Having lost their taste for new residential construction in South Florida, builders are sinking their teeth into a market that continues to thrive: office buildings. Even here, condos are the specialty of the day.
With the costs of both land and construction driven to record highs by the now-defunct residential condo boom, it’s difficult to turn a profit on new for-lease office construction — the traditional office building model. And while rents have increased sharply of late, they have yet to reach levels high enough to support the construction of new residential rental buildings. In reaction, developers have embraced the office condominium.
According to a report by CB Richard Ellis, there are over 4 million square feet of office condominium buildings under construction in Miami-Dade County.
With the average cost of land-plus-construction-costs approaching $300 per square foot, developers would need to lease office space in the upper $40s per square foot to make a project work, levels that Class A office buildings in prime areas are just now approaching.
“That’s why we stepped into office condos,” says Nir Shoshani, principal of NR Investments, one of the first companies to develop office condominiums in South Florida over the past few years. NR took its first shot at the office condo market in Fort Lauderdale, purchasing a vacant building with 165,000 square feet in the burgeoning Downtown area for $23 million. They paid full asking price, but negotiated an interesting arrangement with the seller.
“We agreed that we would close within four to six months,” recalls Shoshani, “and he would allow us to renovate the building in its entirety during that time, investing millions in renovation from day one.”
NR’s bank wanted to see $22 million in pre-construction condominium sales before they would turn over the financing. After striking the deal with the seller, NR immediately brought in an interior design firm, Perla Lichi Design, to draw up plans for a major upgrade of the property, giving it a stylish residential feel. They began renovation right away, and within three months sold enough inventory to secure the bank’s financing and close on the property. In effect, they renovated and sold space that was not yet theirs.
But nobody’s complaining. The building, which they call Museum Plaza because it is near the Museum of Art Fort Lauderdale, went from empty to 85 percent occupied within six months, and has spurred a wave of office condo development in Downtown Fort Lauderdale. Also, the project, which took around 5 percent of the total available space off the market in the Downtown area, put upward pressure on rental rates.
NR is working its way up the coast with its redevelopment strategy. They’ve just completed renovation on a 56,000-square-foot office condo on Hollywood Boulevard in Hollywood. “The Office,” as it is called, offers layouts from 300 to 8,500 square feet, priced from $250 per square foot.
The company has also acquired a nine-story, 103,000-square-foot office building in North Miami, on Biscayne Boulevard, and has begun a $6.5 million renovation. Named “The BLDG,” the project will offer condos ranging in size from 300 to 11,500 square feet, priced between $255 and $330 per square foot.
The purchase of office space in a condominium, acknowledges Shoshani, “is not for everyone. If the end user is a mature place of business that is not expanding, it makes a lot of sense. It’s for a business owner who would like to build into another line of business — real estate.”
The advantage for the developer, in a market as receptive as the present one at least, is obvious. “You can get in and get out quicker,” says Bert Chica, senior broker for Holly Real Estate, which is developing an office condo called Miami Green in an upscale area near Coral Gables in Miami.
“You build a project, sell it, and you’re out,” he says. “With an office building for lease, it usually takes about 10-plus years to see a good return. You’re not going to see the benefit of the development until the leases mature and you do renewals, which is when the upside comes.”
Miami Green, located at 3150 SW 38th Avenue, will be the first environmentally friendly “green” office building in South Florida. Offering 120,000 square feet of condominium office space, the 13-story glass tower is expected to attain silver LEED certification. LEED, or Leadership in Energy and Environmental Design, is a voluntary rating and certification system developed five years ago by the United States Green Building Council.
“We might,” says Scott Fuhrman, an executive in project development at Holly, “be able to get gold [certification] if we have some room in the budget at the end.”
The development will cost approximately $392 per square foot to build — an astonishing figure, says Fuhrman, because in relation to the cost of building a traditional office building, “we’re only spending 2 percent more. Just being smart about the kinds of electronics and smart systems we’re implementing, which are available at a lower cost than they used to be, we’re delivering a better product at a 2 percent increase. And the benefits far outweigh the 2 percent.” For one thing, owners can expect to pay 30 percent less on electric bills.
The building will be positioned on its site to capture as much natural daylight as possible, and its electric lighting will be regulated throughout the day by photo-sensitive sensors. There will be parking on each floor to reduce elevator use and a roof garden will absorb the sun’s radiation, saving on air conditioning. Special irrigation systems and low-flow faucets will conserve water.
Holly broke ground on Miami Green in December and after a brief, low-key public offering, it has reservations for 27 percent of the office space. The building is expected to be completed by the end of 2008. “If this one goes well,” says Fuhrman, “the plan is to build 20 more just like it.”
Another glass high-rise office condo is about to begin construction in the Dadeland section of Kendall. The 18-story Town Center One will be the first Class A office property in Downtown Dadeland, offering 200,000 square feet of space. The building is the first phase of a 5.5-acre mixed-use, pedestrian-friendly development planned by the Miami-based developer Dayco.
According to Dayco project manager Doris Meyers, “Our buyers are local engineers, architects, attorneys, financial planners and title companies — people who live in the neighborhoods of South Miami. It’s a nicer alternative than having to fight the traffic to Downtown. She agrees, however, that, “owning an office is not for everybody. It’s for the small, 2,000- to 5,000-square-foot owners.”
Developer Jorge Arevalo, principal of ICE Development Group, claims to have been the first builder in Downtown Miami to tap this smaller-user market. “There was nothing around the Brickell area or Downtown Miami offering high-caliber condo offices to small buyers with three or four employees — buyers who don’t need more than 1,500 square feet. That niche market has been there and ignored for several years.”
Arevalo says his first condominium tower, the 31-story Logik I, still in the pre-construction phase, sold 90 percent of its 134,000 square feet of office space within a month of its release. “That’s when we decided to go for the second tower,” he says.
Scheduled to begin construction in winter 2008, Logik II will offer 146 condominium offices, ranging in size from 508 square feet to 1,100 square feet, priced from the low $350s. The complex is located at 530 NW 1st Court. in the Overton section of Miami, between Downtown and the Design District.
Some experts familiar with the false starts office condos made in the 1980s and 1990s in Miami aren’t entirely sanguine about the trend. “I have a mixed view,” says Jack Lowell, vice chairman of Flagler Real Estate Services. “We saw some of the same phenomenon in the early ’80s: a run up in the prices and costs and people thought it was better to own than to rent. But then we overbuilt the office market tremendously in the mid- to late ’80s and it became cheaper to rent than to buy.”
Certainly, he said, it makes no sense for investors, who would need to rent at a monthly loss and then have to depend on the whims of the aftermarket, hoping to score strong appreciation when they need to sell. And, says Lowell, “The retail price for office condos is almost twice the wholesale price,” giving major office REITs and pension funds a competitive advantage in the condo market.
With vacancy rates sinking below 8 percent and rents beginning to push $50 a square foot in parts of Miami, some commercial developers are ready to re-enter the for-rent office market. Despite his success with office condos, says Shoshani, after wrapping up his current projects, “we’re going back to rental. Rental does make sense.”