At Least One Market Has Been Able to Ride Out the Economic Downturn

By Polyana da Costa
 

Stable but obviously not immune to the economic downturn — that's South Florida's office market.

Compared with other segments of the commercial real estate market, the office market has been able to ride the economic downturn without taking a major hit — so far.

Still, the sector has been shifting to favor tenants, who can more easily secure larger rent concessions and sublease deals as companies downsize and reduce their space requirements. And the office condo market is pretty much dead.

To get a read on the market, the Daily Business Review spoke to three office specialists: Allen Morris, a longtime office developer and president of the Allen Morris Co.; Rod Loschiavo, a broker in Cushman & Wakefield's Fort Lauderdale office who represents tenants; and Tony Puente, senior vice president of Fairchild Partners, a boutique commercial real estate firm that specializes in office and industrial brokerage.

Where does the South Florida office market stand?

Morris: I think the office market is very healthy. Because the residential condo market has been grossly overbuilt, people assume the commercial office market is overbuilt as well, but it's not.

Loschiavo: Vacancy rates are relatively low by historical standards. It's about 14.3 percent in Broward, 16.2 percent in Palm Beach and. 12.1 percent in Miami-Dade. Palm Beach County has seen a little bit more construction than we've seen in Broward in the last year or so. Broward County really hasn't seen a lot of new development in the last year or two.

The cost of construction had gone up so much that it kept speculative construction to a minimum. But we've seen a kind of shift in the mindset of tenants. Most of the deals I had been doing up until recently were seven- or 10-year deals, but the uncertainty in the market is causing more tenants to do shorter-term leases [three to five years]. It has shifted more to a tenants' market. Rental rates are going to stay flat for this year and the first half of next year.

Puente: Due to the fact there has been very little space built in the last five years, the office market is pretty stable. In Miami, we've experienced a lot of growth in the last few years and a very strong landlord market.

What particular submarkets within the three counties are struggling more, and which ones are doing well?

Morris: The strongest and healthiest market in the greater Miami area is Coral Gables, Brickell Avenue and downtown Miami. The West Airport area and Kendall are also strong, and the main reason is there has much not been much new supply.

Loschiavo: The Fort Lauderdale downtown market is probably struggling a little bit with an overall vacancy rate of 19.1 percent. I think the B buildings in particular are struggling. The A buildings seem to be pretty well-leased and doing pretty well. The activity level in downtown is pretty low.

Weston has a 26 percent vacancy rate but it's a very small market [800,000 square feet]. There is a large lease that is getting ready to be signed there so that should change rather quickly.

The markets that seem to be doing the best are Miramar and Pembroke Pines, with a 7 percent vacancy rate.

Puente: There are probably six or seven submarkets in Miami-Dade County. The big ones are the downtown/Brickell sector and the Coral Gables market. The one market that achieved the lowest vacancy is the Coral Gables market. If you want to look out into the future, the downtown market has close to 2 million square feet that is under construction of large, quality office buildings. That could potentially increase the vacancy rate unless something different happens on absorption here in the next couple years.

Are rental concessions on the rise? What type of concessions are landlords offering tenants?

Morris: There have been some wonderful concessions granted in the new downtown office buildings in order to secure very large anchor tenants. The first one or two tenants in the building may get some really good financial incentives, but that is very unusual and unique in the market place. Other than that, we are not seeing any concession or rent reductions.

Loschiavo: Landlords are offering more concessions than they were a year ago. We are seeing more liberal tenant improvement allowances, some free rent if their credit is good. Creditworthy tenants are in great demand in these ... times.

Puente: For quality tenants, you are seeing landlords that are giving concessions such as a little bit higher improvement dollars, maybe some rent concessions early on in the transactions, and maybe a rental rate a little bit depressed from what it was a year ago.

What about subleases?

Morris: There is some subleasing, mostly financial intuitions that have had to cut back.

Loschiavo: We have seen a lot of sublease space coming online in the past year and a half. We had some fairly large blocks of sublease space that came online in western Broward, but we are seeing that a lot of the sublease space has been absorbed.

Puente: There was a period of time, about a year ago, when subleases were very minimal. You are seeing now subleases going to a normal level — not necessarily high. It's not yet a significant portion of the market.

How are office condos doing? Is there any activity on sales or have they become part of the rental market?

Morris: It has slowed down a great deal, partly because it's harder for people to get financing. Some of the people who have developed or converted office condominium buildings have priced them too high, so they don't make economic sense for the buyer. Either those purchase prices will need to come down a bit, or we will need to wait for the rental rates to rise so that, comparatively, the office condo makes sense.

Loschiavo: The condo market has really fallen pretty hard, and the people who have them are going to own them for a while. I think they probably lost some value. We have seen projects that were originally intended as condos that have been now turned into multitenant buildings. There are some developers that made a lot of money with it, but I think that market is pretty much over.

Puente: For instance, SBS Tower in Coconut Grove — which is a building that a couple years ago was converted to an office condo. We just finished representing Bermello Ajamil for about 37,000 square feet as an extension of a lease in the building. I think some of these buildings that were converted into condos are in a hybrid situation right now. Some of those buildings that were oriented toward medical, that market has stayed fairly strong. But if it's more office space, the larger corporate tenants really were not interested in buying and wanted to keep the flexibility of leases where they could expand and contract.

We hear a lot about green building certification. Do you think tenants really take a LEED certification into consideration when leasing?

Morris: We have decided to make the new Ponce de Leon tower a LEED-certified green building. It will be the first LEED-certified green building in Coral Gables. There is a major company in New York interested in leasing space in that building, and their RFP [request for proposal] actually specifies that the building managers represent if it is a LEED-certified green building. And if not, why not, and what [are] the energy conservation and carbon footprint strategies for the building.

Loschiavo: I think most tenants are encouraged to do it, but it's been very difficult for anyone to be able to actually understand or know the cost benefit of the LEED certification. Most people want to do it, but it's still one of those things that people are struggling with.

Puente: The green wave is here to stay. Most new projects are going to do some level of green. In the Bank of America Tower [at International Place], we are creating the ability for a tenant to pick finishes and material for construction that are green. I think tenants are looking at it. The final decision is not based solely on that, but it is part of the decision process.