The Miami Area’s Office Market as 2023 Ends: Cooling, But Still Hot
Most U.S. commercial hubs would love to be posting the area’s numbers, though signs of a slowdown are unmistakable
Most metropolitan office markets across the nation are sagging under double-digit vacancy rates amid a slow post-pandemic decline in working from home. Yet, the Miami area continues to be a lively outlier where some of the best office space commands rents upward of $100 per square foot.
Not every part of this Florida postcard is pretty, though. As it has elsewhere, the volume of office building sales has cratered in Greater Miami as interest rates have climbed. And the local office market’s huge wave of new-to-market companies may soon crest, if it hasn’t already. Plus, vacancy rates are uneven across submarkets, with vacancy ranging from 7.5 percent along Brickell Avenue to more than 20 percent in Downtown Miami.
Yet, despite these headwinds, the Miami area office market is still propelled by a microscopic unemployment rate and little new office development beyond boutique projects.
Consider Eighteen Sunset, a new five-story office building that will open soon in the Sunset Harbour neighborhood on the west side of Miami Beach, with amenities that include unobstructed views of the Miami skyline across Biscayne Bay. The developers have pre-leased well over half of the 38,660-square-foot building, mainly to companies new to South Florida, and they have priced the remaining space from $150 to $175 per square foot, triple net.
“Having been a tenant in many of the buildings in Miami Beach, we knew there was nothing really that good in the market, so we thought there was an opportunity,” said Bradley Colmer, founder and managing principal of Deco Capital, which developed Eighteen Sunset together with the family office of billionaire investor Marc Rowan, co-founder of New York-based Apollo Global Management. “They’re our capital partner in the deal,” Colmer said.
With an October unemployment rate of 1.6 percent — about half the national jobless rate — the Miami area is drawing the attention of real estate investors and developers by outperforming the U.S. office market. The nationwide office vacancy rate hovered at 16.7 percent in the third quarter of 2023, up 30 basis points from the second quarter and above the previous record of 16.3 percent during the 2007-2009 recession, according to research by brokerage firm Colliers (CIGI). But the vacancy rate in Miami-Dade County — including suburban markets — was 9.6 percent in the third quarter, down 50 basis points from the second quarter, according to Colliers.
“There are Wall Street giants and tech CEOs flocking to Miami,” said Ryan Holtzman, a Miami-based executive managing director of brokerage Cushman Wakefield, which handles leasing for 830 Brickell, an office tower under construction in the Brickell Avenue corridor of Miami. “Companies are recognizing the value of having offices in places where people want to live. And Miami has become one of the top spots where people want to live.”
That trend has likely peaked, though. Newmark has reported a deceleration in new-to-market lease transactions in the Miami area. “The surge in new-to-market leasing that occurred between 2020 and 2022 has slowed down in 2023, with 257,000 square feet of new-to-market transactions, year to date,” the brokerage reported in third-quarter research on the Miami area office market. “This is 75 percent down from record 2022 levels and approximately 50 percent down from the five-year historical average.”
Meanwhile, office building sales volume in the Miami area plunged during the first nine months of 2023 to $430 million from $1.2 billion during the same period in 2022, a 66 percent drop, according to a report by the Miami Association of Realtors.
“Last year was a banner year for us, 2021 was a good recovery year, and we survived 2020,” said Tony Arellano, managing partner of Miami-based commercial brokerage Dwntwn Realty Advisors. “We were maintaining in 2023, maybe slightly down, but it was hard to keep pace with 2022.”
Arellano also said he believes that Miami’s inflow of new-to-market companies is “here to stay” – but elevated interest rates may not be. “Although the Miami office market is still strong and we don’t have systemic supply issues, there’s still the pressure of the capital markets. So, our cap rates, from what used to be 6 or 6.5 percent, have drifted to 7.5 or higher,” he said. “We’re not seeing the stress in Miami, as much as we wanted it to come. There was a lot of money waiting for it. Now that the Fed is looking to cut rates, it’s no longer on our radar.”
With all the fanfare, the view from Miami’s various submarkets does vary, with some areas capturing more of the newcomers and the $100 rents than others.
The Brickell Avenue area had an office vacancy rate of 7.5 percent in the third quarter of 2023, according to office market research by Cushman & Wakefield (CWK). That rate is much lower than in several other major Miami office submarkets, including Downtown Miami (21.7 percent), the Wynwood area (18.9 percent) and Coral Gables (15.9 percent).
“The nature of the demand in Brickell is relatively inelastic. It is the epicenter. It is ground zero. When a company is looking to relocate or set up an office in Miami, that’s where they start,” said Jeff Fronek, managing principal and president of Manhattan-based Tourmaline Capital Partners. “That’s what they read about in the papers. Everyone wants to be on Brickell.”
