Elevated interest rates and skyrocketing insurance premiums have curbed South Florida’s commercial investment sales flurry of recent years, with cash flow and debt woes besetting some property owners.
Yet, Brickell landlords remain unfazed.
Since last fall, four large properties have hit the market, and two are for unprecedented prices that would surpass records set during the pandemic rush on Brickell, when the area became the prime choice for new-to-market companies.
Nuveen Real Estate is asking over $500 million for its 33-story bayfront 701 Brickell office tower. The April listing would pencil out to $730 per square foot of office space, more than the biggest South Florida office deals of the last two years. In October, the 28-story 801 Brickell tower traded for $250 million –– or $602 a square foot of office space –– and in 2022, the 28-story 1221 Brickell tower traded for $286.5 million –– or $720 a square foot of office space.
In March, Aimco listed its bayfront 4.3-acre site that is home to the 32-story Brickell Bay Office Tower, and the adjacent 31-story, 357-unit Yacht Club Apartments. By right, the property has massive redevelopment potential allowing several supertalls spanning a total of more than 3.1 million square feet of condos, hotels, offices, retail or a combination of these. The asking price of $650 million would break down to $151.2 million per acre, surpassing billionaire Ken Griffin’s $363 million purchase –– or $145.2 million per acre –– of a vacant Brickell bayfront development site in 2022, which set a new South Florida record. Griffin is expected to develop a new headquarters tower for his Citadel and Citadel Securities on the site.
“It is interesting to see some of the [asking] pricing they are coming out with,” real estate attorney Liam Krahe said. “That’s some pretty aggressive pricing.”
Brickell real estate experts stand by landlords’ unprecedented listing prices, citing the neighborhood’s reputation as perhaps the only U.S. office market still thriving. They also point to leasing by high-credit tenants in recent years, and the area’s zoning that allows for some of the densest development in South Florida. Brickell also has grown into a residential mecca, with multiple condo and apartment projects on tap.
Yet, holes have appeared in the narrative that Brickell remains untouched by economic headwinds. The influx of out-of-state companies that lease big blocks of space has dwindled, data shows, raising doubts whether Brickell will continue to grow or keep its status as a top market. The neighborhood’s office rents, which are getting close to $200 a square foot, have driven out some tenants to more affordable areas such as Coral Gables. Last fall, Brickell recorded 95,000 square feet of sublease availability, accounting for 24 percent, or the biggest share in Miami-Dade County, a CBRE report showed.
Asking prices are just that, with investment sales often closing for less, experts say. But record listing prices show landlords are betting on a continued Brickell bonanza, despite an economic slowdown and uncertainty.
Whether the boom keeps going and sales set new records, or deals materialize at all, remains to be seen.
Will they reach new records?
Well-heeled institutional investors need to deploy capital, and few places in the U.S. are as safe as Brickell, said Krahe, of Cohen Property Law Group in Miami. They include domestic, as well as Latin American, European and Middle Eastern investors.
“Those [foreign] markets right now are every bit as tumultuous, if not more, than the U.S.,” Krahe said. “Whatever we think of as unstable, it’s 10 times worse there.… A Qatari investor told me he isn’t looking anywhere in the U.S. except South Florida. They want to put money in the U.S., but they can’t justify putting it into areas like L.A. and New York.”
Still, Brickell is not an exception to one rule of investing: The math has to make sense.
In the current economic climate, equity is scarce, with most investors preferring to deploy private lending funds because debt has a superior position in a payout. The same lending groups eventually also put equity in a deal. For ground-up construction projects, investors’ proformas usually have to project a 6.5 percent return to back a project. Higher insurance premiums, as well as still high building materials and labor costs, continue to eat at development profits.
“If you are not at 6.5 percent return on cost, the buyer won’t get the financing, and the investor isn’t going to come into the deal,” Krahe said. “With respect to Brickell, there is capital, but it’s going to be, ‘Do these numbers make sense?’”
Brickell market experts are divided on whether 701 Brickell and Aimco’s asking prices are justified. (Three sources spoke on the condition of anonymity, citing their work in the Brickell market and wariness that their statements could affect client relationships.)
The 701 Brickell tower does command a higher price than 801 Brickell, one source said. It has
685,279 square feet of offices, more than 801 Brickell’s 415,150 square feet. It is also bayfront, unlike 801 Brickell, which is a block away from the bay. 701 Brickell is just over 90 percent leased, just as 801 Brickell was when it traded last year.
