While the political scene has been — to say the least — volatile, the South Florida office market has cast its directional vote for the next year or so: conservative.

“I’d say that 2015 could be considered the apex of the market for sure,” said John Bell, managing director with real estate company Transwestern. “The real estate cycle, by anyone’s standards, is usually three to five years. Well, we’re going into a seven-year cycle with extra innings. I’m curious where and when it will end.”

The “extra innings” doesn’t signal a market crash, he stresses. “There will be a correction of maybe five to 10 percent of values. Or values won’t go up for a while.”

Bell points to a disconnect between buyers and sellers. “Sellers are expecting an appreciation of their assets and are meeting resistance,” he said. “I’m not talking about a significant drop in value, but they will not get the big increases that owners are consistently looking for. Someone who was expecting $22 million this year will only get $20 or $21 million.”

Office transaction volume is down about 15 percent to 25 percent from 2015 depending “on the source,” said Scott O’Donnell, executive director of Cushman & Wakefield. He attributes part of this downturn to changes in the financing markets.

“In 2016, capital retention requirements came in that started to impact the financing markets,” he said. Commercial mortgage backed securities, or CMBS, is “pulling back dramatically. That has always been a major source of financing. In 2014 it was estimated that it was about 25 percent of financing. This year, it’s 9 percent. It’s making it harder for deals to get across the goal line.”

With the CMBS pullback, there will be longer amortization with longer terms — seven to 10 years as opposed to the five to seven that banks offer and 30-year terms versus 20 to 25, he adds.

Colliers International reports the region’s office market absorbed more than 260,000 square feet in the second quarter and rates are increasing. Class A asking rates rose by 50 basis points to the current average of $40.41 per square foot. The slight increase in leasing activity in the second quarter over the first was due to existing tenants wanting new or relocation space (70 percent) as well as new tenants entering the Broward market (30 percent).

Research from JLL notes strong third-quarter leasing activity in Miami-Dade County with 170 transactions taking place with a median of 1,800 square feet executed across the county’s nine major office submarkets. Still, the report conceded the market is “subdued” relative to historical norms.

Ken Krasnow, executive managing director for Colliers, admits, “You’re starting to see a little bit of elongated decision-making. Leasing volume is a little slower. It’s not a reflection of weakening demand, but decision cycles are getting longer, and people are more cautious.”

Millennial Push

However, he sees a transformation with developers and property owners finding deals in “micro markets such as Brickell, Coral Gables, Coconut Grove and even downtown Miami, which are historically not known for or led by office development.”

This transformation is being pushed by millennials who demand a work-play-live lifestyle. “We’re starting to see more developers who see office as a component of mixed use. It’s been a trend elsewhere, but we’re late in it coming here,” Krasnow said. “The market, Miami in particular, is really undergoing a transformation being fueled by the office side of urbanization. These micro markets will become more dense, more self-sufficient. We’ll start to see office become more of a factor in these nontraditional office markets.”

This new dynamic will be a factor throughout the area, he notes. “Brickell is becoming a mixed use area. Downtown Miami, which had lost is luster, is now a sought-after location because millennials want that walkability factor or access to the Metro Rail.”

Michael T. Fay, principal and managing director of the Miami office of Avison Young, a Canadian-based commercial real estate services company, believes the market is still very healthy with rental rates continuing to rise. “Miami is on the map, and it will continue to be a heavy investment market. Some groups will be very aggressive or stretch to get into the market. Foreign capital and other investment groups that don’t have Miami properties are still looking.”

Even with a vibrant market, he sees the activity as being “tempered. People are looking twice over the deal. There’s more conservative underwriting. We need to watch interest rates because they may rise one or two times, and then after that we’ll be in prolonged period of low interest rates. Underwriting will have to adjust. I don’t see lending slowing down, just a conservative, realistic look at things.”

A year or two ago, he would see maybe 15 to 20 offers on a property with a tight bidding range. “Today we may get 10 to 12 offers, and there’s more space between the high and the low.”

Jay Caplin, managing principal with Steelbridge Capital, said the 2009 financial crisis still “looms in everyone’s minds. Underwriting and valuations from lenders are being pretty critical. They’re approaching it with a sober view.”

Still, many positive factors are in the market’s favor. New companies are coming to the area, and there is good organic growth. Office demand has driven up rental rates and lowered vacancies.

In addition, the market is still attractive to foreign capital, but more capital is now coming from Europe and the Middle East in additional to the earlier Latin American influx. Direct flights to China and Asia, which are in the works, should encourage Asian investment as well. Changes in Canadian pension fund laws now allow more money to come from the Great White North.

“Real estate is still a relatively safe investment,” Caplin said.

Market Value

Interestingly, Krasnow said capital is available for New York-based institutional investors.

“They’re very attractive to Miami. A lot of people are looking at Miami the way they saw New York 20 years ago; they saw the transformation of Brooklyn and parts of Manhattan. They can easily make the connection of what certain pockets of Miami could look like in five, 10 to 15 years,” he said.

