Miami’s four major office submarkets — Brickell, Downtown, Coral Gables, and Airport West Dade — are enjoying record growth in Class A asking rental rates, an emerging trend that is further strengthening the city’s positioning as a highly desirable market for local, national and foreign investors.
In the city’s Brickell/Downtown business district, Class A office rents have skyrocketed more than an average of 14 percent per square foot during the past year — a significant difference from the historic average annual increases of 2 to 3 percent per square foot. In fact, the disparity in Class A and B rents in the urban core, where Class A rents range from 40 to 70 percent higher per square foot than Class B rents, is much greater than in submarkets, where Class A rents are approximately 24 percent higher than Class B rents. This creates further incentive for Class B buildings in the urban core to raise asking rental rates and stay apace with Class A, making it a strong business case for investors who are looking for a long-term play with maximum ROI.
Tere Blanca, Blanca Commercial Real Estate
The rent growth is attributed to several factors. While we have seen strong net absorption by local companies expanding and new entries to market by domestic and international companies, one of the most notable factors is a tightening office market with limited new construction coupled with increased building trading activity. Increased demand for Class A office space in Miami is shrinking the supply.
For example, Brickell Class A Tier 1 buildings have reached a vacancy rate of 9 percent, a record low in the past seven years — and is subsequently causing asking rental rates to rise. At the same time, a growing number of investors acquiring and renovating buildings is contributing to the rent increases. In the past three years, more than 10 office buildings in Miami have traded, including most notably Courthouse Tower, 200 Southeast First, 800 Brickell, 777 Brickell, Brickell Arch (formerly Espirito Santo) and 155 South Miami — all located in Miami’s urban core.
Representative of this trend, 800 Brickell and Courthouse Tower have increased rents by an average of 27 percent per square foot during the past year.
Other emerging trends in Miami are also creating opportunities for the higher rents, including the increased investment in public transit infrastructure to which Miami has committed. MiamiCentral, the hub for the new All Aboard Florida passenger rail connecting Miami to Orlando with stops in major metros along the way, will provide a key nexus for business travelers and is located in the heart of the downtown central business district. It will also connect to the existing public transit system that Miami is expanding and improving. In the urban core, companies prefer to locate near public transit for many reasons, including an enhanced ability to attract Millennial talent who prefer these alternate modes of transportation.
Savvy domestic and international investors have been keeping a close pulse on the rent growth, and have also noted the long-term trends of increased transit infrastructure as well as a major initiative to revitalize central business district artery Flagler Street. With these considerations in mind, these investors are identifying and seizing significant opportunities in acquiring Class B buildings and making strategic enhancements to attract as well as retain quality tenants. A recent example is the acquisition of the landmark downtown Miami Courthouse Tower building by New York-based private equity firm Brickman.
Brickman isn’t the only investor seeing value in a long-term bet on Miami. In fact, New York firms have spent $586 million on real estate in one square mile of downtown Miami in the past two years, about 56 percent of the total investment in this area.
With this big picture in mind, what should real estate professionals and companies watch moving forward?
Most significantly, we expect to see increased and continued investment in office buildings, especially Class B, from investors planning to renovate with the goal of retaining and attracting high caliber tenants. Significant rent increases will potentially be a sticker shock for tenants that have leases expiring in the next three years. Companies establishing or having their footprints in Miami should be proactive to carefully consider how to best align their space requirements with their business goals to ensure their space and lease commitments are best suited for their unique needs.
It is clear that the Miami office market has recovered and will continue to strengthen as the city continues to invest in public infrastructure and emerge as a global city and a hub for international business, especially as a gateway to Latin America.
— By Tere Blanca, CEO and Founder, Blanca Commercial Real Estate. This article originally appeared in the May 2016 issue of Southeast Real Estate Business.