Corporate and Economic Growth in Miami Drive Tenant, Investor Demand for Office
Miami continues to be a top-ranked commercial real estate market in the Southeast United States. As the economy gears up to enter its longest expansion period in U.S. history, Miami has shown more resiliency than other South Florida markets, recording steady gains in absorption, robust leasing activity and modest rent growth.
Economic fundamentals remain strong as job growth continues to fuel Miami’s office market with the unemployment rate trending down to 3.2 percent. Miami’s unemployment rate reached the lowest point in its history, falling to 3 percent in April 2019. The fundamentals in economic growth continue to support corporate expansion in nearly every industry as well as new-to-market growth from other U.S. markets and globally. While in the past, most of Miami’s growth came from Latin America, 60 percent of new-to-market growth now comes from Europe, with Spain being a frontrunner.
High demand amid deliveries
Miami-Dade County’s overall office vacancy rate rose slightly by 1 percent in the past 12 months, during which time 937,919 square feet of new office space was delivered to the market. More than 500,000 square feet was absorbed during that time. Because of the strong absorption, the vacancy rate was impacted only slightly, bringing it to the current 12 percent. Net absorption remained positive during the second quarter, with Miami’s Central Business District outperforming suburban submarkets by 12.4 percent due to large blocks of space being taken off the market in the Downtown and Brickell submarkets.
The average rental rate for Class A space is $45.02 compared to $45.26 a year ago. Although rental rates have leveled off, the new Class A office projects coming on line are quoting rental rates of $55 per square foot. This will likely create an uptick in existing Class A rental rates during the fourth quarter of 2019.
Currently, 1.9 million square feet of office space is under construction with approximately 60 percent to be delivered in the Biscayne/Wynwood and Brickell submarkets.
Coworking tenants continued to dominate absorption activity in Miami for the second quarter in a row as they continue to lease significant footprints in building throughout the market. Out of the seven largest lease transactions year-to-date, five were coworking tenants, with WeWork leading the number of coworking companies. WeWork leased 89,307 square feet at Southeast Financial Center, filling a crucial large block of vacant space in the building that had been available for some time. Spaces also leased 51,604 square feet at 1111 Lincoln Road in Miami Beach, which quickly backfilled Viacom’s former space after the company relocated to 3 Miami Central during the first quarter. Several new-to-market coworking brands have come into Miami as well.
Miami leads the country as the market with the largest percentage of office space leased for coworking use. Some landlords remain uncertain about the long-term future and profitability of coworking tenants, as they continue to accumulate large debt obligations amid an eventual slowdown in the market. Others debate coworking concepts will be positioned well in the event of a market slowdown, housing firms that need to downsize given workers are allocated approximately 75 square feet per person instead of the more traditional 175 square feet per person estimate.
Sales ramp up
Miami’s office investment sales activity picked up significantly during second-quarter 2019, despite a slow start at the beginning of the year. Major trades taking place including the $159.4 million sale of 2 and 3 MiamiCentral in downtown Miami to Shorenstein Properties and the $59.9 million sale of the Regions Bank Building in Coral Gables to TA Realty.
While total transaction volume through the first half of 2019 is approximately 70 percent of the total value transacted through the first half of the 2018 calendar year (for office properties above 20,000 square feet), year-to-date investment sales have been flooded with institutional investment. Institutional investors account for 78.7 percent of all buyers so far in 2019, up significantly from the 24.5 percent at year-end 2017. This activity indicates that investors remain bullish on Miami’s office market.
In 2019, buyer pools for investment sales have reduced in size with most buyers also underwriting more conservatively than in previous years. In July, the Federal Reserve cut the federal funds rate for the first time since 2008, which will allow buyers to become a little more aggressive when determining ultimate pricing of a property they wish to acquire.
Opportunity Zones remain a popular investment topic in Miami. While investors are still waiting on regulations to be finalized, many have been setting up large Opportunity Zone funds and are eager to deploy capital.
— By Donna Abood and Michael Fay, Principals and Managing Directors-Miami at Avison Young. This article originally appeared in the August issue of Southeast Real Estate Business.