Christos Costandinides, director of market analytics with CoStar Group. Courtesy photoAcross 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.
JLL managing director Matthew Cheezem in Miami.“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.
The new 12-story Cube Wynwd office building at 222 NW 24th St.in Miami’s Wynwood Arts District. Rendering“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.”
A rendering of 10-story 545Wyn office building at 222 NW 24th St. in Miami’s Wynwood Arts District. It’s to be completed in 2020.From his perspective, “not everyone is going to be hitting a home run. There are going to be some of these buildings that sit with vacancies for extended periods of time, and that will put a ceiling on the market once that reality sets in.”
Patrick Duffy, the Newmark Knight Frank vice chairman leasing 545Wyn, Blanca, who is leasing Cube Wynwd, and David Peretz of Wynwood Annex co-development firm East End Capital are defending the office push.
“While the amount of new space coming online is significant, tenants today are demanding new, modern, best-in-class office space with amenities and infrastructure that are hard to come by in some of the older, existing office stock,” Peretz said. He added employers are keen on nontraditional areas offering a live-work-play lifestyle, and Wynwood is just that.
Newmark Knight has 545 Wyn proposals out to technology, advertising, marketing and real estate companies for occupancy early next year, Duffy said.
“We think once companies can walk in and look at it, it’s going to be a dynamite building,” he said. “It’s going to be where everybody wants to be.”
For Cube Wynwd, Blanca is in talks with creative, consulting, tech and professional service firms looking for 2,500 square feet and more.
And take note: Miami is a different market where pre-leasing is somewhat unusual, Blanca and Duffy said.
“In Miami-Dade County, I don’t think there’s any project historically that has delivered pre-leased at 70% or 80% other than MiamiCentral,” Blanca said. “Traditionally new construction in Miami will deliver anywhere between 30% to 50% pre-leased.”
Costandinides said half leased is not a doomsday scenario, but he notes some buildings are well below that.
“It doesn’t mean it’s the end of the world if something delivers and has no tenants. That’s what brokers do,” he said. “But how many have pre-committed before the building finishes is a sign of the building’s ability to pull tenants.”
Blanca stood up for coworking groups as a good springboard for new companies in South Florida.
“I would call it good incubator space for companies that are entering the market to stabilize their business, to grow their business and then from there go into direct leases with landlords,” she said.
Other Projects
In downtown Fort Lauderdale, the 25-story office tower at The Main Las Olas is 32% pre-leased to four tenants including law firms Akerman and Berger Singerman and investment holding company BBX Capital Corp. Co-developer Stiles Corp. declined to disclose the fourth name.
But the law firms are leaving holes when they move, handing leasing work to their current landlords.
Paul Marko president, leasing and brokerage division of Stiles Corp.Paul Marko, president of Stiles Realty, is confident about The Main, noting the signed tenants have the option to add more space. Letters of intent, the final step before a lease, have been signed for 100,000 square feet of office and retail space.
Stiles first focused on full-floor leases, then looked for 10,000-square-foot tenants and in its final leasing phase will focus on small tenants to fill in the holes, Marko explained.
“We haven’t had a building like this built in 20 years” in the area, he said. “We have a lot of activity, a lot of interest. It’s all positive on companies moving to South Florida in health care, hospitality, legal, finance. The building has some differentiators to it, which makes it even more attractive.”
The tower will have 12-foot glass windows rather than the typical 9-foot windows in downtown buildings. It’s part of a larger 1.4 million-square-foot project that includes a 341-unit multifamily tower. South Florida’s second GreenWise Market will be opened by Publix in the retail space.
Back in Miami-Dade, Coral Gables is getting The Plaza Coral Gables. The first phase to be finished this year includes the 13-story North office tower with 291,267 square feet, Blanca said.
A rendering of The Plaza Coral Gables mixed-use project, which will include two office buildings.“We are pretty confident that by year’s end we are going to be 50% pre-leased in this project in this particular phase,” Blanca said.
The South office tower in the second phase is 40% pre-leased to the relocating BAC Florida Bank.
In the last cycle, nearly 2 million square feet of offices delivered within a year, and that space wasn’t spread across submarkets like the current construction. Newcomers were concentrated in Miami’s Central Business District. Blanca’s firm leased 1450 Brickell, which delivered halfway leased and filled out “rather quickly,” she said.
“Some of that came from other buildings in downtown Miami, and about a third of the tenant roster came from completely new-to-market companies that were financial services that wanted to access the region,” Blanca said.
Future
The upside to the big pipeline boost makes the market friendlier to tenants, Cheezem said. Landlords already are repositioning existing buildings and adding amenities.
“It just becomes a question of value proposition,” he said. “It’s just a more competitive environment with this much new development. No existing landlord is naive to it.”
East End Capital, the co-developer of Wynwood Annex, noted it renovated its 310,000-square-foot 100 Biscayne office tower. The lobby, corridors and bathrooms got a face-lift, and a conference room and gym were added to the former New World Tower.
South Florida’s office market ultimately could take two paths, Cheezem said. If the market stays on track, expect to see circumstantial winners. But a broad economic slowdown would portend a leveling off or even correction.
Meanwhile, construction noise will remain a backdrop in South Florida.
“Can we sustain all this?” Cheezem asked. “My answer is not yes or no. We will see.”
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How Much is Too Much? South Florida Office Market Poised to Add 3.5M Square Feet | Daily Business Review - Law.com
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