Miami River Landing Shops & Residences development along the Miami River. Photo: J. Albert Diaz/ALM

The South Florida office market was so tight it was down to single-digit vacancies, and headline-grabbing transactions in recent years were led by the half-a-billion-dollar trade of downtown Miami's Southeast Financial Center.

But it's time for a hiatus.

Marc Miller

“Overall, especially compared to that period between 2015 and 2017 when the market was really on fire, it has nowhere to go but slow down in a sense,” said Marc Miller, JLL research manager for Florida.

Miami-Dade, Broward and Palm Beach counties had negative net absorption by the close of 2018, meaning more office space is coming onto the growing market than being leased, according to a JLL 2018 fourth quarter report.

Miami-Dade closed the year at 534,205 square feet in negative absorption, Broward at 220,831 and Palm Beach at 92,089, according to the JLL data. That was the first time in Miami-Dade since 2010, in Broward since 2011 and Palm Beach since 2009.

Even more indicative of a calming market is another metric.

Miami-Dade is the region's most populous county and well-recognized internationally. But it closed the year with a 16.5 percent vacancy rate — the highest in five years.

“The last five years in South Florida for a variety of reasons have been extremely strong for

Steven Hurwitz

various factors. My guess is that in the next couple of years you'll see statistics that are probably more normalized,” said Steven Hurwitz, a Colliers International office expert.

But don't fear. He sees no major market correction.

“I think it's more of a normalizing of where you would expect rates and occupancy to be.” said Hurwitz, executive vice president and director of office services in Coral Gables. “I think you'll see more moderate, more normal growth.”

It's not that companies are downsizing or moving out of the region. It's that they aren't expanding like they used to as the region reached full employment and an inflection point, according to JLL and Colliers reports.

“Because hiring has been so slow and it's harder to find talent, some of those expansion plans have been delayed a little bit,” Miller said.

Also, companies already in place have been shrinking their square footage. It's “fitting more people into less space basically,” he said.

Burger King scaled back its headquarters to 150,000 square feet from 223,000 square feet at the Waterford at Blue Lagoon corporate park near Miami International Airport.

Generally, the move reflects the region catching up with a national trend and a response to rising rents, especially in central business districts.

In January, Miami's glass tower-lined Brickell neighborhood had the highest gross asking rent at $47.80 per square foot, and downtown Fort Lauderdale led the county at $38.36 per square foot, according to CoStar Group. Palm Beach, the mansion-studded barrier island with limited office supply, had the highest rents in the county at $51.15 per square foot.

Market Confidence

Despite the rising vacancies after years of robust growth, developers haven't been thwarted from building. Quite the opposite.

In 2018, office developers finished 680,000 square feet in Miami-Dade, about 110,000 square feet more than in 2016 and 2017 combined, according to JLL.

And they aren't slowing down. Look no farther than the mixed-use River Landing Shops & Residences on the north side of the Miami River near the Health District.

Developer Andrew Hellinger has scaled back the retail portion in favor of 135,000 square feet of office space that will be in addition to the originally planned 20,000 square feet on a mezzanine level above stores.

The fifth floor at a River Landing building was meant to be 50,000 square feet of retail. Under the new plan, this floor will become three levels to make for 135,000 square feet of office space and a rooftop courtyard.

“The walls were 36 feet tall. A typical office window is let's say 12 feet,” Hellinger said. “We were able to put three levels of office in what was designed as one-story retail space.”

Expansion of the office segment, which is set to open in early 2020, was driven by the state of the neighborhood rather than the region.

The Health District and the nearby Civic Center are major employment centers and helping drive development along the Miami River. The Health District is home to Jackson Memorial Hospital, the University of Miami Health System, the Bascom Palmer Eye Institute and the Miami VA Healthcare System. The Civic Center includes the Richard E. Gerstein Justice Building courthouse and state attorney's office.

“The vacancy factor in the Health District is zero,” Hellinger said. “We felt with the health care industry growing that there will be demand for office.”

River Landing also will have 528 market-rate apartments, shopping, 28,000 square feet of riverfront dining, 8,000 square feet of public space on the riverfront and more than 2,000 parking spaces, according to its website.

The office component is part of the 2.5 million square feet under construction in Miami-Dade and nearly 4.09 million square feet being built across South Florida, according to CoStar.

Elinor Gutierrez.

As much as half of the new Miami-Dade space is being built on spec with tenants to be determined, said Elinor Gutierrez, a CoStar market analyst in Miami.

“A lot of that space hasn't been leased, so that's going to cause vacancies to increase,” she said.

In downtown Fort Lauderdale, The Main Las Olas, a 1.4 million-square-foot mixed-use project under construction at 201 E. Las Olas Blvd., will include a 25-story office tower.

