The residential development surge in Miami’s urban core is driving land prices to levels that make it difficult to build office space.
In July, for example, an Argentine investor bought 1.25 Downtown acres for $125 million, a price tag too hefty for most office developers. And insiders told The Real Deal that wasn’t the top price offered for the parcel.
Yet there’s little concern among industry observers about any impending office inventory squeeze. Despite two years of growth, the Miami-Dade office market is still recovering from the recession.
The office vacancy rate for Miami-Dade stood at 15.5 percent at the end of the second quarter, according to market research from CBRE. That’s down from 17.4 percent at the end of 2013, and a significant drop from the 19.1 percent peak in the 2012 first quarter. But it’s still far higher than the 7 percent seen in 2007.
In Downtown, the vacancy rate was 21.1 percent, CBRE data shows. In Brickell, the region’s priciest office market, it was a healthier 13.1 percent.
The recovery should continue into 2015, according to JLL executive vice president Scott Strickland. He cited the area’s proximity to Latin America, an appealing lure for international banking firms, as a key driver of the market’s rebound.
Attorney Lewis Cohen, a shareholder at GrayRobinson, also pointed to new firms for lifting the office market, including many foreign companies, particularly from Brazil. Some New York securities firms are also expanding into the area, he said.
“The pick-up in market activity has been really extraordinary over the past year,” Cohen said.
Hedge funds and energy companies are likewise becoming significant players in the Miami office market, according to Blanca Commercial Real Estate vice chairman Danet Linares. “The city has really grown up,” she said.
In the last three-and-a-half years, about 2 million square feet was added to the market, according to Linares. Most of it has been absorbed, and few large blocks of space are left.
One response to high land prices, along with demand for developments that CBRE calls “live-work-play” is mixed-use development, which can provide a higher return for the builder.
Linares said she is seeing an increase in this segment, citing the Swire Group’s Brickell City Centre, which includes hotel, residential, retail and office space.
Development is also creeping westward. “There’re a ton of cranes west of Brickell,” Linares said.
As vacancy declines, rents are rising. CBRE found the average asking rate was $30.83 per square foot at the end of the second quarter, up 12 cents from the prior quarter.
Like developers seeking lower land prices, some companies are looking outside of the Central Business District to escape higher rents.
Shared workspaces and telecommuting are also on the rise, according to Metro 1 president Tony Cho. This in turn promotes the adaptive and creative re-use of existing buildings.
“The way that people work is evolving,” Cho said. “Not a lot of people are talking about traditional new office construction now.”