The Real Deal Miami

What about Class B office space?

By Alexander Britell | April 08, 2011 05:07PM

1101 Brickell

A group of hurricane-proof, environmentally friendly, technologically advanced office towers have cast an imposing shadow over downtown Miami. But it’s not just Brickell Avenue that’s caught in the shade — it’s the Class B office market.

While Class A gets most of the attention, and has added the most space to the downtown central business district, Class B is struggling to compete as tenants look for bargains in price brackets that wouldn’t have typically been viable in a stable real estate market.

“I think in any soft market, there’s what many would refer to as a ‘flight to quality,’” said Steve Hurwitz, a vice president at Continental Real Estate Companies. “There are several new construction Class A buildings available in downtown Brickell, and you see tenants that have the opportunity to price themselves into higher-quality properties than they’re in today.”

The distinction between Class A, B and C office buildings actually comes from the Building Owners and Managers Association, a national group that has been around since 1907. By BOMA’s Metropolitan Base Definition, Class A properties are the “most prestigious buildings competing for premier office users with rents above average for the area… buildings that have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.”

Class B buildings are those “competing for a wide range of users with rents in the average range for the area,” according to BOMA’s metropolitan base definition. “Building finishes are fair to good for the area, and systems are adequate, but the building does not compete with Class A at the same price.”

A strong sign for Class B came at the end of March, when Florida International University moved out of its 1960s-era building at 150 SE 2nd Avenue in Miami to 1101 Brickell, a two-building Class B complex only blocks away from 1450 Brickell.

Since the first quarter of 2008, Miami’s Class B vacancy rate is down from a high of 15.2 percent in the third quarter 2010 to 14.6 percent, according to data from real estate research firm CoStar. Rents in that class of properties were down 1 percent in the first quarter to an average of $24.63 per square foot.

In the Class A market, rents fell 0.2 percent to $36.03 last quarter, with the vacancy rate down to 21.7 percent, a drop from a high of 23 percent in the second quarter of 2010.

But while the disparity in rents hasn’t changed much, properties that were not once available for the typical Class B user are now coming into range as aggressive landlords try to tantalize potential tenants with a host of different tactics.

“Typically you have people going from Class B to Class A because of concessions,” said Chris Macke, senior real estate strategist at CoStar.

According to Macke, the high in the last five years for Class A rents was almost $40 per square foot in 2008. So while asking rates have not deviated significantly on paper, concessions like free rents make the moves feasible for tenants.

“What they’re doing in the Miami market is, and you find this across the country, rather than lowering their asking rates, they’re doing more concessions. In this market, it looks like they’re not discounting asking rents, but they’re doing it on the concessions side.”

Macke said the terms might involve periods of free rent, or certain tenant improvements.