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If you subscribe to the notion that “a rising tide floats all boats,” then all of South Florida is benefiting from the renewed interest by out-of-market and international investors in all of the region’s commercial property sectors. In addition to regular South Florida investors from America’s Northeast and affluent Latin Americans, Florida has experienced a significant number of property acquisitions by Canadians in the last 18 months.
While much of the international investment has focused on Miami/Dade County, one of the largest Broward County investments this year has come from Miami-based Fifteen Group, which recently acquired the Sawgrass Technology Park for $52 million in Sunrise, Fla. The Class B office and industrial buildings were formerly occupied by Racal Milgo and the seller had planned to redevelop the campus but never did.
While industrial, multifamily and retail are garnering the most attention, the pricing structure for office properties is improving. The current cap rate for well-located, stabilized assets is on average 7.5 to 8.5 percent and falling as the market recovers. Much foreign investment is tied to capital flight and is less concerned with achieving the highest yield. As such, pricing is less important to those investors.
In terms of sales data, the average price paid for office buildings in the previous 12 months was $122 per square foot and that is an increase of about 10 percent over the same quarter in the previous year, according to CoStar Group. Lenders are returning to the office market and purchasers are taking advantage of the still historically low interest rates and are able to leverage their investment yields in the mid-teens for many properties.
Leasing Trends
More than 11 million square feet of office space (all categories) is currently available for lease, which translates into a vacancy rate of approximately 17 percent with average rents at $22.75 per square foot, according to CoStar.
The majority of the office deals taking place are characterized by tenants moving from one building to another in the same submarket or from one submarket to another. Very few of the leases signed in the previous 12 months were tenants coming in from outside Broward County. Another important metric to pay attention to in the Broward County office market is that the average tenant occupies less than 4,000 square feet.
Like many markets in the U.S., the South Florida office market has stabilized since the end of the recession yet we have settled into the new normal, meaning companies generally operate with fewer office workers and occupy offices with more people per square foot. The higher density — often with each employee averaging 125 square feet or even less, has led to higher vacancy rates. Thus, landlords struggle to achieve occupancy rates higher than 88 percent and this is a trend that many in the industry believe is here to stay.
The higher density trend is not without consequences. Most buildings were designed for fewer people per square foot and the higher density is putting pressure on parking ratios and challenging the average building’s HVAC systems. This is particularly an issue for older Class B assets built during a time when the average square footage per employee was much higher than today’s modern office standards.
Nonetheless, the western Broward suburban markets are showing signs of a healthier office market. The Weston submarket has seen its office vacancy fall to below 9 percent with rent growth occurring in both Class A and B office product. The Class A Sawgrass International Corporate Park has seen its vacancy rate fall well below 20 percent to a current rate of 16 percent, helped in part by General Dynamics’ decision to renew its lease of 43,911 square feet in a Sawgrass Pointe office building owned by Duke Realty. In nearby Plantation, the market has also experienced greater leasing activity in the Royal Palm I & II project owned by Duke Realty, and vacancy rates have dropped to an average of 15 percent.
Downtown Fort Lauderdale
The biggest story concerning downtown Fort Lauderdale is the current amount of apartment building construction and the anticipated population growth. City commissioners have already parceled out almost all of the 11,060 residential units approved by government planners for the area as of 2006, and now city officials are proposing to make another 8,500 units available for potential development. As such, city planners are forecasting that the current downtown population of 8,200 based on 2010 Census data could swell to more than 45,000.
It is too early to say that the residential development activity is drawing office users to the downtown, but two of the biggest office leases in Broward County so far this year have been in downtown Ft. Lauderdale and by companies moving in from the suburbs.
Becker & Poliakoff is relocating from its long-time Hollywood offices to occupy 46,347 square feet in the One East Broward Boulevard building, which was recently renovated and is a Class A office asset, while Fanatics Mounted Memories is moving from Plantation to downtown Ft. Lauderdale to occupy 17,200 square feet in the Plaza at Las Olas building.
The overall office vacancy in downtown Ft. Lauderdale is a few points lower than it was the peak of the recession and currently stands at approximately 22 percent. Average rents for Class A offices have increased to $31.50 per square foot, according to CoStar Group.
— Ken Morris, principal of Morris Southeast Group/CORFAC International