Miami-Dade: Working overtime
After a long post-recession pause, office development has been revived in the tri-county area — particularly in Miami-Dade County, where residential projects have long dominated the attention of developers.
“I’m excited to see something different from condos and apartments,” said Michael Neal, CEO of West Palm Beach-based Kast Construction. “We had not seen a whole lot of activity in the office space until mid-2016 and through this year. The tempo has escalated.”
Neal said his general contracting firm is pursuing multiple opportunities to build office space, mostly in suburban settings outside of South Florida’s downtown areas in Miami, Fort Lauderdale and West Palm Beach.
“It looks like places like Coral Gables, Miami Beach, Doral — the submarkets, the suburban markets — are kind of sucking some of the air out of the downtown urban cores,” Neal said.
The countywide office vacancy rate in Miami-Dade is 10.7 percent, according to CBRE’s second quarter office market report. While CBRE reported a vacancy rate of 19.9 percent in downtown Miami for the second quarter, rates were less than10 percent in six non-urban submarkets, including Aventura at 8.2 percent, Miami Beach at 5.9 percent and just 1 percent in Coconut Grove.
“Many years ago, we were called ‘Paradise Lost,’” said Maggie Kurtz, a senior vice president of CBRE in Miami, recalling the title of a 1981 Time magazine cover story on crime and chaos in South Florida. “Now we’re one of the most sought-after cities in the country.”
The price of admission has been going up. The average asking rent per square foot for South Florida office space was $31.26 in the second quarter, up 5.1 percent from $29.73 in the same period last year, according to NKF’s latest report on the tri-county office market.
But asking rents in South Florida can range far above average and may rise further before they recede, experts said.
“There are numbers in the $60s on Brickell. We are going to be seeing more numbers in the $60s in the next couple of years,” Kurtz said. “When you start going below double digits [in vacancy rates], rents are going to go up. Period.”
Of course, a spate of office construction can easily send vacancy rates soaring. Although outside of Miami-Dade, South Florida has little office space under construction, there’s a decent amount of new inventory in the county expected to come online by the end of the year. About 979,000 square feet of office space was under construction in Miami-Dade at the end of June, according to CBRE. “I don’t think a million square feet in a 45-million-square-foot market will be bad for us,” Kurtz said.
Two sizable office buildings are nearing completion at MiamiCentral, an 11-acre, mixed-use development in downtown Miami that will include a passenger train station. All Aboard Florida is preparing to launch train service between the downtown station in Miami and two others, in Fort Lauderdale and West Palm Beach, by the end of 2017.
Florida East Coast Industries (FECI), the parent company of All Aboard Florida, is developing a 190,000-square-foot office building — Two MiamiCentral — which will be connected to the train station. The company is also developing a 100,000-square-foot office building called Three MiamiCentral as a standalone structure.
Both buildings are expected to be completed between now and the end of the year, and neither will open empty. FECI has preleased space in both buildings, and future tenants include Ernst & Young, Regus, Venevision International Enterprises and Fortress Investment Group.
Jon Paul Pérez, vice president of the Related Group (and son of CEO Jorge Pérez), said the office projects at MiamiCentral bode well for similar endeavors in Miami: “Preleasing has historically been pretty difficult in South Florida. So, I think if you have that amount of interest in preleasing, you are doing pretty well…My understanding is that they are at $60 [of rent per square foot] on one of the buildings.”
Much larger office projects are also entering the development pipeline in Miami-Dade. For example, Houston-based developer Hines is preparing to break ground next year on a 500,000-square-foot office building in the 27-acre, mixed-use development Miami Worldcenter. Hines plans to finish construction of the office component in 2020.
Hines is familiar with the strengths of the Miami market, and an abundance of large corporate tenants has not been one of them. The Houston firm’s history in Miami dates back to 1981, when Hines built a downtown landmark, the Southeast Financial Center, a 55-story office building that Spanish billionaire Amancio Ortega bought last year for $500 million.
“Miami is not the deepest office market. It doesn’t have the biggest office tenants,” said Michael Harrison, senior managing director of Hines. “Miami is not like an Atlanta, where you have half-a-million-square-foot law firms and corporate clients. It’s a small-tenant market.”
