South Florida office vacancy rates are likely to remain low this year as the area’s inventory of office space grows at a moderate pace, a panel of commercial real estate experts said Wednesday.
“In the last cycle, the inventory grew by 27 percent. In this cycle so far, if all the [office] construction projects in South Florida are completed, we will have added 7 percent to the inventory,” said Kyle Jones, senior managing director of Fort Lauderdale-based Stiles. “We’re not anywhere near the levels we were before.”
Jones and four other panelists spoke at a luncheon in downtown Fort Lauderdale organized by the real estate trade group NAIOP.
South Florida has 107 million square feet of office space and an 11.4 percent vacancy rate, down from 12 percent in the first quarter of 2018, said panel moderator Greg Martin. The tri-county market absorbed about 120,000 square feet of new office space in the first quarter, said Martin, a principal of Avison Young.
The panelists agreed that the combination of ongoing economic growth and low unemployment bode well for office investors and developers in South Florida. In Palm Beach County, for example, the office inventory “is still pretty limited, which makes us very optimistic about the potential for rent growth and absorption,” said Mark Corlew, principal of Grover Corlew.
Grover Corlew has acquired several office properties in Palm Beach County “that we thought were potential redevelopment candidates,” Corlew said. But “as we’ve run through the numbers, the rents and the cash flow going forward really takes redevelopment off the table. We just can’t justify knocking down the income we’re currently getting.”
Buyers of South Florida office properties are borrowing to finance a conservatively small percentage of their acquisitions, a sign that the area’s office market has further upside for investors, said panelist Christian Lee, vice chairman of CBRE.
“Even when a 75 percent LTV [loan to value] is available, in most of the deals we’re doing today, the buyers elect to use 65 percent debt,” Lee said. “It gives me a lot of hope that we’ve got a lot more runway before we see a down market.”
Lee said collateralized mortgage-backed securities (CMBS) lenders are playing a smaller role in South Florida’s current office market expansion cycle than in the cycle that ended in 2007. “Banks play a much bigger role than they did in the prior market cycle,” Lee said. “They have always been big on construction lending, but on perms [permanent loans] they’ve gotten much more aggressive.”
Historically, out-of-town developers have flooded South Florida with new office space once the area’s vacancy rate dropped to the mid-teens, but not in the current cycle, said panelist Rod ‘Lo’ Loschiavo, executive managing director of Colliers International South Florida. “We have not had that happen at all this time,” Loschiavo said. “I guess we can thank the apartment developers, in part, for that – for running up the cost of land so high.”
However, office rents in South Florida may start rising more slowly than in recent years, Loschiavo said. “We’ve seen about a 50 percent increase in rental rates in the past five years or so, and that’s just unheard of,” he said. “I think we’re starting to reach a plateau.”