The Brickell area is bordered by the Miami River and Downtown Miami to the north, Biscayne Bay to the east, the Rickenbacker Causeway to the south, and Interstate 95 to the west. The area’s high-rise shoreline along Biscayne Bay is mostly lined with condos from the Rickenbacker Causeway up to 13th Street, and mostly office buildings north of 13th to the Miami River. Leisure attractions include Mary Brickell Village, a popular cluster of dining and shopping destinations, and Brickell City Centre, a mixed-use commercial property that encompasses a multilevel, open-air shopping mall with restaurants and movie theaters.
Brickell’s low vacancy rate reflects the success of 830 Brickell, the area’s biggest office development in more than 10 years. Scheduled to open for occupancy in early 2024, 830 Brickell is a 57-story office building where all 640,000 square feet have been pre-leased by tenants that include Microsoft, CI Financial, software investment firm Thoma Bravo, law firm Kirkland & Ellis, and multinational hedge fund Citadel, led by billionaire investor Ken Griffin.
No other major office development is now under construction in Brickell. The next big one to break ground may be an 80-story office tower at 700 Brickell Avenue that Related Companies plans to develop together with Hong Kong-based Swire Properties, the owner of an existing, 33-story office building on the site.
But they need to secure financing first. Manhattan-based Related and Swire will start construction on the project if they recruit enough tenants first, said Holtzman of Cushman & Wakefield. “The challenge in this environment is you have to have a certain percentage of pre-leased [office space] before you can break ground and get construction financing,” he said. “So, they’re just working on that at this point.”
Although its address is 830 Brickell Plaza, one block west of Brickell Avenue, the 830 Brickell office building will have eastward views of Biscayne Bay on upper floors — at a premium price. Lease rates at 830 Brickell increased as the number of available spaces dwindled, Holtzman said. “We started off in the low $70s [per square foot] and ended up doing our final deals in the mid to upper $100s,” he added. “If we had another few floors or 100,000 square feet left, we’d be quoting $200 a foot, gross. … There are very few places in the country where this is happening.”
Fronek expects his firm Tourmaline to piggyback on 830 Brickell’s standout performance. “That building was effectively 100 percent pre-leased about a year ahead of its delivery,” he said.
About three months ago, Tourmaline and Monarch Alternative Capital LP paid about $250 million to acquire a nearby trophy asset, 801 Brickell, a 28-story building with 412,000 square feet of Class A office space. The previous owner, Chicago-based investment manager Nuveen, substantially upgraded the 39-year-old office building, Fronek said.
“They did a major renovation and delivered pretty substantial amenities, including a new lobby,” Fronek said. He also said 801 Brickell has a 92 percent occupancy rate and the remaining office space will be leased at triple-digit rates. “We’re looking at over $100 per square foot on that,” he added.
Pricey offices in Brickell have led some tenants to look elsewhere and lease space in Downtown Miami and other local submarkets that are more affordable. Office market research in the third quarter of 2023 by Cushman & Wakefield shows that the average asking rent per square foot for Class A office space was $98.28 in Brickell, $77.62 in Wynwood, $64.77 in Downtown Miami, and $53.97 in Coral Gables, slightly below the countywide average of $56.80.
“We do view downtown as a beneficiary of the rapid price appreciation of rents in Brickell,” Fronek said, citing his experience with Citigroup Center, an office building in Downtown Miami. Monarch Alternative Capital bought the 34-story office building in 2021 and operates it in partnership with Tourmaline. “We bought the building 60 percent leased. We have crossed the 70 percent threshold,” he said.
Downtown Miami also has lost some office tenants to other submarkets in the Miami area, part of a broader trend in South Florida as tenants move out of central business districts to less expensive suburban submarkets, according to third-quarter market research by Colliers. The brokerage reported that a total of more than 40 tenants moved from Downtown Miami and Brickell over three years and left about 150,000 square feet of vacant office space behind. Colliers also reported that the tenant migration to South Florida’s suburbs grew progressively from 2020 to 2022, and that tenants new to Miami absorbed much of the vacant space.
Downtown Miami has improved as an office location, Fronek said, thanks largely to the downtown station of the Brightline passenger train service, which reopened in November 2021 after the pandemic suspended operations for more than a year. The trains run northbound to stops that include Aventura, Fort Lauderdale, Boca Raton, West Palm Beach and, since Sept. 22, Orlando as well.
“The train station has become a game-changer,” Fronek said, adding that Downtown Miami is showing other signs of urban renewal. “It continues to change for the better. There’s food and beverage concepts that are opening, and there has been a significant amount of residential construction in the north part of downtown.”
