The Real Deal Miami

Rebounding office market drives trophy building sales

Industry experts predict expensive trades will continue throughout 2014

April 29, 2014 12:45PM
By Francisco Alvarado

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Matthew Cheezem and Charles Foschini

Matthew Cheezem and Charles Foschini

Institutional property owners are unloading trophy office buildings to cash in on the rebounding South Florida office market.

The recent sales of buildings like the Courvoisier Centre on Miami’s Brickell Key and Las Olas Centre in Fort Lauderdale reflect a market that is seeing lower vacancy rates, a lack of new construction and strong employment growth, local real estate insiders say. Those factors are also attracting new office investors to South Florida.

“The sellers are at the point of the cycle when they can harvest their profits,” CBRE vice chairman Charles Foschini told The Real Deal. Buyers are aggressive, he said, because it is cheaper to buy an existing property than to build new. “With very little, if any, commercial real estate coming online, the buyers believe rents will go up further,” he said. “Which, in turn, will cause a spike in value while they own it.”

Several hefty office trades closed in the last two months.

For instance, Pearlmark Real Estate Partners sold Douglas Entrance in Coral Gables to a joint venture between Miami-based Banyan Street Capital and Oaktree Capital Management for $100.5 million. In Miami’s financial district, Orlando’s Parkway Properties purchased Courvoisier Centre for $146 million. To the north in Fort Lauderdale, RREEF America picked up Las Olas Centre from USAA Real Estate for $204 million.

More Class A office properties expected to change hands in the coming months.

“The investor outlook on South Florida is pretty bullish,” Cresa South Florida senior vice president Matthew Cheezem told TRD. “On the seller side, you can’t underscore the impact [of the recession] in the last five years. It has been very difficult for office building asset managers. If they can get their money out, they are going to take advantage of it.”

The buyers are well-capitalized institutions that can expect solid return on their investment over the next five-to-10 years, according to Cheezem. Investor interest is fueled by a substantial drop in vacancy rates and no new development in the pipeline.

Over the last four years, Miami-Dade County’s Class A office vacancy rate declined by nearly six percentage points to 16.6 percent, according to JLL.

Yet few are building right now. The Brickell area won’t have new office space until at least 2018, when Swire Properties expects to complete the office tower for its Brickell City Centre mixed-use project. In West Palm Beach, Related Urban recently shelved plans for a new building called Gateway Tower at CityPlace due to a lack of interested tenants, according to the Palm Beach Post. Tenants including Bank of America/Merrill Lynch and two law firms backed out because they needed space in less than 18 months.

Meanwhile, tenants are quickly filling up existing office buildings. In Miami-Dade, the county’s overall year-over-year office vacancy rate fell to 16.1 percent from 16.5 percent in the first three months of the year, according to CBRE.

Some of the trophy towers recently acquired have substantial holes to fill, however. That gives the new owners a chance to immediately generate increased cash flow through fresh leases.

The Douglas Entrance office campus at 800 South Douglas Road was 82 percent occupied at the time of Pearlmark’s sale. Las Olas Centre at 350 East Las Olas Boulevard and Courvoisier Centre at 501 and 601 Brickell Key Drive have occupancy rates of 76 percent and 83 percent, respectively.

The next high-profile office property to sell could be CityPlace Tower. KBS Realty Advisors put the West Palm Beach building on the market earlier this month. The company bought the building, which is 95 percent occupied, for $127 million in 2011.

Other signature buildings that may be in play, industry sources say, include 1450 Brickell Avenue, which is fully occupied, and downtown’s Miami Tower, which signed TotalBank as an anchor tenant in October 2013.

“I would expect the velocity of transactions to continue picking up the pace,” Foschini says. “Miami is white hot right now.”

  • ConcernTroll

    This article got it backwards. Investors willing to accept lesser returns are driving prices up. It’s a dynamic where the cash is coming in first and driving the rest, and not, like this piece argues, that the fundamentals are so improved they’re bringing in investment. Yes, we’re better than where we were when the sky was falling in 2010. Vacancy rates ARE trending lower. But the “local real estate insiders” you spoke to must have been high to say we’re seeing “strong employment growth.”

    All in all, this is pretty solid puff for the office brokers, who somehow always have a way of concluding that “now’s a great time to do a deal” no matter what the market actually looks like. I specially love the part where the writer explains the “substantial holes to fill” in trophy buildings are “a chance to immediately generate increased cash flow through fresh leases.” So, new owners will be magically be able to fill the spaces previous owners couldn’t because…

  • SHAWN

    LADIES AND GENTELMAN THIS ARTICLE IS A PERFECT EXAMPLE OF OW AND WHY THE REAL ESTATE BUBLE IS GOING TO BURST. WHAT EMPLOYMENT RATE ARE YOU TALKING ABOUT, THE EMPLOYMENT RATE OF CORPORATE TENANTS SUCH AS LARGE BANKS AND ETC LEASING OFFICE SPACE. DONT YOU THINK ITS A BIT OFF THAT THE ONLY REAL ESTATE MARKET BOUNCING BACK WAS THE LUXURY MARKET THE PEOPLE WHO DID NOT GET HIT AS HARD AS MIDDLE CLASS AMERICA. DEVELOPERS ARE BUILDING AND SELLING BASED ON AN EXAGERATED NUMBER THYE BUILT THEMSELFS

  • Steven Cohen

    Dwarf sized commentator on CNBC, David Faber, cannot grasp that the lower the Cap Rate the higher the price. Faber does not understand interest rates will be low for many years. Faber, never really was interested in Sports and handles his severe Napoleonic Complex, by crying Doom for the economy.

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