By James W. Shindell
When developers delivered three new Class A office buildings in Downtown Miami/Brickell into 2010's slowed economy, some industry watchers expected the new buildings to struggle for years. Four short years later, these buildings, having a combined 1.2 million square feet, have nearly stabilized and new office developments are in the works as part of massive mixed-use developments like Brickell City Centre, Miami Worldcenter, and All Aboard Florida's Miami Central.
A recent study prepared by the Miami Downtown Development Authority sheds some light on the Miami office market. Among the Authority's findings:
- The office market experienced 675,000 square feet of net absorption from quarter 1 of 2012 to quarter 4 of 2013. Nearly 100% of this absorption is attributable to Class A product.
- Current vacancy levels on Brickell Avenue in Miami’s Financial District are at 15%, down from 24.6% in 2011, while vacancy levels in the CBD are just below 20%, down from 23% three years ago.
- Rents have not recovered from the 2008 peak, but steady growth over the last eight quarters has rents now above levels of 2006/7.
- Over the last three years, the CBD/Brickell area has averaged 1.7 million square feet per year leased. The study notes that a significant amount of this activity is reflective of existing office users either renewing in their own space or moving to another building within the market.
- Current stabilization rates would indicate demand for office product to be introduced to market in four to five years (after taking into account the 127,000 square feet currently under construction).
At the core of the office market narrative is the high cost of land in the CBD/Brickell area. The recent sale of the 1.25 acre "Epic II" site on the north side of the Miami River for $125 million is illustrative. A mere four years ago, this property had appraised at ten to twenty percent of this amount. Just across the river, the 444 Brickell office site sold to a condominium developer for $104 million. The prices that developers of ultra-luxury condominiums are willing to pay for land have pushed out developers of other product, including office.
This, combined with the exit of office REITs from suburban product and their move to urban live-work-play markets, has created a boon for the owners of existing Class A office product in the Downtown/Brickell area. These owners find themselves in a position to sell in a bid process to a bevy of waiting institutional investors- insurance companies, foreign investors, pension funds, and REITS, willing and able to pay cash. These deals, currently being negotiated, feature short or no due diligence periods and seller favorable documentation.
The office development field for the foreseeable future is left to those who acquired land prior to the price run-up. Swire’s Brickell City Centre, a 2.9 million-square-foot mixed-use development, plans to bring 260,000 square feet of office space to market in two towers. The first tower of 127,000 square feet is under construction. A local law firm, relocating from the CBD, just announced for 80% of this space. Miami Worldcenter, a $2 billion, 10-block, 27-acre development, is looking to add office space to its project. And All Aboard Florida is developing a 3 million-square-foot urban, mixed-use transit-oriented development around its new train station. The project, called MiamiCentral will offer the first new Class A development in Downtown Miami in years. The office component of the All Aboard Florida project totals nearly 800,000 square feet. The first two towers span 215,000 square feet and are set to open at the end of 2016 when the station comes on line.
These developers believe that demand for office space in the urban core is rising on multiple fronts. The CBD/Brickell market is attracting multinational companies from Latin America, Europe and Asia to its office towers even while new-to-market tenants from New England, New York, California and Illinois are exploring the possibilities in Florida as they seek relief from high tax environments. And smaller local businesses are growing in a recovering economy, sparking organic job growth and a demand for more office space.
Although Miami was hard hit on the office leasing front with over 1 million square feet of space delivered almost all at once, the market is again vibrant. Current owners are in a favorable position to sell. Developers once again see the potential for new office construction. It remains to be seen if and when the new product will come to market, but the developers are optimistic. Both Swire and All Aboard Florida have announced that they believe their developments will create their own demand. They can also look to Miami's resiliency in overcoming the crash and the transformation of the business district to a 24/7 work-live environment.
This article was originally published on Real Estate Finance & Investment.
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