The past year has been a long and winding ride, and some unexpected trends have been taking place in the Miami office market, between the onset of the COVID-19 pandemic and through its recovery to date.
Logically, one would expect that an ongoing pandemic keeping corporate offices closed and employees working from home would negatively affect occupancy levels and lead to a deceleration in asking rents for office space. On the contrary, the Miami office market has remained solid, and while the area is a natural draw for tourism and entertainment, an increasing number of companies also recognize it as a sought-after location from which to operate their businesses.
Tech’s influence on rents
Miami has been one of the most active office markets in the nation thus far in 2021. While office markets in the Northeast and California remain partly closed due to several public health initiatives and related business constraints, Miami’s pro-business culture — coupled with Florida’s lack of state income taxes and business development efforts rolled out by Miami Mayor Francis Suarez and the Miami-Dade County Beacon Council — have ensured that the city’s economic engine kept running.
Donna Abood, Avison Young
Case in point, not only did Class A rental rates in the central business district not decline during the months of March through December 2020, but rather they grew by 3 percent over that period, and then increased by another 2.6 percent during the first five months of 2021. In Brickell alone, Class A asking rates have grown by almost 10 percent since the beginning of the year.
So how can this be?
In addition to both the City of Miami and the Miami-Dade County governments offering support to local businesses, Mayor Suarez also rolled out his tech-targeted business development program incentive in September 2020, which has been instrumental in attracting numerous tech and financial tech firms to relocate to Miami. Over 17 high-profile financial and tech firms have recently decided to call South Florida home, including Spotify, Boston Private, Subway, Goldman Sachs and Thoma Bravo.
Michael Fay, Avison Young
While office vacancy increased 238 basis points over the end of 2020, a noteworthy cause was new space coming to market. New development activity remains steady, with 1.2 million square feet of new space delivered since the beginning of 2020 and another 1.6 million square feet coming on line between now and the end of 2022.
These buildings are coming onto the market with asking rents between $56 to $75 per square foot, well below the $75 to $80 that tech tenants are accustomed to paying in other markets, offering relocating companies a considerable and immediate cost savings in their operating costs. Additionally, there is still room for the ceiling on Class A rates to rise further due to significant expected demand from new-to-market tenants.
Sales eclipse past two years
Investment activity is beginning to accelerate, catapulted in part by suppressed activity during 2020 due to temporary pandemic-related concerns. Miami’s office investment sales activity for 2021 was brisk during the first half of the year. The most notable institutional sale in 2020 — Northwood Investors’ $128 million ($619 per square foot) acquisition of Two & Three Brickell City Centre — has already been surpassed by Blackstone’s $230 million ($723 per square foot) acquisition of MiamiCentral 2 & 3 in March.
Total year-to-date 2021 office investment sales (for office properties above 20,000 square feet) in Miami-Dade County totaled over $454 million, which is six times the volume of office sales within the same time frame for 2020. It’s also double the amount of sales in 2019 for the same time period.
While there were only seven separate transactions from January to May 2020, the number of sales in 2021 and 2019 remained relatively the same at 11 and 10, respectively. Coincidentally, MiamiCentral 2 & 3 sold in the first half of 2019 and 2021, but the latter of the two sales was at a $59.5 million premium to its predecessor, with only a 500 basis point uptick in leasing activity.
Miami’s strong incentives programs are attracting considerable activity from new-to-market tenants looking to also take advantage of the more favorable tax situation, cost of living and quality of life that Miami offers. This same activity has managed to push average Class A and B office asking rental rates higher across Miami-Dade, which translates to investors seeing increased net operating income across their portfolios and commanding higher prices for real estate.
The outstanding pricing achieved for MiamiCentral 2 & 3 was supported by Blackstone’s new-to-market, 41,341 square foot lease in Tower 2 in fourth-quarter 2020.
In addition to larger institutional and family office transactions across Miami-Dade, the office market has also benefitted from local, and out-of-town end users taking advantage of the lower interest rate market and opting to buy office space rather than lease. These new players include technology companies, law firms, family offices and wealth management companies that intend to operate out of their space for the long-term and want to take advantage of all available tax benefits.
Market supports growth
Miami is well-poised for this moment of growth. There is a strong, well-educated labor force in place, due in part to proactive measures taken over a decade ago when several universities in South Florida collaborated to create new programs for degrees in tech, engineering and cyber security.
The area’s diverse cultural representation is also attractive for companies relocating from the Northeast and California, and the city’s unparalleled lifestyle, walkable business communities, mild weather and transportation network continue to inspire workers from CEOs to recent graduates to relocate to South Florida.
With Miami continuing to gain attention from more companies seeking business-friendly environments, its office market can be expected to flourish, and investors can continue to anticipate increasing property values.
— By Donna Abood, Principal and Managing Director and Michael Fay, Principal and Managing Director, Avison Young. This article originally appeared in the May 2021 issue of Southeast Real Estate Business.