Higher rents in Brickell and other submarkets in the Miami area are encouraging some office tenants to lease space in Coral Gables, an upscale city just a few miles southwest of Brickell that has long served as an affordable office location near Miami’s urban core.
“Coral Gables is still a significant discount to Brickell,” said Spencer Morris, president of Allen Morris Company, a commercial real estate developer based in Coral Gables. “As rents have gone up in Brickell, a lot of tenants that have historically been there have moved out of Brickell and relocated to Coral Gables, especially in the last year to 18 months.”
Alhambra Towers, a landmark 16-story office building that Allen Morris Company built 20 years ago in Downtown Coral Gables, has yielded higher lease rates per square foot since the COVID-19 pandemic receded. “Now we’re pushing the high $50s, low $60s. So, we’ve seen about a 25, 30 percent increase in rates since COVID,” Morris said. “Brickell Class A buildings are increasing from pre-COVID levels of $55, $60 per square foot to over $100 per square foot. Trophy buildings are crossing the $120 to $150 mark.”
As in other Miami submarkets, office development has been rare in Coral Gables, where building height is limited to 16 stories and the municipal government imposes Mediterranean design standards on developments in the city’s commercial core.
“Coral Gables is a market with ultra-high barriers to entry,” said Eduardo Otaola, managing principal of Constellation Group, a real estate development firm operating from Kendall, a Miami suburb, but planning to move its home office to Coral Gables. “Most of our team are Coral Gables residents.”
Constellation plans to occupy office space in one of two properties it’s developing in Coral Gables. They are 4225 Ponce, a 120-foot-tall project with 85,000 square feet for office tenants and retailers; and 4241 Aurora, a mixed-use development combining 10,000 square feet of office space with about 8,000 square feet of retail space and as many as 84 residential units.
“Ponce will be attracting institutional-quality tenants,” Otaola said. “Aurora will be more for local shops and the local office market.” So far, he said, rents for pre-leased space at 4225 Ponce have come close to $60 per square foot, triple-net. “I think we’re going to be above that,” he said. “There’s a lack of supply.”
An abundant supply of high-end homes and tree-lined neighborhoods distinguish Coral Gables from other submarkets, attracting business decision-makers who want an office location close to where they reside, said Steven Hurwitz, a managing director and South Florida agency head at brokerage JLL (JLL).
A different demographic prevails in high-rise homes in Brickell and Downtown Miami, Hurwitz said. “It is more younger worker bees,” Hurwitz said. “The decision-makers generally are living south of Miami in Coral Gables or Pinecrest, or north in Miami Beach or Aventura.”
Colliers reported that the Miami area’s second-largest office lease in the third quarter of 2023 was in the Wynwood submarket, a former industrial area north of Downtown Miami. Sony Music Entertainment signed a lease for 44,742 square feet at 545 Wyn, Colliers said. The 10-story, mixed-use building opened in 2020 with 298,000 square feet of office space and 26,340 square feet of retail space.
Known for colorful murals on the walls of its older buildings, Wynwood is a trendy area that has attracted art galleries, creative companies (like Sony Music), tech companies, and myriad food and beverage venues. Yet, as it matures, Wynwood is attracting not only artists, foodies and hipsters but also professionals in such buttoned-down fields as investing and accounting.
For example, Miami International Securities Exchange plans to open a physical trading floor at 545 Wyn, subject to regulatory approval. The company, also known as MIAX, operates an electronic exchange for trading U.S.-listed options and leased 38,400 square feet.
Accounting giant PwC has also leased space in 545 Wyn, located at 545 Northwest 26th Street. PwC, also known as PricewaterhouseCoopers, leased 38,904 square feet at the office building.
Some asking rates for Wynwood office space have topped $90 per square foot, full-service, according to JLL’s market research. “Submarkets like downtown [Miami], Coral Gables, Coconut Grove, and the Miami airport can benefit from existing tenants being priced out of Brickell and Wynwood,” JLL reported.
“Sony is there. You have PWC there. So, you have some real blue-chip companies who don’t check the box of creative or tech,” Hurwitz said. Whether the inventory of office space in Wynwood will expand and restrain lease rates is unclear, he said. “There are several new projects proposed. We’ll see which one of them can pre-lease enough tenant space to get built.”
Across the Miami-area market, construction of office space has long taken a backseat to residential and other types of development, Hurwitz said. “In the last 10 years, we’ve had very few new deliveries of office,” he said. “Office would not be the highest and best use, so a lot of land was gobbled up for residential, hospitality and retail projects.”