The Real Deal Miami

Shadow market emerges amid corporate bleeding

By Jennifer LeClaire | March 10, 2009 11:53AM

Employment and office lease rates go hand in hand — and both are sliding in South Florida.

The January report from the U.S. Conference of Mayors predicted the region could shed an additional 85,000 jobs in 2009, driving the unemployment rate from 6.4 percent in the fourth quarter of 2008 to well over 8 percent by the end of the year.

First-quarter office space reports aren’t yet in, but Miami’s vacant inventory is already increasing. Vacancies increased by 1.4 million square feet in 2008, or 3 percent of the total market, according to Cushman & Wakefield.

That translates to significant impacts on the supply-and-demand fundamentals in Miami’s office market, driving many tenants to sublease space to secondary tenants at discounted rents. It’s called a shadow office rental market, and real estate experts expect it to grow worse in the coming quarters.

“Companies are downsizing, white collar jobs are diminishing and there’s extra space on the market,” said Alan Kleber, a senior director in Cushman & Wakefield’s Miami office. “In order to stop the bleeding, companies are consolidating operations. If they were leasing two floors, they may consolidate into one and sublease the other.”

Since the tenant isn’t looking to profit on the sublease — the company is just trying to stop the bleeding — consolidation is putting pressure on landlords as the sublease prices compete with existing space.

Here’s an example: a company rents Class A space on Brickell Avenue for $38 a square foot. That company hits business setbacks and needs to dispose of the space. The company sets the price at $30 a square foot, undercutting the landlord, who’s trying to rent similar space on the open market.

“The shadow market may begin to impact the velocity and absorption of space in the Miami marketplace,” Kleber said. “Companies are negotiating bargains. The only downside is not having a direct relationship with the landlord. If the tenant doesn’t pay the lease, everybody is out.”

In Palm Beach County, the story is similar. Overall absorption was a negative 277,192 square feet in 2008, according to Cushman & Wakefield. Leasing activity has flat lined the last two years, holding steady at 1.6 million square feet of transactions.

Drilling down to Boca Raton, John Jaspert, a senior associate in the Palm Beach County office of CB Richard Ellis, said there’s an enormous amount of shadow space unofficially available in Boca Raton. If that inventory was “officially” on the market, he said, it would drive vacancy rates “astronomically higher” than what’s being tracked.

“I have two clients right now with two large chunks of space in Boca within two blocks of each other. That space is not currently on the market officially, but if you brought them a tenant they would sublease it,” said Jaspert.

In his nine-year career, including the downturn after the Sept. 11, 2001 terror attacks, Jaspert said he’s never had so much sublease space in his inventory. Twelve of his clients are looking to sublease space in Boca Raton. What started in the financial services sector has rippled through nearly every local industry.

“Who’s subleasing? Cost-conscious CPAs and law firms that have been in Class C and Class B buildings,” Jaspert said. “Local tenants are taking the opportunity to move into a premier Class A building. That’s who this is helping.”