At the Aimco site at 1001 and 1111 Brickell Bay Drive, the pair of existing towers could be hindrance for a buyer, the source said.
“Having the assets on the site is detrimental because you still have to clear those buildings out and then you have to demolish them,” the source said. “It’s more complicated and nuanced than Ken Griffin’s site.”
A second source had a different take. Leases at Aimco’s Brickell Bay Office Tower either expire in 2027 or include a clause that the landlord can invoke to cancel a lease to start redevelopment, the source said. To vacate the Yacht Club Apartments, all a developer has to do is stop leasing it and wait for the 12- to 18-month leases to expire. “So there’s absolutely zero complications,” the source said.
Aimco’s asking price is solely based on the site’s potential for development, with the existing towers an added bonus that gives a buyer cash flow for taxes and other expenses until new plans are approved, the source said.
Yet, a third source had a different take. Aimco’s property “is a generational opportunity,” they said. “If you go up and down the coast, a lot of those sites have been developed and likely won’t be redeveloped for a very, very long time. It’s not surprising that something of this scale could set a record sale value.”
The 701 Brickell office tower also could be a redevelopment site. Its offering memorandum outlines the site’s new construction potential. Under the Miami 21 zoning code, the 3.8-acre site could be developed with up to 1,908 residential units in a 48-story tower by right, and an 80-story tower with bonuses. This potential increases to 2,068 units if a buyer gets approval to develop under Miami-Dade County’s Rapid Transit Zone code.
It would be difficult to build atop the tower’s seven-story garage, which protrudes from the building east to the bay. 701 Brickell and the next-door 777 Brickell are bound by an easement that bans construction atop either tower’s garage, according to the offering. The third source who spoke to The Real Deal said the asking price likely factors in the site’s development potential, but expressed doubt the property would sell for the listed price due to the difficulty of building atop the garage.
“While the value is there, it’s not likely someone looking to buy an office building is willing to give the seller values that would require them to get all kinds of [development] approvals from the neighbor,” the source said. “The complicated nature of this is going to be prohibitive to their pricing.”
Nuveen and a broker who is part of the JLL team marketing 701 Brickell declined comment. A broker who is part of the CBRE team marketing Aimco’s site also declined comment, and Aimco didn’t immediately return a request for comment.
Brickell landlords’ listings seem to generate ripple effects. Shortly after Aimco’s site hit the market, the 26-slip public Vice City Marina at 809 Brickell Key Drive next to the Four Ambassadors condo complex hit the market, with an asking price between $37 million and $40 million.
Last October, after 801 Brickell sold for $250 million, the 15-story 800 Brickell office building hit the market unpriced. Landlord Gatsby Enterprises pulled it off the market, according to Michael Fay, one of the Avison Young brokers who marketed the site.
“We did get offers. But the owners have considered developing a portion of the site themselves and are looking at a couple of other ideas,” he said.
The recent listings come at a difficult time for commercial real estate. The industry widely thought last year that the Federal Reserve would drop interest rates several times this year and investment sales would rally. But these hopes have fizzled as the Fed hasn’t yet slashed rates, and it’s unclear when a reprieve would come. At the same time, bank lending remains tight following the bank collapses early last year.
Yet, a general feeling that South Florida is poised for continued growth has gripped the real estate industry, Fay said.
“Everyone feels we are at the end of the tightening cycle and starting loosened up monetary policy here. We are starting to feel this momentum in the last 45 to 60 days,” Fay said, pointing out that banks aren’t the only lending source. “Some people are getting more aggressive with their underwriting, which helps sellers get a higher price.”
About 15 offers have come in for the Aimco site so far, ranging from the low $500 millions to over $600 million, according to one of the sources who spoke on the condition of anonymity.
The site is separated by one lot to its south — the Mark on Brickell condo tower at 1155 Brickell Bay Drive — from Griffin’s 2.5-acre development site at 1201 Brickell Bay Drive. Publicly traded Aimco has said in its Securities and Exchange Commission filings that it wants to sell the site by year-end.
Could another billionaire decide to go all in on Brickell like Griffin did and scoop up either 701 Brickell or Aimco’s site? That’s yet to play out.
Said Krahe: “We will see how things shake out in the next six to eight months.”
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