Farewell Boom-Bust Cycle: Miami Office Market Ascends as the City Matures
For decades, the real estate market in Miami has been either boom or bust. Lately, the market has been on an impressive expansion cycle, with new office development following aggressive lease rate increases that in some areas have risen as much as 20 percent in total the past few years.
As investors and users witness the growth in South Florida, the market has seen a significant amount of new development as rental rates continued to climb. The quick expansion, and arguably over-development, has left some investors wondering if a bust is inevitable with such a crowded market.
In many metro areas, a bust would be a logical result. However, South Florida has become more mature as a corporate center, leading many industry leaders to see Miami’s future as a more consistent, stable market of growth rather than one with a constant pattern of boom and bust.
As South Florida matures with a diverse range of investors and users, adapts to industry disruptors and addresses transportation issues, the office market is moving into a pattern of more stable growth, with no bust on the horizon.
Leasing, sales activity
In the first quarter of 2019, the office market saw 1.1 million square feet of leasing activity in the Brickell, Kendall and Miami Airport submarkets, accounting for 51 percent of Miami-Dade County’s leasing activity. There is also significant activity in new construction, with 2.7 million square feet currently underway, as well as investment sales.
In the largest sale of the quarter, Baptist Health acquired a building in Coral Gables for $37 million, while WeWork, a coworking giant and office real estate disruptor, increased its influence by signing the largest lease of the quarter, a 146,000-square-foot space at Brickell Plaza. The WeWork lease is part of a new 552,000-square-foot Class A space that will be complete in 2021.
Miami also has seen a surge of interest from domestic investors. In certain areas in the Northeast, tax law changes have negatively impacted businesses, hedge funds and family offices, motivating them to increase their investments in South Florida. While some historically looked to Miami for a second home and a small company outpost, many are now making South Florida their primary residence and moving their families and corporate headquarters to the area.
West Palm Beach, in particular, has been successfully attracting hedge funds and fintech firms from the Northeast for years, but after the recent tax reforms, the growth in relocations to the entire South Florida area has accelerated. Many new tenants are taking space with access to expanding transportation systems, mirroring patterns in other major U.S. markets.
And while domestic investment is on the rise, foreign investors are also looking to the area more than they have in past years. Primarily coming from Latin American countries, investors see the relative stability of the Miami office market as a draw.
Transit, normalized growth
In another positive step for the market, significant progress had been made to improve how residents and visitors get around town. Two rail developments, Tri-Rail and Virgin Trains (formerly Brightline), now connect West Palm Beach, Fort Lauderdale and Miami, dropping passengers off near Miami’s downtown business district.
Virgin Trains commuters can now reach Miami from Fort Lauderdale in 30 minutes and can travel from West Palm Beach in just an hour. If employees drive from Fort Lauderdale to their offices in Miami, the morning commute averages an hour and a half with traffic congestion.
Tri-Rail stations reach Miami submarkets like Hollywood, Hialeah and Golden Glades, and a commute from Fort Lauderdale to downtown Miami on Tri-Rail can take as little as 20 minutes.
This trend of normalized growth is a positive indicator of the future of real estate in South Florida. The more modest growth speaks to the success of South Florida’s office market, and supports the continued investor interest in the area, both from landlords and tenants.
Lease rate growth of as much as 20 percent in the last several years cumulatively may now be replaced with more reasonable rates of 2 to 3 percent per year.
Tailwinds affect outlook
Even though the city’s office market is celebrating good news in terms of growth and long-term stability, Miami is not without its challenges. Looking further into the future, several factors will affect the market.
For investors and developers, the challenge is to build new office space with rental rates that cover construction costs but also match market demand. The current market is strong enough to allow for rental rates that cover construction costs, but this will bear watching.
Also, while the first steps in addressing traffic congestion have been promising, there is still a long way to go. It will be critical for South Florida leaders to figure out how to effectively connect commuters to the rail lines so people can easily reach where they need to go.
Industry disruptors like WeWork and Industrious will also continue to impact how landlords and tenants do business, as these coworking companies are supporting smaller workspaces, open-concept designs and flexible deal terms. Many office spaces in trendy areas are adapting to the collaborative space model and shorter lease terms inspired by coworking companies, allowing the spaces to remain competitive as consumer habits evolve.
In sum, a slowdown in the Miami office market is nothing to fear. The market is well-equipped to keep growing at a reasonable pace, which for this metro area means coming down from double-digit growth in the development of new office space to more sustainable growth rates of 2 to 4 percent year-over-year.
— By Steven Hurwitz, Executive Vice President of Office Services at Colliers International, and Douglas Okun, Executive Vice President at Colliers International. This article originally appeared in the May issue of Southeast Real Estate Business.