Many of the smaller companies have flocked to co-working office spaces, which have proliferated in the Miami-Dade market since 2010 and emerged as major tenants themselves. WeWork Executive Suites, for example, leased 60,000 square feet at Giralda Place in Coral Gables — the second-biggest office lease throughout Miami-Dade in a second-quarter survey by CBRE.
“We’re among the big customers for oversized office space in good neighborhoods right now,” said Michael Feinstein, founder and CEO of Büro, a Miami-based landlord with five co-working locations in Miami-Dade. “We’ve signed six leases ourselves for between 10,000 and 20,000 square feet in the past few years.”
Feinstein said co-working space operators such as Büro, WeWork and Pipeline offer flexible spaces and tenant terms that filled a void in the market. “All of the commercial owners and brokers were just ignoring two-, three-, four-, five- and six-person companies,” he said. “They don’t want to sign five-year leases in Class A buildings. It’s ridiculous for a small company.”
But office landlords for companies both big and small can do well when vacancy is low, which is the case in several Miami submarkets.
Consider the acquisitions of Easton Group, an industrial real estate firm that diversified with the purchase of two office buildings. One is near the firm’s home office in Doral, north of Miami International Airport. The other is in the Blue Lagoon commercial district just south of the airport. The office vacancy rate in the area around the Miami airport is 9.2 percent, according to a second-quarter report by brokerage firm JLL.
Easton Group paid a total of $17.5 million for the two office buildings, which have 190,000 square feet of space combined. “We bought them about two years ago, and they were about 75 percent occupied, and now we’re up a little over 90 percent,” said Ed Easton, chairman and CEO of Easton Group. “We bought them for about $85 a foot, which turned out to be a good price.”
Meanwhile, several condominium office developments in Miami-Dade’s suburban submarkets are adding to the county’s inventory of office options.
In late August, construction on Ofizzina, a nine-story condo office building in Coral Gables, was nearing completion as the number of presales mounted. “It is 78 percent sold out,” said Saddy Delgado, a Miami-based agent at One Sotheby’s International Realty.
Delgado said One Sotheby’s got the assignment from developer TSG Group to market Ofizzina’s unsold inventory at seven-figure prices because the brokerage primarily markets high-end residential properties.
“All of my residential buyers are great potential buyers of this office space,” she said.
In northeast Miami-Dade’s Aventura submarket, a lower-priced, 129-unit condominium office building called Forum Aventura is under construction. “We have sold 83 percent of Forum,” said Javier Rabinovich, a principal of CK Privé Group, the developer behind Forum Aventura and Forum Park, a nearby condo office project with a similar name, which has 287 units.
“Our outlook for northeast [Miami-Dade] and Aventura is bullish,” said Rabinovich, a resident of Aventura since 1999. “We have seen a consistently high level of [office] occupancy, and we see the market absorbing new supply.”
Two major office projects in downtown West Palm Beach are at various stages in the regulatory approval process, but Palm Beach County had no office construction underway in the second quarter, according to research by several brokerage firms.
In downtown West Palm Beach, billionaire real estate developer and Palm Beach resident Jeff Greene is advancing a mixed-use development called One West Palm that’s designed with 345 apartments and 200,000 square feet of office space — half of the 400,000 square feet originally planned.
New York-based Related Companies, meanwhile, is proposing an office building in downtown West Palm Beach with 274,000 square feet of space. The Related site is zoned for buildings no taller than five stories, so the company’s 25-story office project hinges on city approval of rezoning.
“I don’t know if downtown West Palm has the depth to absorb a new building of that size,” said Brian Gale, a Miami-based vice chairman of office brokerage services at Cushman and Wakefield. “I don’t see over 200,000 square feet of pent-up demand in that market…and I’ve been in downtown West Palm leasing for 14 years.”
But Gale is confident that the market will readily absorb the hundreds of thousands of square feet of office space already under construction in Miami-Dade.
“I don’t suspect that the amount of space that’s under construction will negatively affect the Miami office market,” he said. “Rents continue to increase, concessions continue to decline, and that’s why you’re starting to see some new development.”