Is it Time for New Office Construction?

MIAMI—We're not at the bottom any more. South Florida's largest urban office markets are not only reporting increased leasing activity—some cities are pushing all-time pricing records. So says JLL's Spring 2014 Skyline Review.

Following four consecutive years of significant absorption, premium office space in Miami's Central Business District (CBD) are dwindling. At the same time, JLL is reporting five-year-low vacancy rates among Ft. Lauderdale's premier properties. Further north, top-tier trophy assets in West Palm Beach are posting 13.1% vacancy rate, as suburban companies seize the opportunity to enter the class A downtown market without breaking the bank.

An influx of new-to-market tenants, scarcity of premium space, and an overall lack of new construction planned are contributing to a shift towards a more landlord-favored market. The bottom line: it's a good time to own a trophy office building in South Florida.

Miami's CBD office market, which includes Downtown and Brickell submarkets, is flirting with some of the highest asking rents quoted since 2008, ranging in the neighborhood of $51 to $60 per square foot for premium office space. There are relatively few options for high full-floor offices with unobstructed views. Only four penthouse options remain. Strong leasing dynamics are helping to fuel sales activity, with 781,659 square feet of skyline inventory trading hands in 2013.

“It's really a perfect storm for high quality office buildings in downtown Miami right now,” says Scott Strickland, executive vice president for JLL in Miami. “A combination of new corporate users entering the market and expanding here, a strengthening economy, and an overall dearth of high quality new space with desirable views on the immediate horizon is putting upward pressure on rents, downward pressure on landlord concessions, and leaving large tenants with few premium options to choose from.”

Downtown Ft. Lauderdale is coming off one of its most active years ever, with 166,500 square feet of trophy office space absorbed in 2013. Greenspoon Marder, Becker & Poliakoff, Prolexic Technology, and Premier Beverage all signed major leases that removed several large blocks of office space from the market.

Year-over-year vacancy among skyline properties has fallen 4.3% as a result. That, in turn, has put high-end office space at a premium and spurring initial whispers about the need for new construction for the first time since 2006.

Moving north to West Palm Beach, office buildings in the urban core are seeing a flight to quality as suburban tenants, drawn to asking rates near historic lows, seize the opportunity to upgrade to class A space downtown. This activity has put top-tier properties in tenants' crosshairs, with vacancy rates for trophy buildings downtown experiencing a 13.1% vacancy rate. JLL predicts this tightening should continue for the foreseeable future, as there is no new class A office construction underway.

“Miami is setting the tone for all of South Florida, having dramatically tightened over the last 12 months and buoying optimism across the broader market,” says Jeff Morris, managing director for JLL's Capital Markets Group in Florida. “With little by way of new development planned over the coming years and rental rates headed higher, we expect to see sustained interest among investors trying to capitalize on the momentum in the market.”