Christian Lee is a vice chairman at CB Richard Ellis in Miami in the institutional group and capital markets group for office and industrial properties. CBRE has been extremely active of late in the commercial market, marketing the new 600 Brickell office tower in downtown Miami and tapping New York veteran Kenneth Krasnow to head its Broward and Palm Beach operations. One of the biggest questions for the Miami office market as it emerges from the downturn is rents — with the addition of three large-scale office towers, the impact on rents and their potential for improvement is still up in the air. The Real Deal talked to Lee about the overall changes in rents and what they mean for investment in the office market.
How has the office market changed with the addition of what is now three large-scale towers [1450 Brickell, Wells Fargo Financial Center and 600 Brickell]?
What has not happened that a lot of people expected was, with the delivery of three new office buildings to the market, a lot of people felt we were going to see a much larger decrease in market rent than what we’ve seen. Certainly market rents are down from the peak — we’ve seen an overall decrease of about 17 percent from the peak rents of 2007, but a lot of people believed we’d see much larger declines, and it just didn’t happen. At this point in time, the general consensus is that the market is now on an upswing, and we’re heading into an increase in market rents going forward. So the future is fairly bright, and seems to be getting brighter all the time.
But is it going to be a significant increase in rents?
CBRE Econometric Advisors, our internal economic advisory group is projecting 1.1 percent rent growth for next year, which isn’t very much, but their outlook is 1.1 percent for 2012, 4.2 percent for 2013, 4.7 percent for 2014 and 4.5 percent for 2016, so obviously those kinds of growth rates far outpace inflation. And if they’re correct, then over the same period their projection is that vacancy rates will drop by a combined overall 5 percent. If all of that stuff happens, it’s a great time to want to invest in office buildings in downtown Miami.
How did rents downtown fall compared to the rest of the area — say, for example, Palm Beach’s office market? Was there any divergence?
The market rents held up much better in Brickell than they did [in Palm Beach]. I think the primary reason for that is the strength of the landlords. If you look up and down Brickelll, by and large, you have deep-pocketed owners. They did not have to cave at the first sign of distress and start pushing market rents.
Has there been any spillover from the drop in rents to other costs?
Tenant improvement costs are way down. I think that’s a product of landlords not being willing to provide as much, but them being able to get rates in the $40s [per square foot]. So what used to cost them $50 [per foot] to build out, costs $40 [a foot] now.
On the residential side, we’ve seen a huge trend of foreign buyers. Is that flowing over to the office side?
Increasingly, we’re seeing competition from foreign buyers for better quality assets downtown. They also like Coral Gables and Airport West. They love Southeast Broward, including Sunrise and Plantation, and of course Las Olas and Boca Raton. Those are the major markets [these buyers] are looking to invest in.