 per square foot for triple-net leases in that market over the last three to four months and are trending toward a $30 high as large financial services providers, law firms and other businesses move into premium offices.
“We’re on our way,” Erickson said. “The rental rates we’re going to be seeing and have already started to see in the last 120 days are going to reach levels where developers pencil out potential office products. Whether they’re ready to put shovels in the ground is something else, but look for new development in 2016. There are a couple of developers talking about speculative office product now when that was not even a consideration a couple of months ago.”
Successes in targeting high-value tenants might account for the shift in attitudes as luxury office markets cash in by targeting financial services firms following wealthy clients into South Florida’s rebounding housing market.
Across Palm Beach County, landlords benefitted from a push by the county’s marketing arm to attract white-collar jobs. An effort by the Business Development Board of Palm Beach County recruited 15 private equity, hedge fund and finance companies who’ve occupied thousands of square feet of office space across the county in recent years. Early recruits include private equity firm Kayne Anderson Real Estate Advisors, which moved to Boca Raton from New York in 2013, leasing 12,750 square feet at One Town Center. In October, DRB Capital LLC, a financial services firm specializing in structured settlement, annuity monetization and litigation funding, leased 19,223 square feet on Congress Avenue in Delray Beach. In February, Govic Capital and affiliates, a wealth management firm and hedge fund with offices in New York and Sarasota, leased office space at 125 Worth Ave. in Palm Beach for its corporate headquarters. That month Olympus Insurance also moved to the county, occupying 18,648 square feet at 4200 Northcorp Parkway in Palm Beach Gardens.
But in some markets, like Miami-Dade’s central business and financial districts, landlords are holding out for top dollar, with mixed results for some trophy towers.
For some, like the 1450 Brickell tower, high asking rates attracted deep-pocketed tenants willing to pay between $45 and $60 per square foot and who’ve accounted for more than 99 percent of the building’s 582,817 square feet.
But for others, like the 47-story Wells Fargo Center, built in 2010 between two midrises in downtown Miami, would-be renters in the market for premium space have turned down rates of about $40 per square foot for lower floors with no views.
The 21st to 26th floors are nearly vacant, but space is limited on higher floors, beginning at the 37th, where rents start at about $42 per square foot. Overall, the building has a nearly 38 percent vacancy, according to data from Cushman & Wakefield of Florida Inc.
“Most of the Class A space is pretty leased up,” said Mirta DeCespedes, senior research analyst at Cushman & Wakefield. “They’re probably holding out for the rents they want.”
One holdout, the Brickell World Plaza tower, has about 135,000 square feet of unleased space for a vacancy rate of about 29 percent. The 40-story tower was built in 2010 with nearly 632,000 square feet. Asking rates on its highest floors reach $50 per square foot.
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