South Florida industrial plays “blend and extend” strategy

South Florida’s industrial market now features new Class A stock at 1985 rents. The stark reality of the market’s collapse has set prices back three decades, and landlords are doing all they can to stem the tide of vacancies and drive new tenant demand.

While some say employing a strategy of “blending and extending” is a good idea, dropping rents overall is not necessarily working quite yet.

In Miami, vacancy and availability rates rose to their highest levels in the past five years, in the second quarter, according to CB Richard Ellis. Rental rates are ranging from 20 percent to 25 percent below 2007 in many Miami submarkets. Miami-Dade’s average asking rental rate was $8.39 per square foot 2007’s second quarter. That compares to $7.69 in the second quarter of 2009. The good news is that lower rates are driving deals.

“We’re starting to see more activity on the industrial side,” said Jose Hevia, president and CEO of Flagler Real Estate Services in Miami. “But there is still plenty of inventory that needs to be absorbed. We’re not seeing a lot of new tenants coming into the market and there are plenty of concessions being made, just like in the office sector.”

Vacancies have risen, but these large companies are still anchors. To fill the vacancies, they had to make concessions.

After lowering lowering rents to 1985 rates, the Miramar Park of Commerce started seeing occupancies rise again, despite maintaining more than 160 tenants in the park, including American Express, GE, Federal Express and Nissan. To fill vacancies, the property owner had to offer rent concessions. Rents start at $8.50 per square foot. Two years ago the rates were $14.50.

“If tenants are able to take space in its as-is condition or close to as-is, they’re realizing some tremendous benefit rent-wise,” said Maridee Bell, vice president of Sunbeam Properties and Development in Miramar. “Once we have to start putting new dollars in, the tenants don’t get the same advantage.”

Albert Couto, COO of the Easton Group, a real estate services firm in Miami, said rent concessions in the industrial market are more likely to attract smaller, less creditworthy clients — and they aren’t blanket concessions, either. Easton is inking lease agreements that spell out how long those concessions will last before the tenant’s rates return to healthier market values.

“You have to be cautious when you move your rents and for whom you move your rents because you may have a lot of small mom and pops in the same building,” Couto says. “Once you start making concessions, other tenants come in asking for the same deal. It’s a domino effect.”

Couto sees tenants shopping the market and bringing his leasing agents competitive quotes as a point of negotiation. Like most other industrial developers in South Florida, Easton is willing to adjust rents up to 20 percent to keep a tenant in the building. But Easton wants to see financial statements that demonstrate a real need before making the adjustments.

Although industrial developers would rather live in the headier high rent days, executives are looking on the bright side: helping companies reduce operating expenses saves jobs and positions the tenant for a stronger future.

“Reducing rents is smart business, even though it means were making less money right now,” Bell said. “‘Blending and extending’ — reducing rents today on existing terms in exchange for renewals — is a win-win in this market.”