Trophy office towers have been trading across South Florida in spite of the regional market slowing down after five years of robust growth.
Four downtown office towers traded in 2018 even with some vacancy rates climbing.
In the fourth quarter, the rate reached 17.7 percent in downtown Miami, the highest in Miami-Dade County, and 12.4 percent in downtown Fort Lauderdale, the second highest in Broward County, according to a Colliers International report.
The pace of overall growth in the region’s office market is expected to slow. Also, the high urban core rents and traffic headaches have been pushing some tenants to the suburbs, experts and reports indicate.
Yet investors still have been betting on some big deals, citing population growth and the evolution into true live-work-play hubs, especially with the development of the downtown Miami WorldCenter and the Virgin Trains USA stations in downtown Miami, Fort Lauderdale and West Palm Beach.
The first residents are arriving at WorldCenter following the opening of the newly finished 43-story, 444-unit apartment tower Caoba. The project also will have retail, a hotel and office and meeting space.
“In South Florida in general, (we are) attracted to the job growth and the population growth,” said Kevin Chin, senior vice president with PCCP LLC, which bought two South Florida office towers last year. “There is substantial development going on in downtown.”
The real estate finance and investment management firm with offices in California and New York bought downtown Miami’s SunTrust International Center for $127 million and as part of a joint venture bought downtown Fort Lauderdale’s 1 E Broward for $108.5 million.
1 E Broward “is a well-leased building. It’s the closest office building to Brightline, so we thought that was attractive as well,” Chin, who is based in New York, said using Virgin Trains’ previous name.
PCCP bought the 19-story Fort Lauderdale building in a joint venture with West Palm Beach-based NAI/Merin Hunter Codman from Ivy Realty.
For NAI/Merin, a commercial real estate services firm that has started buying as well, the purchase was motivated in part by Fort Lauderdale’s growth.
“I can tell you a lot of the young people in my office who formerly would have gravitated to Miami or Delray Beach are now choosing instead to move to Fort Lauderdale,” said Neil Merin, NAI/Merin chairman and founder.
Indeed, added Colliers International’s Warren Weiser, Central Business Districts here now not only have retail and residential offerings but also various modes of transportation. This has prompted a diversification of tenants, making the areas attractive to investors, added Weiser, vice chairman of capital markets for Florida.
The top-dollar transaction in 2018 was the $248.5 million purchase of Brickell’s Sabadell Financial Center, a 522,892-square-foot, 30-story tower on 1.78 acres. A joint venture of New York-based global investor KKR & Co. Inc. and Orlando-based office real estate owner and operator Parkway Properties bought the building from PGIM Real Estate.
KKR, a new-to-market investor, echoed NAI/Merin and PCCP by saying population growth and the live-work-play lifestyle, in part driven by the mixed-use Brickell City Centre, attracted it to Brickell.
“You’ve got really young people living there. There’s a lot of restaurants and a lot of commercial activity coming online. From a demographic perspective, just the idea that today so many people are within those age demographics, 24 to 44 and zero to 14, means they are working there and/or starting families there, which was part of the investment thesis for us,” Roger Morales, KKR member and head of commercial real estate acquisitions for the Americas, told the Daily Business Review last October.
Sabadell Financial Center, also called 1111 Brickell, traded last June.
Later in the year, an affiliate of New York Life Insurance Co. subsidiary NYL Investors LLC bought the 33-story Brickell City Tower, also referred to as Brickell Bayview, at 80 SW Eighth St. for $117 million. The seller was a joint venture of real estate investors Banyan Street Capital LLC, Crocker Partners LLC and Independencia Asset Management LLC.
This was the second major property unloaded last year by Crocker Partners, a Boca Raton-based investor, which also sold the SunTrust tower.
As a value-add investor, Crocker buys underperforming assets, repositions them by increasing occupancy, through renovations or both, and then sells them. It completed this strategy with Brickell Bayview and SunTrust, managing partner Angelo Bianco has told the DBR.
In downtown Fort Lauderdale, 200 E Broward traded in October 2017. Miami-based Banyan Street Capital LLC in a joint venture with funds managed by Los Angeles-based Oaktree Capital Management LP bought the 21-story building from an affiliate of Boston-based investment manager TA Realty LLC for $81.5 million.
New owners are looking for quick improvements.
For one, SunTrust, which underwent a $13.5 million renovation that included work on the elevators, lobby and multi-tenant floors by Crocker, had some vacancy on the five highest floors at the time of sale.
The property includes a pedestal garage, 33,502 square feet of fully leased retail and 406,346 square feet of office space, with a 39 percent vacancy rate at the time of sale.
PCCP’s Chin said that’s now down to 30 percent to 35 percent.
“We’ve had positive leasing momentum,” he said. “We’ve implemented speculative suite program.”
PCCP has subdivided some of the vacant space into 10,000-square-foot or smaller units, making them move-in ready for smaller tenants who generally are looking for speed, Chin said.
“When they are looking for space, they need it in the next two to three months. We have built out those suites that corporations can come in and occupy,” he said.
The purchase also made sense for PCCP because the $127 million price tag is much less than new construction, Chin noted. Both SunTrust and 1 E Broward offer an upside in rental revenue, too.
Ivy Realty, which sold 1 E Broward, invested $5 million in renovations in the 1984 tower and raised occupancy to 91 percent. Since the sale, the rate is up to 93.5 percent.
At the same time, rents have remained below market, according to Merin.
They average now is $18 per square foot triple net compared with the average market rate of $30 to $35 per square foot, he said. Rents won’t be increased to the market rate but may hit $28 a square foot.
Aside from the Fort Lauderdale train station, the tower is just south of FATVillage, a once dilapidated warehouse district that’s experienced a rebirth.
“It looks very much like Wynwood five or maybe six years ago,” Merin said, referring to FATVillage. “Instead of being adjacent to the worst neighborhood in Fort Lauderdale, it (1 E Broward) is adjacent to the most attractive neighborhood in the city.”