Deanna Lobinsky (Melanie Bell)
After five years of being forced to offer deep concessions just to keep the bottom from falling out of the office leasing market, 2014 is shaping up to be the year office landlords finally get to breathe a little easier.
Buoyed by a revived market, office buildings are trading at higher premiums, and lease rates are slowly creeping up.
Related: Shared Office Space No Longer An Embarrassment
For the first time in years, Class A office space in some desirable urban quarters can honestly be described as scarce.
It’s not quite a landlord’s market, but it’s also not the tenant’s paradise seen since the depths of the financial crisis.
“We firmly believe that the market is in an equilibrium now, and it’s going away from being a tenant’s market,” said Maggie Kurtz, a CBRE senior vice president with 25 years of experience in the South Florida commercial real estate
The changing tide for office landlords is apparent in the revival of a market for sales, led by the $71 million sale of the Esperante Corporate Center in West Palm Beach on Nov. 26
In the last six weeks, Fort Lauderdale attorney Keith Poliakoff has helped four long-time tenants buy their first office buildings. The Arnstein & Lehr partner said it’s a sign that increased pressure on lease rates is spurring investment in office space across South Florida.
“Rents are on the rise, so it might be time to buy,” said Poliakoff, who in January closed on an $8.25 million deal for a 26-year-old, 52,000-square-foot Hollywood office building. “We’re seeing a tremendous trend of people who previously didn’t own their offices now jumping into the still-depressed real estate market and buying buildings.”
Quoted lease rates inched up 5 percent in South Florida suburban markets and more in Miami’s Brickell Avenue corridor and Fort Lauderdale’s Las Olas Boulevard strip.
The jump is not necessarily evident from asking rates, which have remained flat or only moderately higher in most markets. But double-digit jumps in actual rates indicate landlords are doing away with deep concessions seen during the financial crisis, and tenants are increasingly paying closer to the asking price.
“The tide’s definitely turned,” Ed Mitchell, senior vice president of South Florida operations for Duke Realty, said at the Feb. 12 Marcus & Millichap CRE Forum Florida. “Brokers still ask for discounts, but they’re less likely to get them.”
First to go was rent abatement and the days when renters could negotiate six to 12 months’ worth of concessions on five-year leases.
“Landlords have more control over what pricing they can achieve in today’s marketplace,” said Shay Pope, a tenant representative and senior vice president of CBRE. “For the foreseeable future we expect to see rates continuing to rise in all submarkets across South Florida.”
Supply And DEMAND
Increased demand, in an improving economy where South Florida’s population grows at a faster pace than the national average, is of course part of the equation.
Scott Strickland, Miami executive vice president at JLL, formerly Jones Lang LaSalle, pointed to the last three skyscrapers to open in Miami’s urban core. Downtown’s Wells Fargo Center, 600 Brickell Ave. and 1450 Brickell Ave. have been leasing their space at a brisk pace. That’s in spite of the fact that “those buildings came online at the worst part of the market, after the bubble had burst and the situation was bleak,” Strickland said.
He said hedge funds are among the companies that have scouted for space in the Brickell area.
“We’re seeing creative companies and entrepreneurs taking a lot of office spaces. If you see at the LabMiami and Quest, those are popular,” Strickland said. “It’s not just the entrepreneurs. It’s the big companies that want to test the waters. Thirty to 35 percent of the deals are coming from out of state.”
Some major firms are moving their headquarters to South Florida for tax benefits and other incentives. One of the latest announcements came in January when the Cancer Treatment Centers of America said it would move from suburban Chicago to Boca Raton. It was the largest deal involving a corporate relocation since DHL Worldwide Express signed a $5 million lease to move its Latin American, Caribbean and Canadian operations to Plantation about 14 years ago.
“People are coming from all over,” Strickland said. “Miami is hot.”
Building owners also benefit from a slim construction pipeline. No new multitenant office complexes of 30,000 square feet or more are under construction in Broward or Palm Beach counties. Even in Miami-Dade, South Florida’s most active market, office construction remains conservative with 170,724 square feet set for delivery this year and 128,580 square feet expected in 2015.
Brokers say the result is upward pricing pressure as tenants compete for prime spots.
“Class A space is solidifying across the board, and it’s pushing rates up for all asset types,” said Deanna Lobinsky, senior vice president in CBRE Inc.’s Fort Lauderdale office.
