A wave of new-to-market office tenants — specifically legal tenants following the influx of financial firms and tech companies — continue to expand their presence in Miami. The trend further solidifies the city’s spot as a top destination for companies seeking reduced taxes, strong talent and vibrant communities.
Looking back at the first quarter of 2023, net absorption totaled over 81,000 square feet (compared to 76,000 square feet in the first quarter of 2022), marking the third-highest quarterly total since 2020. Most leasing activity occurred in the Central Business District (CBD) and in Class A product in Wynwood and Coral Gables as tenants continue to lease high-quality space.
However, the lack of availability in quality product, as well as the overall economic uncertainty, has led to a slowdown in leasing volume to start 2023 — particularly among new-to-market tenants. Leasing activity totaled 750,000 square feet in the first quarter compared to 1.5 million in fourth-quarter 2022.
The quarter closed with a 16.3 percent vacancy rate, the lowest level since the onset of the pandemic in early 2020. Class A availability fell 260 basis points to 21.1 percent year-over-year with the largest drops recorded in downtown Miami, which fell 540 basis points year-over-year to 24 percent, and Airport/Doral, which fell 580 basis points to 22.2 percent. For downtown, this is a level not seen since 2016.
Vacancy is much lower in pockets of the Miami market, such as Class A space in the Brickell financial district (9.3 percent), but overall vacancy across the market remains elevated due to new, unoccupied product deliveries — though this space is not expected to linger. This is because Miami has seen strong preleasing numbers, with new deliveries and under-construction product 73 percent leased in a market historically not known for its preleasing. The development pipeline remains particularly strong in the Wynwood submarket, which is slated to deliver over 387,000 square feet between 2023 and mid-2025, to service the demand for high-quality space.
Despite the cooling fundamentals, landlords continue to raise asking rents to record levels — up 12.9 percent year-over-year. Downtown rates are continuing to increase, but not at the rapid pace of Brickell. Class A Brickell rates increased by 24 percent year-over-year to $90.11 per square foot, the highest rate in the market. The increase helped launch Class A rates for the overall market to $63.80 per square foot, a 17 percent year-over-year jump.
For tenants that can’t afford the additional capital costs to build out space, their focus is on reusing existing space or seeking speculative suites to reduce construction costs. Landlords are willing to make the investment to build out speculative suites to lease short term with the ability to increase rents on the renewals. Tenants that can’t afford the increase in rental costs are seeking space in quality buildings in other markets like Coral Gables, Miami Beach or Wynwood.
Overall, despite a slowing pace in demand to start 2023, the market remains healthy. One reason for this has been the robust influx from new tenants and residents, but also due to a measured development pipeline and overall resilient sublease market.
Many markets across the country have seen an increase in available sublease space. And while there certainly was an uptick in Miami, it never crossed the threshold of 3 percent of total inventory and is now down to 1.5 percent, which is relatively inline with historical norms. All U.S. markets are facing macroeconomic headwinds in the short-term, but Miami is on solid footing to weather those conditions.
— By Marc Miller, Associate Director of Research, CBRE. This article was originally published in the May 2023 issue of Southeast Real Estate Business.