Rebounding office market drives trophy building sales
Institutional property owners are unloading trophy office buildings to cash in on the rebounding South Florida office market.
The recent sales of buildings like the Courvoisier Centre on Miami’s Brickell Key and Las Olas Centre in Fort Lauderdale reflect a market that is seeing lower vacancy rates, a lack of new construction and strong employment growth, local real estate insiders say. Those factors are also attracting new office investors to South Florida.
“The sellers are at the point of the cycle when they can harvest their profits,” CBRE vice chairman Charles Foschini told The Real Deal. Buyers are aggressive, he said, because it is cheaper to buy an existing property than to build new. “With very little, if any, commercial real estate coming online, the buyers believe rents will go up further,” he said. “Which, in turn, will cause a spike in value while they own it.”
Several hefty office trades closed in the last two months.
For instance, Pearlmark Real Estate Partners sold Douglas Entrance in Coral Gables to a joint venture between Miami-based Banyan Street Capital and Oaktree Capital Management for $100.5 million. In Miami’s financial district, Orlando’s Parkway Properties purchased Courvoisier Centre for $146 million. To the north in Fort Lauderdale, RREEF America picked up Las Olas Centre from USAA Real Estate for $204 million.
More Class A office properties expected to change hands in the coming months.
“The investor outlook on South Florida is pretty bullish,” Cresa South Florida senior vice president Matthew Cheezem told TRD. “On the seller side, you can’t underscore the impact [of the recession] in the last five years. It has been very difficult for office building asset managers. If they can get their money out, they are going to take advantage of it.”
The buyers are well-capitalized institutions that can expect solid return on their investment over the next five-to-10 years, according to Cheezem. Investor interest is fueled by a substantial drop in vacancy rates and no new development in the pipeline.
Over the last four years, Miami-Dade County’s Class A office vacancy rate declined by nearly six percentage points to 16.6 percent, according to JLL.
Yet few are building right now. The Brickell area won’t have new office space until at least 2018, when Swire Properties expects to complete the office tower for its Brickell City Centre mixed-use project. In West Palm Beach, Related Urban recently shelved plans for a new building called Gateway Tower at CityPlace due to a lack of interested tenants, according to the Palm Beach Post. Tenants including Bank of America/Merrill Lynch and two law firms backed out because they needed space in less than 18 months.
Meanwhile, tenants are quickly filling up existing office buildings. In Miami-Dade, the county’s overall year-over-year office vacancy rate fell to 16.1 percent from 16.5 percent in the first three months of the year, according to CBRE.
Some of the trophy towers recently acquired have substantial holes to fill, however. That gives the new owners a chance to immediately generate increased cash flow through fresh leases.
The Douglas Entrance office campus at 800 South Douglas Road was 82 percent occupied at the time of Pearlmark’s sale. Las Olas Centre at 350 East Las Olas Boulevard and Courvoisier Centre at 501 and 601 Brickell Key Drive have occupancy rates of 76 percent and 83 percent, respectively.
The next high-profile office property to sell could be CityPlace Tower. KBS Realty Advisors put the West Palm Beach building on the market earlier this month. The company bought the building, which is 95 percent occupied, for $127 million in 2011.
Other signature buildings that may be in play, industry sources say, include 1450 Brickell Avenue, which is fully occupied, and downtown’s Miami Tower, which signed TotalBank as an anchor tenant in October 2013.
“I would expect the velocity of transactions to continue picking up the pace,” Foschini says. “Miami is white hot right now.”