That’s especially true in Fort Lauderdale, where vacancy rates contracted, absorption soared and rents grew in the last 12 months as new tenants occupied 400,000 square feet of office space. With Class A occupancy hovering around 90 percent, brokers say the market has shifted in favor of owners of premium space.
“Every six or seven years you see signs of a landlord market emerging,” said Rudy Touzet, managing partner at Miami-based Banyan Street Capital LLC. “I think you’re seeing early signs here.”
A case in point is the reversal of fortunes at Fort Lauderdale’s One East Broward, which struggled with cash flow about two years ago when occupancy stagnated at 45 percent. But after upgrades by owner Capital Realty Inc., new tenants leased 100,000 square feet in 2013, bringing occupancy to more than 85 percent. Rental rates have since climbed about 10 percent to reach $18.50 per square foot.
“The good news is in today’s environment it’s not simply tenants shifting from one space to another,” Pope said. “There’s relocation into South Florida and real job growth.”
It’s not all good news for office landlords. One ongoing challenge is shrinking demand for square footage by individual clients. Many tenants are taking less square footage per employee, and some lease renewals are going through for less space than before.
“We used to use a standard of 1,000 feet per lawyer for law firms. Now we’re down to 700,” said Jack Lowell, vice president of office space broker Flagler Real Estate Services. “Open space plan is now the preferred office layout.”
Reduced space demand requires more tenants to fill a building, but increasing density inside offices can cause some practical problems. Parking does not multiply even if the number of people inside the building does.
Another heartburn-inducing issue for landlords in central business districts is tenants who simply want to move closer to home and shorten their commute.
The law firm of Stokes McMillan Antunez is moving from it’s long-time headquarters at the SunTrust International Center in downtown Miami. Even with the landlord adding amenities and renovating common areas, firm co-founder Paul Stokes said the office is moving to the Datran Center in suburban Kendall to better accommodate commuters.
“It’s almost like a little town here in the downtown area, so I’ll miss it,” Stokes said. “But it was really a matter of convenience. We have three women lawyers with children, and they’re very important to us. So we’re leaning in to make it more convenient to them.”
Of course, one submarket’s loss is another’s gain.
Bert Checa, a broker with Pointe Group Advisors and leasing agent for several office buildings, recently helped arrange the sale of two suites at an office-condo in Miami’s Edgewater neighborhood.
“A lot of the tenants that are in the Biscayne corridor definitely could have gone to Brickell but could not have gotten certain benefits there in terms of abundant parking and low traffic,” Checa said. “The companies here don’t want to deal with the Brickell parking and the Brickell pricing situation.”
Steven Hurwitz, a senior vice president with real estate firm CREC, said that same dynamic is buoying markets in places like Aventura and Miami Beach, which boast “small- to medium-sized entrepreneurial firms where the core of that firm wants to see the advantages of being close to home.”
While the general shift in office market dynamics in 2014 seems evident, it’s harder to predict what the market will bear deeper into the future. A major question mark for real estate oracles is jobs. This is expected to be the year South Florida finally creates enough positions to make up for the employment losses during the economic downturn. But most of those new jobs are not office positions.
Miami-Dade recovered 80 percent of the jobs lost in 2008 and 2009, while Broward and Palm Beach counties have regained about 65 percent each, according to data from Marcus & Millichap Inc. But of the 55,600 jobs created in South Florida last year, less than 25 percent were in finance, business and professional services.
“When you look at office performance, that’s not necessarily great news,” said Marcus & Millichap senior vice president Al Pontius, moderator of a Feb. 12 panel discussion on office inventory and job growth. “The overall picture doesn’t seem very impressive.”
There’s also the fact that developers could potentially skew the market by building in anticipation of a boom. It’s happened several times during recent real estate cycles, most notably in the mid-1980s, but also at the turn of the century.
Ezra Katz, chief executive and founder of finance broker Aztec Group Inc., said developers “simply can’t help themselves” from building office product as vacancy rates approach 10 percent.
“The one imponderable we wonder about is new supply because if you add new supply, you affect the overall market,” said Lowell, the Flagler vice president. At the same time, he saw cause for optimism.
“The Miami brand has never been stronger. I’ve been here 42 years, and I’ve never seen such a worldwide appreciation of what we have here.”