February, 08, 2008

According to reports recently issued by brokerage CB Richard Ellis Inc., the South Florida office market is holding its own— and even prospering in areas— due to continued strong fundamentals. But there are some signs of weakness. Corporate bankruptcies, downsizings and the downturn in the economy haven't taken a major toll on the office market here —yet. The Miami office market is thriving, due largely to its appeal to multinational companies, while Broward County's office market is showing signs of stabilization. Palm Beach County, however, is the weakest of the three South Florida markets, with vacancies rising and lease rates falling. But that means there are bargains to be had for tenants seeking new space.

"These are excellent times for people to take advantage of the opportunities that are out there," says Rick Miller, managing director of CBRE in Palm Beach County. "If you're in the market for office space, whether it's a relocation or you want to restructure a current lease, now is a great time." In its MarketView reports for the fourth quarter of 2007 (the most recent quarter for which statistics are available), CBRE states that the condition of the South Florida office market is as follows:


Miami-Dade County

Despite an uncertain U.S. economy, the Miami office market finished strong in 2007. Over 400,000 square feet was absorbed during 2007, and the vacancy rate is a low 7 percent, just a slight uptick from the 6.9 percent registered in the third quarter of 2007 but a decrease of 0.7 percentage points from 2006. More space is available for sublease due to companies downsizing or consolidating operations.

Asking rent rates continue to rise, with the overall direct weighted asking rental rate at $29.17 per square-foot (full service gross), an increase of $2.88 from the fourth quarter of 2006. And Class A space alone has seen an increase of over $4 in the past year.

"The fundamentals in the commercial section are still very strong," says Scott Sime, managing director of CBRE's Miami office. "It's difficult to even find Class A space in some of our local submarkets, and I think there will be record-setting rent numbers achieved in certain markets."

Cushman & Wakefield's John Marshall agrees. "There really are no large blocks of Class A space available in Miami, and landlords are taking advantage of that," he says. "People are talking about $50 rental rate numbers in our downtown CBD, which have never been achieved before. Broward County is lagging behind, though, and Palm Beach I is the weakest of the three South Florida markets."

Of course, the rent increases aren't due solely to limited supply and high demand. They can also be attributed to higher operating costs, which are being passed along to tenants. To counter the rising rents, many landlords are starting to quote triple net rates. Over 20 buildings in Miami-Dade County are now quoting NNN rates, and most new construction projects are doing so as well.

How will the market do for the rest of 2008?

Even though Miami's home and condo construction industries are in a decline international trade and tourism have been bolstered by the weakening of the dollar. This bodes well for the office market.

"We'll consistently outperform the American economy," Sime says. "I feel confident that the real growth of Miami-Dade County is yet to come."


Broward County

The vacancy rate rose to 11.1 percent in the fourth quarter of 2007, up from 9.5 percent the period before, but much of the increase in new vacant space can be attributed to the completion of three office projects during the fourth quarter. The downtown submarket alone gained 268,000 square feet of new inventory with the completion of 200 Las Olas Circle and Courthouse Place. Net absorption was negative for the year, as companies gave back space due to downsizing and consolidation, but overall leasing volume for the year was over 1.96 million square-feet, equal to the 1.96 million square-feet of lease transactions recorded during 2006.

Developers remain bullish on Broward County, and several new projects are slated. Construction on the 437,000-square-foot Atlantic Center in downtown Fort Lauderdale should commence during the first quarter of 2008, with a projected completion date in 2010. Construction has already begun on Sawgrass Pointe II, a 93,000-square-foot Class A office building in Sawgrass International Corporate Park.


Palm Beach County

The good news: As the office market sorts out both decreasing demand and increasing supply, opportunities abound for tenants looking to cut expenses by getting into lower-cost space. Concessions have even returned by landlords anxious to attract new tenants without significantly dropping asking rents.

The bad news: Developers of new projects may delay construction due to demand and credit challenges. The vacancy rate here shot to 15.3 percent in the fourth quarter, up from 11.9 percent in the third quarter, and net absorption for the quarter was minus 550,000-square-feet. Factors contributing to the increase in vacancy and negative absorption included the departure of Applied Card Systems from 300,000 square feet in Boca Raton and the repositioning of a 170,000-square-foot office-condominium project to rental space. Asking rents decreased slightly in the fourth quarter, to $19.75 per square foot NNN, but were still 2.1 percent higher than the rate in the fourth quarter of 2006.

"The market is correcting and transitioning to a tenant's market," says Miller. "For the last few years, we had an incredibly strong office market with single-digit vacancies, and that's not normal."

Nearly 1 million-square-feet of new office space is due to be delivered in 2008, in West Palm Beach and Boca Raton. But Miller remains bullish about the market-at least from a tenant prospective. "Even with the additional space coming online this year, we'll continue to see strong market activity," he says. "Every year leases expire, and people have to make real estate decisions. With a strong tenant's market, it creates that opportunity."

Go to chart: South Florida Office Submarkets

Author: Robyn A. Friedman