While Akerman, Berger Singerman and BBX Capital have collectively signed on for 85,000 square feet, that's about 24 percent of the total 357,000 square feet. Akerman and Berger Singerman will move from nearby offices at 350 E. Las Olas Blvd.

“A lot of it is robbing Peter to pay Paul from a market perspective,” Miller said. “The new construction, and there's definitely an appetite for new construction in the market, all of the new properties have been performing very well and outperforming the overall market. But for the most part, they are all drawing from tenants existing in the market, so even though The Main has 85,000 square feet of pre-leasing, that's 85,000 square feet that is going to be put back on the market in properties along Las Olas Boulevard.”

Still, The Main Las Olas developer Stiles said it's confident in its project. For one, its office tower will offer tenants a lot of amenities, including access to the organic foods GreenWise Market that leased space at The Main Las Olas residential tower, Scott MacLaren, president of Stiles, said in part in an emailed statement.

“The timing is right for a new Class A office building in the central business district of Fort Lauderdale given the lack of new office supply and heightened demand for the next generation of space,” MacLaren added in his email. “Rental rates have increased significantly, offsetting construction costs, and there are very few large blocks of space available in the Class-A buildings on Las Olas.”

Also keeping Stiles optimistic: the leases secured so far as well as talks with potential tenants, MacLaren said.

What's Next? 

The influx of new construction is what in part is stabilizing the market from years of robust growth.

“If you look back over the last five years of development, much of the available development sites had gone toward other uses like residential, retail and hospitality, while the demand for office remained very strong,” Hurwitz said. Construction deliveries “are now sort of catching up with that demand, which is causing what I think would be presumably a … more moderate growth pattern than what we have experienced in the last five years. And I would say something that's probably more normal.”

Looking beyond this year shows a stabilizing market.

In each county, net deliveries are expected to exceed net absorption almost every quarter until the beginning of 2023, according to CoStar projections. The company is factoring in a projected overall economic slowdown that economists keep pushing further out.

“We use Moody's Analytics for our economic data. Since Moody's Analytics is forecasting a slowdown in the market in 2020, our economic models are going to show that, and as a result we have demand that's going to slow down as well,” Gutierrez said.

CoStar's Christos Costandinides added: ”Nobody can forecast the future 100 percent. Will a recession happen in 2020? Nobody knows. It's just an increased chance that it will happen.”

Vacancy rates in each county are expected to continue slightly annually through 2023 after steadily declining from 2012 to 2017, according to CoStar.

“We are going to forecast a slowdown in demand and then also we do have some spec space. Even though it's not a significant portion in the market, there is some spec space that's going to hit the market,” Gutierrez said. “It's only a slight (vacancy) increase. It's not anything major.”

Robert Dabrowski

Can the region handle the new construction? Hurwitz and Colliers colleague Robert Dabrowski say the market will fare well.

Landlords haven't been scared off, and lease rates are climbing as tenants become more diverse, Hurwitz and Dabrowski said.

“The good news for South Florida is that that rental rate still being high speaks to the fact that we are not anticipating any sort of major correction in the office market,” Hurwitz said.

Each county saw healthy rent increases in the fourth quarter. In Miami-Dade, the average gross asking rent reached $36.49 per square foot, up 7 percent from late 2017, and Class A rates reached $43.02, a 3.7 percent increase, according to a Colliers report. Broward experienced the highest rise in gross asking rent at $31.25 per square foot, up 17 percent in a year. In Palm Beach, the average asking rent reached $30 per square foot, up 2 percent, and the Class A rates reached a 20-year high of $35 per square foot.

Back in the day, Brickell was known as Miami's financial district, Aventura was known for the Aventura Mall, and South Beach was known for its tourists. But in recent years, the areas have been drawing startups and hedge funds.

Hurwitz has helped about six hedge funds relocate to areas from South Beach to Aventura.

MSD Capital, the private investment company that exclusively manages the assets of Dell Technologies CEO Michael Dell and his family, opened an office at West Palm Beach's Esperante Corporate Center last year.

A lot of the private investment and wealth-management newcomers in Palm Beach County aren't moving their entire operations, Dabrowski said.

“A lot of them haven't been moving their families yet. It's kind of like a tester. We had looked for 50,000-square-foot to 100,000-square-foot headquarters relocation tenants who are looking here,” Dabrowski said. “Most of our absorption in Palm Beach County has been second or third offices adding to New York and California offices.”

Hurwitz is seeing industry diversity in the slowing market.

“You have a huge amount of technology, a huge amount of startups, a huge amount of financial services, wealth management, hedge fund family offices moving from the Northeast,” he said, with encouragement from the 2017 tax law. “As the economy and the office market starts to slow down to a more moderate growth, the impact of that I think is very much buffered by the fact that we still have a growing and expanding demand base.”