Alex Zylberglait CCIM, SIOR and Ryan Shaw of Marcus & Millichap answer pressing questions on the state of the Miami office market.
• What trends do you see presently in office development in your area?
Office development is relatively slow at this time except for the projects that were already in the works prior to the market downturn, specifically projects in Downtown Miami as well as in Coral Gables and Doral. Given the current market conditions, it is unlikely that we will see any significant development for the next few years. In addition, most office assets today could be acquired at below replacement cost therefore stifling the development of new product. There are a few exceptions that include some medical office buildings and some buildings that are being built as “green” buildings, which is a trend likely to be around for a while as long as there is development. In fact, many government tenants are requiring that any space they lease be in a building that complies with the latest “green” standards.
• Who are the active office developers in your area?
Rilea Group is active in Downtown Miami as is MDM Development Group, which is working on Met2, and the Foram Group is developing Brickell Financial.
• Please name one or two significant office developments in your area. What impact will these projects have on the market?
Downtown Miami has three projects that will bring close to two million square feet to the market once completed. Met2 is being developed by MDM Development Group. Located in the CBD, it will total about 700,000 square feet and will have a JW Marriot attached. Brickell Financial is being developed by the Foram Group and is located in the Brickell submarket. The project will total more than 600,000 square feet of space. The first two buildings will feature office space, and the second buildings, which will be built once the market recovers, will feature mixed-use space. The last project that sits at the southern tip of the Brickell Financial district is 1450 Brickell, which is being developed by the Rilea Group and will total almost 580,000 square feet. These three projects are bringing on a lot of office space at a time when vacancy rates have been rising and rents declining. This will likely cause further downward pressure on rents and demand for other Class A and B buildings in both Brickell and CBD submarkets.
• Where is the majority of development taking place? Why is this area doing well?
The majority of the development is in the Brickell and CBD submarkets although Doral, Coral Gables and Miami Lakes have seen some new projects that have recently been completed. Most of the new developments have all taken place on a speculative basis due to tight market conditions in 2006, 2007 and the first quarter of 2008. The Coral Gables project was built as the new headquarters for Bacardi. The downturn in the market pushed out a lot of the real estate and mortgage companies. Now with the restructuring of the banks we are likely to see some of those large financial institutions giving back space as they consolidate. The good news for the Miami market is that it is still well positioned as the Gateway of the Americas.
• What area do you expect to be the next big development market? Why?
Except for the projects that are currently under construction, the office development market will be very quiet for the next few years while this new supply gets absorbed. The only caveat is for locations next to hospitals that might see some new space built such as University of Miami’s science programs. These programs should help in the creation of jobs and projects that will need space for research and development. Most of this space will be located next to Jackson’s hospital in the Miami submarket.
• What areas are doing well in terms of office leasing? Which areas are struggling with office leasing?
Most of the leasing is from companies downsizing and moving to smaller space including executive type of space. Some of the stronger submarkets include South Miami, Coral Gables, and Downtown. Some of the weaker markets include Brickell, Hialeah and the Biscayne Corridor.
• Please give a measure of office vacancy rates and available sublease space.
The current vacancy rate in Miami-Dade is just under 12 percent with an approximate sublease space of 800,000 square feet.
• What impact do current interest rates have on the office market? What predictions do you have for interest rates and their effect on the office market in the next year?
Current interest rates are still low on a historical basis. However, the absence of interest-only financing has made current effective interest rates higher than before; therefore, putting upward pressure on yield requirements. These higher investor yield requirements have been compounded by declining fundamentals. During the next year, we will likely see interest rates around the same levels or perhaps slightly higher given the ongoing challenges in our economy despite the significant stimuli being implemented by the feds which may not have a noticeable impact until the end of next year or even into the following year.
• What is the status of job growth/(un)employment rates and what bearing will it have on the office market?
Since late 2007, total employment has contracted by more than 63,000 jobs. Declining construction resulted in 10,500 construction workers being let go over the last year. Office employment has decreased by 6.6 percent, or 15,600 positions, in the last 12 months. This year a total of 16,400 jobs in the office sector will likely be trimmed, an increase of 4,600 over last year. Given this outlook, the office market is likely to stagnate over the next few quarters with some exceptions in medical, government and education investments.
• Is there any type of office tenant absorbing a majority of space? What industries do you expect to expand in the next year to absorb a great deal of office space? What areas will be affected?
Medical office users such as the University of Miami and the new “green” movement, especially government related buildings, could be poised to diversify the local economy even more. We still have a strong economic and demographic base coupled with our international ties with Latin America and Europe. This bodes well for the overall demand outlook for office space that should allow us to weather the downturn better than other metropolitan regions in the country.
• Would you like to make any additional observations about the office market in your area?
The office market was one of the last sectors to be affected by the recession. Yet at this time the condo buildings that were overbuilt in Miami are starting to fill up and we are seeing new growth from young professionals that will fuel the office market’s comeback. Our leaders really need to focus on the education system to help bring more high paying jobs to Miami. Employers want to be here for several reasons, but they need qualified people to hire. With housing prices becoming affordable again we can become a world-class city that has a more diverse economy and even better quality of life.
— Alex Zylberglait CCIM, SIOR, vice president of Investments, and Ryan Shaw, associate, focus on office properties in Miami-Dade County. Both work out of Marcus & Millichap’s Miami office.