Stephen Ross becomes king of West Palm offices
Group bets on generating tenants from its New York network and on financial firm influx to South Florida
For Stephen Ross, his latest bet on the West Palm Beach office market must feel like déjà vu.
In the aftermath of the 9/11 terrorist attacks, when buyers canceled contracts, financing froze and construction halted, Ross forged ahead despite doubt over the future of New York City real estate. His Related Companies kept building AOL Time Warner Center, now called the Deutsche Bank Center, with offices, condominiums, a Mandarin Oriental hotel and retail.
Ross, who owns the Miami Dolphins, did not know it at the time, but two decades later his newest conquest would be downtown West Palm Beach, where Related has become the biggest Class A office owner after spending more than $457 million in the past seven months.
Ross’ investment in the West Palm Beach office market mirrors his post-9/11 bet. Both times he was constructing a major project when unexpected events cast a serious shadow. Both times he moved ahead when few believed in the market enough to make a hefty play. And both times Ross invested fearlessly.
In West Palm Beach, Related was in the midst of building the 360 Rosemary Square office tower when the coronavirus pandemic struck.
“Related was really in a quandary because their new office building was under construction and Covid hit, and nobody was doing anything,” said Neil Merin, chair of NAI Merin Hunter Codman.
By last autumn, the South Florida office market had turned around, opening the door for Related to make its big play. The group bought two trophy office buildings and half of the interest in a third, while it finished and fully leased 360 Rosemary. It is about to start construction on another tower after purchasing a church site.
Yet the viability of Related’s office empire is under a microscope. While it is boldly betting on the influx of financial firms to South Florida, it remains to be seen whether tenants plan to make the region their permanent home.
To grasp Related’s confidence in the market, look at the numbers. It shelled out roughly $25 million more for the three buildings than competing buyers were willing to offer, according to Merin.
In January, Related bought the two Phillips Point office towers for $282 million. Then it bought the CityPlace Tower for $175 million, followed by the acquisition of half of the ownership interest in Esperanté Corporate Center for an undisclosed amount.
Related bid about $10 million more than the next-highest offers for Phillips Point, said Merin, whose NAI subleased the top three floors to a hedge fund prior to the building’s sale. Related also dropped $10 million over the seller’s asking price from two years ago for CityPlace. Related closed in May.
Merin, who represented an undisclosed unsuccessful bidder for Esperanté, said Related also offered the most for the interest in that tower, although he did not know exactly how much the group paid. Still, Related’s extra ante for this tower accounted for the remaining $5 million of the $25 million Merin estimated it shelled out above competitors’ bids.
“This is a case where one plus one, plus one, equals five,” Merin said. “The ability to raise rents at Phillips Point and not get undercut by Esperanté or CityPlace Tower … reinforces his ability. Ross is not going to get undercut by himself.”
He added that the occupancy rate in the three towers reached roughly 85 percent to 87 percent in June, although he expects this to increase with the financial firm influx.
Related Southeast Partner Gopal Rajegowda said the group’s play in downtown West Palm Beach is not new.
In 2000, Related developed the 72-acre CityPlace, which was renamed Rosemary Square as part of a $550 million renovation and expansion of the mostly retail complex.
“We have always been a big fan of West Palm,” Rajegowda said. “It’s just that in the last year we have seen a significant accelerated growth and inquiry for best-in-class office space.”
The group’s wager on the market is in part based on the ability to generate tenants from its New York network, and in part on the growth of the South Florida financial service sector, he said.
Rajegowda declined to confirm either as a potential or current tenant.
To the extent the group is betting on financial firms, its next office tower, One Flagler, has been dubbed the “hedge fund tower,” said Robert Orban, who heads the South Florida office of Cresa.
Related plans to start building the 25-story One Flagler in October and finish it in 2023, after buying the site overlooking the Intracoastal Waterway for $20.1 million in July.
Still, the tenants moving to South Florida have yet to discover the region’s challenges, Orban said.
“The question for all of South Florida for these out-of-market tenants is, ‘How long will they stick here?’” he said. “We have seen instances before where people will come in and kind of dip their toe in the market and sign a three-year lease, and then they [say], ‘It’s kind of not working for us.’ We are at the beginning stage of it now.”
Among the issues that could arise is finding a trained labor pool, Orban said. “We don’t have the power of a Boston or an Austin or Silicon Valley in terms of location for that kind of talent,” he said.
Related’s Rajegowda is not worried, saying tenants have signed long-term leases. They are “firms with significant financial net worth,” he said. “I don’t think they are taking the decision lightly.”
But a long-term lease does not necessarily mean a tenant will stay. About four years after Boston-based Fidelity Investments signed a seven-year lease in 2007 in Brickell, the firm started looking to sublease its space.
Fidelity said it was not finding “the right mix of folks down here,” Orban recalled.
Angelo Bianco, managing partner of CP Group, is confident, saying the risk for Related is nonexistent. CP Group co-developed the 18-story CityPlace with Related in 2008.
Bianco said downtown West Palm Beach tenants are diverse, making for a balanced market. They also are small, making for little risk if one tenant opts out. And they are here to stay.
“People like the ease of the South Florida lifestyle, and I don’t see anyone going back,” Bianco said.
Still, Orban notes that new-to-market tenants’ eagerness to move to South Florida occurred during the cooler months.
“Oh, the humidity today is something,” he said in June. “It would be interesting to talk to these folks in a year, after they have lived here and through the weather and the hurricanes and some of the other challenges we have in Florida. They are easy to overlook when you are here on vacation.”