Caplin said the overall health of the market is very strong and points to the SunTrust Center property in Fort Lauderdale as an example. Steelbridge Capital acquired the 270,000-square-foot office complex in June for $90 million, or $333 per square foot.

“Our view is that there’s still value in the market,” he said. “There’s not a tremendous amount of construction, which we see as a positive sign. And job growth, it drive rents up. There is always a market for properties that can be improved.”

After the interivew, Fort Lauderdale’s 110 Tower traded for $113 million, and Miami’s New World Tower sold for $84 million.

O’Donnell said another reason why transaction volume may be slowing is a number of deals over the past four years involved distressed properties that had vacancy issues and the buyers, bought low, stabilized the asset and resold it.

“The next owners won’t achieve a big pop in value through value creation or dramatic increases in occupancy,” he said. “They’ll have to get it in rent growth, and it’s going to take longer to achieve the profitability they’re seeking.”

Hindering the growth of the Miami office market is the difficulty in landing a signature tenant that will absorb several floors.

“Among the reasons why there are limited new properties being developed is that it’s hard to get financing for a spec office building. Unless you have a specific tenant, it takes time to identify tenants and lock them in,” Caplin said. “There aren’t that many big tenants in Florida; you don’t have the same corporate concentrations that you have in Atlanta or Charlotte.”

Election Overhang

Still, experts predict a definite flurry of activity and then a slowdown for a variety of reasons.

“The banks have been very bullish on South Florida, and all the loans they have been hoping to do have been allocated,” Caplin said. “I believe the next six months will be pretty solid with no major correction, but after that it could be highly speculative. What we’re advising clients who are looking to trade is to bring it out now or first quarter of 2017 or wait until it normalizes and we see an adjustment in late 2017.”

Bell expects a rush to bring properties on the market in the second half of the year. “Institutional and private groups, even if they’re on the fence about whether they’re ready to go or not, are getting the deal out the door to monetize it now.”

Of course, a nagging factor in the market has nothing to do with interest rates, signature tenants and work-life balance. It’s the election.

“The economy is in a holding pattern until after the election. After the election, some of the air will be let out of the balloon,” Bell said. “If the Democrats win, there is a lot of belief that capital gains taxes will most likely go up, maybe not overnight, and that affects real estate is a big way. If Trump comes in, there are other factors that will come in, maybe not taxes but the perception of instability and that things could change.”

O’Donnell said, “If this election goes in a strange way or if some geopolitical events occur, things could change very quickly.”

While the political scene has been — to say the least — volatile, the South Florida office market has cast its directional vote for the next year or so: conservative.

“I’d say that 2015 could be considered the apex of the market for sure,” said John Bell, managing director with real estate company Transwestern. “The real estate cycle, by anyone’s standards, is usually three to five years. Well, we’re going into a seven-year cycle with extra innings. I’m curious where and when it will end.”

The “extra innings” doesn’t signal a market crash, he stresses. “There will be a correction of maybe five to 10 percent of values. Or values won’t go up for a while.”

Bell points to a disconnect between buyers and sellers. “Sellers are expecting an appreciation of their assets and are meeting resistance,” he said. “I’m not talking about a significant drop in value, but they will not get the big increases that owners are consistently looking for. Someone who was expecting $22 million this year will only get $20 or $21 million.”

Office transaction volume is down about 15 percent to 25 percent from 2015 depending “on the source,” said Scott O’Donnell, executive director of Cushman & Wakefield. He attributes part of this downturn to changes in the financing markets.

“In 2016, capital retention requirements came in that started to impact the financing markets,” he said. Commercial mortgage backed securities, or CMBS, is “pulling back dramatically. That has always been a major source of financing. In 2014 it was estimated that it was about 25 percent of financing. This year, it’s 9 percent. It’s making it harder for deals to get across the goal line.”

With the CMBS pullback, there will be longer amortization with longer terms — seven to 10 years as opposed to the five to seven that banks offer and 30-year terms versus 20 to 25, he adds.

Colliers International reports the region’s office market absorbed more than 260,000 square feet in the second quarter and rates are increasing. Class A asking rates rose by 50 basis points to the current average of $40.41 per square foot. The slight increase in leasing activity in the second quarter over the first was due to existing tenants wanting new or relocation space (70 percent) as well as new tenants entering the Broward market (30 percent).

Research from JLL notes strong third-quarter leasing activity in Miami-Dade County with 170 transactions taking place with a median of 1,800 square feet executed across the county’s nine major office submarkets. Still, the report conceded the market is “subdued” relative to historical norms.

Ken Krasnow, executive managing director for Colliers, admits, “You’re starting to see a little bit of elongated decision-making. Leasing volume is a little slower. It’s not a reflection of weakening demand, but decision cycles are getting longer, and people are more cautious.”

Millennial Push

However, he sees a transformation with developers and property owners finding deals in “micro markets such as Brickell, Coral Gables, Coconut Grove and even downtown Miami, which are historically not known for or led by office development.”

