Leases  ·  Industry

Miami and Palm Beach Office Markets Still Gliding Despite Fragile Economy

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Continued demand for office space, especially Class A, is pushing asking rents higher in Miami, even as vacancies hover above pre-pandemic levels.

With asking rents increasing 12 percent annually to $65.03 per square foot in the second quarter of 2023, landlords are cashing in, regardless of weak spots in the market, CBRE (CBRE)’s Thomas Haughton told Commercial Observer.

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Brickell and Downtown are still benefiting from the wave of tenants who started migrating to Florida to sidestep COVID-19 lockdowns in other parts of the country, while more established tenants have vacated the area to office properties north of the Miami River.

“From 2020 through 2022, the Miami market was really driven by the new-to-market tenants,” Haughton said. “We still saw some of the impacts of the hybrid and remote work trends and we saw some locally based companies that were trying to downsize and save costs like everywhere else, but that influx of unprecedented demand has really filled the gaps and brought the central business district to what it is today.”

Miami overall had a vacancy rate of 16.5 percent in the second quarter, a decrease of 1.1 percent year-over-year but still above the pre-pandemic baseline of 12.4 percent. That said, Brickell buildings were anywhere from 90 to 95 percent leased during the second quarter, according to Haughton. 

This strength of the Downtown core amounts to a “veneer of health” behind which “lies a fragile economy,” according to the outlook provided in CBRE’s second-quarter report. The threat of a recession is what is driving the tenants to downsize and move in order to keep expenses down.

“Anecdotally, some of our colleagues, people who are in the space and people representing tenants think the market is certainly kind of slowed down, and a lot of new-to-market tenant demand has been pulled out,” Haughton said. “So what you’re left with is a lot of local tenants who have leases rolling.”

For those older tenants renewing in the central business district who signed at $50 to $60 per square foot, they’re now getting proposals from landlords to reup at $90 to $100 per square foot, according to Haughton. Even if those tenants decide not to move to Downtown Miami, there’s always Coral Gables, which is benefiting as well.

West Palm Beach has also seen its share of new buildings being constructed to serve increased demand, a move that could potentially entice some Miami firms because of Brightline rail access between the two cities, but flight to quality that far north isn’t a trend at this time, Haughton said. 

“It’s possible to commute, but typically you’re either a West Palm tenant or a Miami tenant, depending on what you want,” Haughton added. 

But some tenants, especially financial services firms, have opened offices in both sections of South Florida.

Net absorption reached about 22,000 square feet in Miami, concentrated in Coconut Grove, Wynwood and Brickell, while Palm Beach saw 59,000 square feet of absorption despite up to 50,800 square feet of sublet space hitting the market, a separate CBRE report showed.

Vacancy sits at about 11.9 percent in Palm Beach leading to average asking rent of $32.82 per square foot, a record high for the county.

There are some dark spots in the office market in South Florida, but they hardly compare to other parts of the country such as Los Angeles, Manhattan and D.C., where vacancies have hit record highs. In Los Angeles, sale prices in 2023 have dropped 43 percent, and Brookfield (BN) recently defaulted on more than $1 billion in debt tied to three office downtown buildings.

Manhattan isn’t faring a whole lot better. Available office space in Manhattan hit an all-time high of 70 million square feet — about a 19.7 percent vacancy rate — in the second quarter of 2023. Leasing continues to be depressed by up to 25 percent compared to the pre-pandemic average, Commercial Observer reported earlier in July.

Mark Hallum can be reached at mhallum@commercialobserver.com.