The dropping vacancy rate is also being fueled by limited new construction, which is the result of increased construction costs. "Population growth and business expansion are generating growing demand for services," says Marcus & Millichap Miami office regional manager Kirk Felici. "The Downtown Miami office market especially is experiencing a dramatic turnaround with higher occupancies and escalating rents."

Employment is expected to increase by 6,400 positions in 2006, which reflects a 0.6% gain. Office employment is expected to increase by 5,400 jobs, which reflects a 2% gain. Last year, the market posted a 4.9% increase in job growth, the report states.

As a result, vacancy is expected to drop to 8.8% by the end of the year, reflecting a 260 basis point improvement over the year, following a 300 basis point decline last year. Asking rents are expected to increase by 6.4% over the year to $25.86 per sf, while effective rents jump 8.5% to $22 per sf, according to the report.

Over 1.5 million sf is currently under construction, of which 300,000 sf is expected to be completed by year end. While construction is picking up to a degree, inventory growth will still lag behind absorption of 800,000 sf to one million sf per year, the report says.

Investors remain active in the market with aggressive bidding. The trailing 12-month median sales price of $194 per sf is 21.3% higher than a year ago.