This transformation is being pushed by millennials who demand a work-play-live lifestyle. “We’re starting to see more developers who see office as a component of mixed use. It’s been a trend elsewhere, but we’re late in it coming here,” Krasnow said. “The market, Miami in particular, is really undergoing a transformation being fueled by the office side of urbanization. These micro markets will become more dense, more self-sufficient. We’ll start to see office become more of a factor in these nontraditional office markets.”

This new dynamic will be a factor throughout the area, he notes. “Brickell is becoming a mixed use area. Downtown Miami, which had lost is luster, is now a sought-after location because millennials want that walkability factor or access to the Metro Rail.”

Michael T. Fay, principal and managing director of the Miami office of Avison Young, a Canadian-based commercial real estate services company, believes the market is still very healthy with rental rates continuing to rise. “Miami is on the map, and it will continue to be a heavy investment market. Some groups will be very aggressive or stretch to get into the market. Foreign capital and other investment groups that don’t have Miami properties are still looking.”

Even with a vibrant market, he sees the activity as being “tempered. People are looking twice over the deal. There’s more conservative underwriting. We need to watch interest rates because they may rise one or two times, and then after that we’ll be in prolonged period of low interest rates. Underwriting will have to adjust. I don’t see lending slowing down, just a conservative, realistic look at things.”

A year or two ago, he would see maybe 15 to 20 offers on a property with a tight bidding range. “Today we may get 10 to 12 offers, and there’s more space between the high and the low.”

Jay Caplin, managing principal with Steelbridge Capital, said the 2009 financial crisis still “looms in everyone’s minds. Underwriting and valuations from lenders are being pretty critical. They’re approaching it with a sober view.”

Still, many positive factors are in the market’s favor. New companies are coming to the area, and there is good organic growth. Office demand has driven up rental rates and lowered vacancies.

In addition, the market is still attractive to foreign capital, but more capital is now coming from Europe and the Middle East in additional to the earlier Latin American influx. Direct flights to China and Asia, which are in the works, should encourage Asian investment as well. Changes in Canadian pension fund laws now allow more money to come from the Great White North.

“Real estate is still a relatively safe investment,” Caplin said.

Market Value

Interestingly, Krasnow said capital is available for New York-based institutional investors.

“They’re very attractive to Miami. A lot of people are looking at Miami the way they saw New York 20 years ago; they saw the transformation of Brooklyn and parts of Manhattan. They can easily make the connection of what certain pockets of Miami could look like in five, 10 to 15 years,” he said.

Caplin said the overall health of the market is very strong and points to the SunTrust Center property in Fort Lauderdale as an example. Steelbridge Capital acquired the 270,000-square-foot office complex in June for $90 million, or $333 per square foot.

“Our view is that there’s still value in the market,” he said. “There’s not a tremendous amount of construction, which we see as a positive sign. And job growth, it drive rents up. There is always a market for properties that can be improved.”

After the interivew, Fort Lauderdale’s 110 Tower traded for $113 million, and Miami’s New World Tower sold for $84 million.

O’Donnell said another reason why transaction volume may be slowing is a number of deals over the past four years involved distressed properties that had vacancy issues and the buyers, bought low, stabilized the asset and resold it.

“The next owners won’t achieve a big pop in value through value creation or dramatic increases in occupancy,” he said. “They’ll have to get it in rent growth, and it’s going to take longer to achieve the profitability they’re seeking.”

Hindering the growth of the Miami office market is the difficulty in landing a signature tenant that will absorb several floors.

“Among the reasons why there are limited new properties being developed is that it’s hard to get financing for a spec office building. Unless you have a specific tenant, it takes time to identify tenants and lock them in,” Caplin said. “There aren’t that many big tenants in Florida; you don’t have the same corporate concentrations that you have in Atlanta or Charlotte.”

Election Overhang

Still, experts predict a definite flurry of activity and then a slowdown for a variety of reasons.

“The banks have been very bullish on South Florida, and all the loans they have been hoping to do have been allocated,” Caplin said. “I believe the next six months will be pretty solid with no major correction, but after that it could be highly speculative. What we’re advising clients who are looking to trade is to bring it out now or first quarter of 2017 or wait until it normalizes and we see an adjustment in late 2017.”

Bell expects a rush to bring properties on the market in the second half of the year. “Institutional and private groups, even if they’re on the fence about whether they’re ready to go or not, are getting the deal out the door to monetize it now.”

Of course, a nagging factor in the market has nothing to do with interest rates, signature tenants and work-life balance. It’s the election.

“The economy is in a holding pattern until after the election. After the election, some of the air will be let out of the balloon,” Bell said. “If the Democrats win, there is a lot of belief that capital gains taxes will most likely go up, maybe not overnight, and that affects real estate is a big way. If Trump comes in, there are other factors that will come in, maybe not taxes but the perception of instability and that things could change.”

O’Donnell said, “If this election goes in a strange way or if some geopolitical events occur, things could change very quickly.”