Downtown, Airport areas continue strong showing.

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Submitted by Alex Zylberglait CCIM, SIOR and Ryan Shaw, associate vice president and associate with the Miami office of Marcus & Millichap Real Estate Investment Services. Posted Online 05-07-08.

What area is your expertise?
Our primary focus of business is office properties in Miami-Dade County, Florida.

What trends do you see presently in office development in your area?
Office developments over the past few years have been limited to mostly office condominiums and build to suit. The office condo market was short lived and non-existent at this point. Unfinished condo projects are currently going back to for rent product and therefore adding nominal supply back to the market. The majority of office development for Dade is focused in the downtown Miami and Airport West submarkets. Downtown has seen three projects break ground for approximately 1.77 million square feet of Class A space. The airport area is targeted for many of the import and export companies that see much of the business go through the Miami International Airport as cargo planes transport much of the imports that come into the Port of Miami. Broward county is a little bit different in respect to they have had little new development in the office sector but have several projects that are planned mostly in downtown Ft. Lauderdale, Hollywood and Plantation. Both Miami and Ft. Lauderdale are enhancing their respective urban cores with several projects.

Who are the active office developers in your area?
There are a number of active developers in South Florida and in Miami-Dade who play a key role in the South Florida economy. Two that have been particularly active for a long time include Procacci Development Corp. and Stiles Corp. As for a developer who has looked long term and really embraced and started the LEED certification movement here in Miami, that would be The Foram Group. They have the Brickell Financial Center, which is currently under construction.

Please name one or two significant office developments in your area. What impact will these projects have on the market?
For Dade County it would have to be the Brickell Financial Center and GSA Immigration buildings that are being constructed in three different locations. The Brickell Financial Center was one of the first LEED pre-certified buildings in Florida and is going to really be a landmark building for Miami which you see the likes of in New York or Chicago with the Empire State Building or Sears Tower, respectively. The building is going to be first class with retail, office, luxury condominiums and hotel rooms. Loretta Cockrum and her Family-Owned Foram Group have done a tremendous job putting the project together and were willing to put in extra time and money that will make this one of the nicest office buildings south of New York City.
The other projects I mentioned have not received the press and are not as sexy as most of the projects that are taking place in downtown, but with over 1.5 million square feet of GSA leased space for immigration it will facilitate the logistics for users that these properties serve. South Florida has a tremendous influx of immigration and these buildings have been located to make the number of people visiting immigration services daily much easier than the old buildings they are currently in. The new facilities will also be an improvement for the employees and help create new jobs.

Where is the majority of development taking place? Why is this area doing well?
The majority of development is in the urban core of each city. Downtown Miami has had a tremendous amount of residential condo developed and as people move into these units it will make it a friendlier environment if they could use public transportation or walk a short distance to their office. This holds true for downtown Ft. Lauderdale as well. When I say urban core of each city; in the past you have had suburban sprawl but with the land constraints of South Florida that sprawl could only go so far, so you are seeing other cities develop a smaller scale of a downtown to keep the residents close to home. The other major office areas in Dade are Coral Gables and Doral. The City of Doral, which is close to the Miami airport caters to many businesses in the import/export industries.

What area do you expect to be the next big development market? Why?
South Florida has just gone through a strong development period and there are several projects that just broke ground or are still on the books. Those projects are going to have to be completed and start seeing absorption before you see a lot of new development.

What areas are doing well in terms of office leasing? Which areas are struggling with office leasing?
The economy is worsening as everybody reads on a daily basis, but I truly believe that the media is playing a bigger role in the uncertainty. While some mortgage brokers, real estate brokers (especially residential) and aspiring developers are closing their doors, the overall occupancy rates for office properties in Dade County are high. In general, demand for office space is softening more in the lower quality assets in inferior locations or those not offering much in terms of amenities. Offices in strong locations are doing a lot better and buildings that offer full service leases are also favored by tenants since business owners prefer to know with more certainty their occupancy costs instead of having expense pass through exposure.

Please give a measure of office vacancy rates. Please give a measure of available sublease space.
Miami vacancy rate is pushing closer to 10 percent this year compared to around 7 percent a year ago. Class A sublease space currently represents 10 percent of all vacant high-end space.

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?
Interest rates are historically low. What is affecting real estate and businesses is the lack of liquidity. A year ago anyone who could sign their name could get a loan now someone has to show that that they have the financial backing and experience to support any loan dollars, and even those people are having a difficult time. There are a number of challenges ahead in the economy that will likely act to suppress any significant increase in interest rates in the coming 12 to 18 months including the continued debacle of the sub-prime mortgages, the high cost of energy, and the increased levels of unemployment. Therefore we don’t believe there will be a significant shift in valuations for office markets as a whole though lower quality assets may see a moderate upward push on cap rates.

What is the status of job growth/(un)employment rates and what bearing will it have on the office market?
Unemployment is on the rise, but Florida has boasted the lowest unemployment rates in the country for years. Many people in the construction and financials might have to find work elsewhere. I just read somewhere that Florida’s ranking for venture capital was very high as well as science related developments. If we can diversify our economy to science related fields, technology and really improve our education system, then that will not only the help the office sector but it will be hard to compete with Florida.

Is there any type of office tenant absorbing a majority of space? What industries do you expect to

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