How Much is Too Much? South Florida Office Market Poised to Add 3.5M Square Feet
Will South Florida be left with glitzy new office buildings that merely pull tenants from older offices, or will all the holes be filled? Leasing agents say it depends.
February 24, 2020 at 05:00 AM
11 minute read
Across South Florida, construction cranes are a common sight and the thrum of construction a familiar sound with 3.5 million square feet of offices underway. But when the space will get filled and how quickly remains to be seen.
"That's the million-dollar question. There's going to be winners and losers," said Matthew Cheezem, managing director at JLL in Miami.
Leasing agents for the new buildings are quick to say they are confident in both the market as a whole and their individual projects. From their perspective, the added supply is a good thing, and there is nothing to worry about.
"The projects are delivering a little spread out and in various markets, and they appeal to different tenant criteria. I do feel that Miami continues to draw companies from all over the world and now from California and continues to draw from New York," said Tere Blanca, CEO of Miami's Blanca Commercial Real Estate, which is leasing some of the major projects in the pipeline. "That will help backfill some of the spaces, whether it's in the new buildings or buildings that are getting impacted with tenants who are moving out."
Christos Costandinides, director of market analytics at CoStar Group in Miami, has a different take.
The region is getting a 3.5% increase in inventory, slightly more than the 2% national rate, he said. This inventory growth means South Florida will have slightly more available space than the national average once all the construction is completed.
About 3.1 million square feet of the new inventory will be Class A, adding to the existing 45.5 million, according to JLL.
This isn't necessarily bad news, but a closer look at the economy, the types of tenants and pre-leasing is in order, Costandinides said. With job growth at a slower pace, new tenant demand isn't growing as fast as right after the Great Recession.
"It's just that when you are in a ditch and you are climbing out, you are adding a lot more jobs. That's what we were doing here, but since then things have normalized," he said.
Headline-grabbing leases were triggered by the arrival of new financial service firms. A deep-pockets addition is the publicly traded Icahn Enterprises LP led by billionaire Carl Icahn, which is relocating later this year to a floor and a half at Sunny Isles Beach's Milton Office Tower.
But financial firms don't bring a large contingent of employees, Costandinides cautioned.
"It's not Amazon," he said.
South Florida lost its bid for the e-commerce giant's second headquarters. In fact, the region has failed to attract big corporate relocations as a whole, both Costandinides and Cheezem noted.
Another big tenant in the news has been coworking groups, which accounted for a fifth of leasing last year, but questions about their viability shroud the relatively new sector. WeWork, one of the giants in the coworking industry, backtracked on going public last year after investors raised concerns about the company's value, and CEO Adam Neumann was ousted amid concerns over corporate culture and leadership.
"Without a capital lifeline, WeWork will continue to pull out of leases left and right as they move closer to what can ultimately be bankruptcy," said attorney Barry Lapides, a partner at Berger Singerman in Miami.
WeWork rented 170,000 square feet on 10 floors at the 57-story spec office tower now under construction, 830 Brickell in the Brickell Financial District, according to CoStar.
It's good news that the building secured a big tenant, but on the flip side the tenant has an uncertain future, Costandinides said.
"It's questionable whether in two years when the project will be complete at what shape the company will be in," he said. "One thing I can tell you for the coworking space, it's an industry which is fairly new, and second none of these companies publish financial results so you don't really know how healthy they are."
The Cushman & Wakefield representative in charge of leasing the building defended its viability, saying talks are ongoing with new-to-market businesses as well as existing South Florida companies.
"The amount of interested tenants for 830 Brickell has far exceeded our early expectations as we are just now coming out of the ground," said Brian Gale, vice chairman of office brokerage services.
Over the past four months they have presented the asset to tenants looking to rent over 300,000 square feet in Brickell, which already is a healthy market with high rents and minimal vacancies, Gale added.
Picking on Wynwood
A good benchmark is 70% to 80% preleasing in the six months before a building's completion, Costandinides said.
But some of the much touted buildings finished last year and on tap this year don't achieve this, and Miami's Wynwood neighborhood is a prime example. The globally known arts district is now a budding office market.
The Cube Wynwd was finished last year and reported one secured tenant, coworking firm Spaces, which leased 31% of the 76,811 square feet of offices, according to CoStar. Completed Wynwood Annex secured Live Nation entertainment company, which leased 13% of the 60,000-square-foot building, which includes retail space. On their heels is 545Wyn with its only secured tenant so far architectural firm Gensler, which designed the building and leased about 5% of its 298,597 square feet. Other projects on tap are Gateway at Wynwood with 195,000 square feet of offices and Wynwood Square with 54,000 square feet.
"We are yet to see the first big commitment in that neighborhood," Cheezem said. "There's definitely a great small market that's been developed there that has a lot of room to grow still, but is it going to fill that space and where are they going to come from? The Cube was the first one that delivered. You can see how much vacancy they still have. 545 Wyn is right behind them to deliver this year."
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