Why South Florida’s Office Market Shines As Other US Regions Struggle

Now known as Eighteen Sunset, the mixed retail-and-office development commands some of the highest asking rents in the area, topping $150 a square foot triple-net. The office component, scheduled to be completed by the end of the year, is already 80 percent preleased. 

Even as the future of work remains in limbo thanks to hybrid and remote models, and marquee markets such as San Francisco and New York struggle to recover from the pandemic, Miami has emerged as a boomtown for offices. New-to-market tenants have continued to ink leases, rents are on the up, and developers are betting that demand will remain high as they launch new office projects across the city.

Asking rents in Miami have jumped since 2021, breaching an average $50 per square foot at the end of 2022, while the vacancy rate has continued to drop, falling to 16.4 percent, according to data from JLL (JLL). 

At the close of 2022, Miami boasted the fourth-highest absorption rate in the country — surpassing pre-pandemic levels — bested only by smaller markets such as Grand Rapids, Mich., and Jacksonville and West Palm Beach in Florida. In another sign that Miami tenants are holding on to their space, the city’s sublease availability rate has remained below 2 percent since the second quarter of 2021. 

By comparison, the vacancy rate in San Francisco, one of the country’s premier office markets  thanks to the tech industry, has skyrocketed to 25 percent and is expected to further increase this year. By the end of 2022, the absorption rate stood at -3.2 percent, with tenants returning more than 2.8 million square feet back to the market. 

New York, while not as hard hit as San Francisco, has yet to fully recover from the pandemic. NYC’s vacancy rate stood at 15.9 percent, a 14-year high, with the absorption rate at -0.5, accounting for nearly 2.3 million square feet.

The two coastal cities may never return to pre-pandemic metrics. By the end of the decade, 1.1 billion square feet of vacant office space nationwide is expected to remain vacant, a Cushman & Wakefield report found. Worse still, more than 25 percent of the country’s total 5.56 billion square feet of office, about 1.4 billion, will be considered obsolete.

The market downturn has already claimed some of the country’s biggest players as victims. In February, Brookfield (BN) Properties, one of the largest office landlords in the country, defaulted on two loans tied to a pair of office skyscrapers in Downtown Los Angeles. Also last month, a  Related Companies affiliate and its partner, BentallGreenOak, defaulted on two office buildings in New York’s Long Island City neighborhood, The Real Deal reported. 

But that’s hardly the case in Miami. Even Related hasn’t lost confidence in the asset class. The New York-based developer, led by Stephen Ross, and partner Swire Properties plan to break ground this year on an 80-story office skyscraper in the heart of Miami’s financial district. The building could become Florida’s tallest tower.

The joint venture isn’t alone. In Miami Beach, star residential broker turned developer Michael Shvo is working on three office projects, all designed by world-renowned architect Norman Foster. Former Google CEO Eric Schmidt has backed another office venture in the Miami Beach neighborhood known as South of Fifth.

Even the Miami Design District, known as a top destination for luxury shopping and dining, is getting into the office business. The property’s owners are close to signing tenants and plan to break ground on a 15-story tower this year, the first standalone office building for the 18-block development. 

The Miami area has over 1 million square feet of office space under construction, according to JLL, a figure that doesn’t include Citadel’s proposed new headquarters. Last year, the financial firm paid $363 million for a vacant waterfront site in Brickell, a record for Miami land sales. While the company has yet to release details about the office development, it has selected a developer for the project, which it expects to take about five years to construct. 

Part of Miami’s success is thanks to the influx of new-to-market tenants, who decamped to South Florida during the pandemic and expanded the city’s tenant pool. To both entice employees back to cubicles and to fit their corporate images, these companies, often high-flying tech startups and financial giants, sought only the highest caliber of offices — something that Miami lacks. 

Unlike Manhattan and San Francisco, where Class A offerings make up 67 and 71 percent of the market, respectively, Miami’s Class A offices account for only 55 percent of the share, according to JLL. The dearth of luxury offices helped fill up 830 Brickell, the first standalone office tower erected in Miami over the past decade, as the 55-story development was being completed last year.

The demand was so strong that 830 Brickell’s developers, OKO Group and Cain International, last year paid WeWork — which had signed a lease in 2019 when the asking rent stood around $65 per square foot — to forgo its 146,000-square-foot office as the development’s going rate breached $100 a square foot. Financial heavyweights Citadel and Santander Bank later filled the space.

The frenzied market has kept Miami leasing brokers busy. The past two years have been the busiest of David Valdez’s 33-year career. “Before COVID, there was a lot of effort put in on the agency side to canvass the tenants, get them over to buildings, and hold broker events,” the Blanca Commercial Real Estate agent said. Not anymore. “When so many tenants are coming into the market, that’s more the phone ringing than you making the phone ring.”

Despite the progress made during the pandemic, the Miami office market has yet to mature. It remains a bargain when compared to New York and San Francisco, where the average asking rent is tens of dollars more expensive at $81.64 and $78.12 per square foot, respectively. And lower-tiered, Class B office properties in Miami have taken a hit, netting a -1.2 absorption rate last year, per JLL. 

There’s no guarantee that the rush of new-to-market companies, which bolstered Miami’s market, will continue as the pandemic eases and fears of a recession loom. A slowdown spells trouble for the projects now under development.  

The Miami market has also not been immune from the wider macroeconomic downturn. South Florida office investment sales have plummeted as interest rates rose in the past year, making it more difficult and expensive for buyers to secure financing. Between the third and fourth quarters of 2022, the total dollar volume transacted dropped by 43 percent to $458 million, according to data from Newmark. 

Even properties that were leased up with renowned tenants have failed to sell. The owners of 1111 Brickell, also known as Sabadell Financial Center, took the 30-story office building off the market last year, despite New York-based hedge fund Millennium Management having inked a 75,000-square-foot lease in 2021, The Real Deal reported.

The developers of the Gateway at Wynwood followed suit, pulling the 14-story property off the market last year and securing a $113 million refinancing loan last month. Completed in 2021, the office building nabbed tenants such as OpenStore, a startup founded by Keith Rabois, a member of the so-called PayPal mafia, and commercial brokerage Marcus & Millichap (MMI), among others.

But as rents continue to climb, holding on to properties is not a bad outcome for office owners, according to Cushman & Wakefield’s Dominic Montazemi, who leads investment sales. 

“The Fed has made it artificially harder to transact on offices. Then why choose to sell today if you don’t have to?” the broker said. The Miami office market has “rents that are 100 percent above where they ever were — if not higher.”

Julia Echikson can be reached at jechikson@commercialobserver.com.