Two weeks ago, billionaire developer Jeff Greene threatened to stop construction of a two-tower, 30-story mixed-use project in downtown West Palm Beach.
Greene, who told the Palm Beach Post in late April that he would “leave the shell up” because the city was resistant to approve a zoning request, is changing his tune. Now, he’s saying that he will build the project at 550 North Quadrille Boulevard as is, but at a slower pace, if he can’t get the property rezoned. Greene wants to change the project’s zoning from hotel, office space and multifamily to all multifamily.
“I blame myself because I did start the project, and I was overly optimistic,” he told The Real Deal. “No one had a gun to my head to start these two towers.”
Greene, a former Democratic gubernatorial candidate and billionaire real estate investor who made a fortune during the subprime mortgage crisis, is now locked in a political fight with the city’s mayor, Keith James, who argues that Greene is making demands at the eleventh hour. Greene made a deal with the city in 2016 when it made a zoning change to increase the project’s height, James argues.
“My view is ‘no.’ You got the benefit of your bargain and now you need to fulfill your end of the bargain,” James said. “You basically kept building ‘till you got to 28 stories and then you come to me and say, ‘Ah I can’t really do what I said I was going to do.’ It doesn’t work that way.”
Greene’s $250 million development has been in the works for about five years and would mark the real estate mogul’s largest project in the city. The development is north of Related Companies’ Rosemary Square and Brightline’s West Palm Beach station, near the Flagler Memorial Bridge that connects the mainland to Palm Beach.
In early 2016, the city approved a zoning change to the property that allowed Greene to build 30-story towers, in place of 10 stories allowed at the time. In exchange, Greene, betting on West Palm Beach becoming a world class city, would build a hotel and office project. He hired the Miami architecture firm Arquitectonica to design the skyscrapers, which looked like towers of stacked blocks.
But his plans have drawn skepticism from day one. Critics, who have been pointing to a lack of demand for new office space, question why Greene waited until now to try to force a change in zoning.
He now wants both towers to be multifamily. (One tower was already planned to have 328 apartments.) Greene, who is building on spec and was seeking to finance once it was finished, said his bankers “led me to believe that when this was completed, they would be able to finance 80 percent of my costs.”
“Most lenders are more comfortable taking back multifamily than unfinished office space or an unoperated hotel,” Greene added.
Supply problems
Meanwhile, Greene’s broker, Cushman & Wakefield, has not secured any tenants for the 200,000 square feet of office space, Greene said.
The lack of tenants is a textbook example of supply and demand, according to industry experts.
West Palm Beach’s Central Business District has 673,350 square feet of Class A office space under construction, with an average asking rent of $54.39 per square foot, according to Colliers International South Florida’s first quarter report.
Neil Merin, chairman of the commercial real estate firm NAI Merin Hunter Codman, said the city has shown that it can only absorb one new Class A office building every 10 years.
To go forward with the office component of the One West Palm project “seems to be silly,” Greene said. He’s already invested $100 million into construction.
In addition to Greene’s project, Related Companies is building 360 Rosemary, a 20-story, 300,000-square-foot office building in Rosemary Square. The New York developer also plans a second office project, a 25-story, 270,000-square-foot Class A tower project called One Flagler at 154 Lakeview Avenue, near the intersection of South Flagler Drive and Okeechobee Boulevard. Billionaire Charles Cohen of Cohen Brothers Realty also confirmed he’s moving forward with plans to develop a 24-story, 490,000-square-foot office building in West Palm.
Merin said only “in good years” can the West Palm office market absorb 100,000 square feet.
And if Greene doesn’t get his zoning change and is forced to move forward with office space, a battle could ensue for rent concessions to lure tenants into new buildings, Merin predicts. West Palm’s vacancy rate for Class A office space was 17 percent last year. With Related’s and Greene’s project, it could reach 35 percent, according to Merin.
Mayor James said Greene should have come to the city sooner if he had concerns about oversupply and wanted to change the project’s designs.
“He’s a businessman. He came to us with that deal,” James said. “Whatever crystal ball he may have, he’s the one who anticipated what the demand was going to be going forward.”
Concerns about oversupply contradict Palm Beach County’s economic development board’s pitch of recent years. It has pushed developers to build more Class A office properties in West Palm, in hopes that it would appease Wall Street investors and hedge funds to relocate to the city.
The board has tried to persuade wealthy hedge funders and investors with homes in Palm Beach to bring their company’s operations to West Palm. In 2016, Greene said, “How can a city with this much wealth and education have so few amazing buildings, restaurants and hotels?”
So far, few, if any, well-known hedge funds have relocated their primary offices to high-end office developments in Palm Beach County. Hedge funds aren’t looking for huge spaces, but instead, smaller offices. Paul Tudor Jones leased 10,800 square feet at 109 Royal Palm Way in Palm Beach in 2016, according to the Palm Beach Daily News.
“Nobody’s moving down and taking 50,000 feet,” Greene said.
Coronavirus impact
As the pandemic continues to pummel South Florida’s economy, and companies reduce their need for office space, West Palm’s high-end office market could face even harder times.
“At $50 to $60 a foot… The numbers just don’t pencil out,” said Peter Reed, managing partner of Commercial Florida Realty Services.
Greene said that building a hotel also no longer makes sense. Downtown West Palm has four new hotels, and “people have generally adapted new habits,” that pose a challenge for hotels that depend on meetings and conventions, he said.
Construction of the two-tower project has reached the 28th floor, and once the building tops off in a few weeks, Greene said he’ll determine what to do next. Greene is hesitant to install glass or elevators until after he applies for a rezoning.
He could also sell the office building. “We’re willing to get our money out of this,” he said.
“The smart thing is that it should get finished,” he added. “It will get finished.”