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MIAMI-Office construction activity in this market would normally be considered a good thing, but not with unemployment nearing 10% and job reductions eroding demand for space. Consequently, Miami-Dade County is facing tough times with nearly two million square feet of new space slated for completion this year, further softening property fundamentals.

Marcus & Millichap estimates that 1.8 million square feet of new offices are slated for completion this year, plus 740,000 square feet in 2010. Completions over the past year have increased local office stock nearly 2%.

“If the projects currently under way are completed as scheduled, for-lease stock in the county will increase by the greatest amount in any single year since the late 1980s,” says Kirk Felici, regional manager for Marcus & Millichap in Miami. At the same time, he points out, job losses are expected to continue, including an estimated loss of 16,400 positions among office users this year.

Even with midyear vacancy of 16%, Miami’s office market could reach historic high vacancy resulting from diminished demand and added supply, states Cushman & Wakefield in its latest research report. Inflows of capital from Europe and Latin America have helped the local economy stay above the fray, but those regions are also feeling the effects of the global recession.

Vacant inventory increased by 2.1 million over the past year, accounting for almost 5% of the total office market, Cushman & Wakefield reports. Overall asking rents remained above $30 per square foot through this year’s first half, with a “flight to quality” to class A buildings helping landlords hold rates steady despite excessive market pressure.

Investment activity in the second quarter was down 80% from the same period in 2008, according to Cushman & Wakefield, largely due to lack of liquidity in the financial markets. Marcus & Millichap notes that lenders remain averse to underwriting large deals, which are regarded as riskier.

“Besides the ongoing decline in space demand, additions to supply in the Brickell and Downtown submarkets have emerged as an issue for many potential buyers,” Felici says. “Also, investors are reluctant to bid on assets saddled with challenges such as high vacancy, a poor tenant mix or debt maturing in the near term.”

Real Capital Analytics identifies $240 million worth of troubled office assets in 12 properties totaling 2.4 million square feet within the Miami market. Miami is ranked seventh overall in the US in distress with a total of $4.6 billion, mostly involving development, apartment and hotel properties.

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