Source: http://worldcityweb.com/home/MIA/publications/magazine/24/662/

South Florida office market is tightening

by Richard Westlund

For the past three years, many South Florida companies enjoyed the benefits of a soft office market. Ever since the nationwide post-9/11 economic slowdown, landlords have been offering appealing leasing rates, free rent and other concessions to attract office tenants.

But that situation is changing in 2005, say commercial leasing experts interviewed by WorldCity. With no significant new office construction under way in Miami-Dade or Broward Counties, vacancy rates are falling. At the same time, leasing activity is picking up as more tenants are making long-delayed decisions about their space needs.

“For a tenant, now is a great time to be looking for space,” says Sandra Andersen, senior vice president and leasing director, Jones Lang LaSalle, Fort Lauderdale. “We’re definitely seeing the markets tighten. Tenants should take advantage of today’s good packages, because that will change in the next 12 months.”

Miami-Dade’s office vacancy rate has been gradually falling from a peak of 15.6 percent in mid 2003, according to CB Richard Ellis. The arrival of new international companies like Kraft Foods and AIG Latin America, as well as expansions by professional firms like White and Case resulted in net positive absorption of 1.1 million square feet in 2004.

Other tenants, such as Shutts and Bowen have taken advantage of today’s market conditions through a “blend and extend” approach, lengthening their leases in order to lock in rents at current market values.

The opening of Espirito Santo Plaza on Brickell Avenue and 2525 Ponce in Coral Gables in 2004 added 1 million square feet to the county’s overall supply of space. During 2004, the average asking rent in Miami-Dade rose from $23.97 to $24.50 per square foot. This increase was due to improving market fundamentals, as well as a continued decrease in sublease offerings, said the CB Richard Ellis report.

In the first quarter of 2005, Miami-Dade enjoyed net absorption of 279,000 square feet, according to a report from Jones Lang LaSalle. The county’s overall vacancy rate fell to 12.1 percent from 12.3 percent at year-end 2004. Demand for space was concentrated in the Airport West, Miami Lakes and downtown submarkets.

“Despite increased demand, true rental rate growth is not anticipated until next year,” says Christopher J. Wasko, international director, leasing and management Jones Lang LaSalle.

Falling Vacancies

With no new office buildings now under construction, and leasing activity on the rise, vacancies will decline even more quickly during the rest of 2005, according to Peter Harrison, senior vice president, Transwestern Commercial Services, Miami. “I don’t think you’ll see a new building delivered in downtown Miami or Brickell for at least four years,” he says. “With today’s higher land and construction costs, you need rents in the $40 range to justify new construction.”

Currently, tenants are paying $33 to $35 per square foot for Class A space in the downtown, Brickell and Coral Gables markets, says Harrison. “I believe you’ll see rents go up by $2 a square foot across the board in Miami-Dade this year. That’s a reflection of the fact that there is no new product on the horizon.”

Companies looking for the best deals on leasing rates might consider the Airport West market. “That submarket is still soft, although it’s much stronger than it was two years ago,” says Harrison. “Those office buildings are less expensive to build and have surface parking, so rents don’t have to be as high as downtown.”

Another option would be buying space in an office condominium building. Traditionally, this approach has appealed primarily to small businesses leasing 1,000 to 5,000 square feet, and to medical businesses with high tenant build-out costs, such as equipment and water, power and medical gas lines.

Buying Space

In recent years, a growing number of international firms are buying office space as well a strategy that is common in Mexico and South America. Ownership allows them to have more control of their space, while gaining the benefit of any appreciation in the property’s value.

Throughout South Florida about 1.5 million square feet of condo office space is now under construction or in the planning stage, according to Miami developer Kenneth Weston, president, Kenneth Weston & Associates. Weston says this new space is focused primarily on medical practices and other healthcare users.

That includes several existing office buildings in Aventura, Brickell and other South Florida locations that are being converted into condos aimed at both domestic and international entrepreneurs. Because it typically takes two years to deliver a new office building, these types of conversions offer immediate space availability for smaller users with an immediate need, says Harrison.

However, Harrison cautions that office condominiums make sense only when a business or professional firm feels confident that its space needs won’t change for at least five to ten years. “If you know you’re going to expand or contract during the next decade, you’re usually better off renting than owning,” he adds.

Broward Outlook

In many ways, the outlook for Broward County’s office market is similar to Miami- Dade’s: slowly falling vacancy rates, lack of new construction and potentially rising leasing rates.

“We expect to see a 5 percent bump in leasing rates this year,” says Jeff Holding, managing director, CB Richard Ellis, Fort Lauderdale. “With very little new construction, positive absorption of space will continue.”

In 2004, vacancies in the Broward market declined from 15.4 to 13.8 percent at year end, according to a CB Richard Ellis report. Absorption totaled 555,000 square feet and the average full-service asking rent rose from $21.94 to $22.17 per square foot.

Only two significant buildings totaling 290,500 square feet were added to the Broward market in 2004: Himmarshee Landing and the conversion of the Offices at the Fashion Mall from retail to offices. That’s well below the construction pace of the past four years, which averaged more than 2.9 million square feet annually.

A first-quarter report from Jones Lasalle Lang showed the highest vacancy rates in downtown Fort Lauderdale (19.34 percent) and Cypress Creek (19.16 percent). That’s was well above the suburban market average of 11.76 percent.

Clearly, leasing activity this year is strongest in the suburbs. “We’re seeing more activity in Sunrise, Miramar, Weston and the rest of the southwest Broward corridor,” says Holding. “That space is running from $12 to $17 a square foot, and it offers convenient access to suburban workers as well as the Miami-Dade market.”

Andersen adds that international tenants may also find attractive rates in Cypress Creek, whose office towers are lagging other South Florida markets. “We are seeing more large users starting to make decisions, and that’s a positive for the entire marketplace,” he adds.

Looking ahead to the second half of 2005, South Florida leasing experts agree that the region’s international orientation is a clear plus for its office market. “With its reliance on the Latin America and European economies, Miami is less afflicted by the boom/bust cycles that afflict many other U.S. markets,” said the CB Richard Ellis report. “Whereas many other markets around the nation still grapple with the excess capacity and extended period of business recovery, the Miami-Dade office market is an expansionary mode.”