Real Estate
The construction effect
New construction changes the landscape of Miami’s CBD
Smart Business Miami | February 2008
Eric R. Groffman
Vice President
Transwestern
Due to the lack of new commercial
construction over the last five years
in the Central Business District (CBD), which includes the downtown and
Brickell submarkets, Miami office rents are
at an all-time high and many tenants/business owners are feeling the burden of high
office costs on their overhead. The
increased rental rates and record-low
vacancy rates has led to a new wave of
office construction in the CBD. Beginning
in 2010, approximately 1.7 million square
feet of new Class A space is scheduled for
delivery to the market.
“These new buildings will not only provide state-of-the-art designs and building
efficiencies but more choices to tenants,”
says Eric R. Groffman, Vice President in
Transwestern’s South Florida office. “Until
then, tenants are feeling the tightness in the
market and are exploring their options,
many wondering what move to make
next.”
Groffman is an expert in the CBD sub-market with over nine years experience
focusing on this market. In the past 12
months, Groffman achieved some of the
highest lease rates the CBD has ever seen
on behalf of one institutional owner.
Smart Business asked Groffman about
his take on the changing CBD market and
its potential impact on landlords and tenants alike.
What is currently happening in the CBD?
Over the past 18 months, the Class A and
B office space in the Miami CBD has been
some of the best-performing space in the
country. The strong South Florida economy coupled with no new supply since 2002
has resulted in single-digit vacancy and
exceptionally strong rental growth.
Currently, rental rates are averaging above
$45 for almost all Class A properties in the
CBD. To put this into perspective, the rates
are $10 per square foot, 20 percent higher
than 24 months ago. Tenants that leased
space in 2002 and 2003 have been surprised at their proposed renewal rates and
some have opted to relocate to Class B
space where rates have risen to the high $30 range. In spite of the slowing national
economy, we expect rates to increase 4 to
5 percent through 2009 until some of the
new construction comes online.
How will the new construction affect the
market?
Approximately 1.7 million square feet of
new Class A office space will be delivered
in the matter of a two-year time span, starting first quarter 2010 through 2011, and
while this is a lot of space, some interesting
dynamics will impact the absorption. All
three major projects strive to be the new
‘Trophy Office’ buildings in the CBD, offering significantly more amenities and features than the existing buildings, and they
should be in great demand by users mandated to lease space that meets new environmental standards.
Older generation Class A buildings will
be challenged by the new buildings to hold
onto tenants and meet new environmental
standards. In anticipation, landlords of the
existing Class A buildings have been strategically preparing their rollover schedules
to minimize their exposure during the expected 24- to 30-month lease up as they
foresee a flattening of rental rates in the
market once the new product is delivered.
How does the glut of the residential condo
market impact the commercial market?
First, for the last four years, the cost to
construct buildings and build out tenant
space has risen by as much as 20 percent
annually, so any reduction in these costs is
welcomed relief. Second, a long-standing
complaint for many companies and professional firms has been South Florida’s high
cost of living. There has been a dramatic
decrease in the monthly rent and sales
price per square foot for condos in the
CBD as a result of the oversupply.
Along with the tremendous wave of
condo development came an abundance
of amenities to the CBD, making it a more
desirable place to live and work as compared to five years ago. As a result, while
companies deal with higher real estate
costs, they may find less pressure on
increasing wages due to lower housing
cost in the CBD. We often forget labor
and real estate remains one of the highest
operating costs of most professional
companies.
What is ahead and how does this affect
companies interested in the CBD?
The overall CBD will be in flux for the
next three years as the residential condo
glut works its way out and the office market starts to absorb 1.7 million square feet
of new space. For the first time in years,
tenants will have a variety of choices while
average rates flatten. In addition, we
expect a disparity in rates between new
and existing Class A buildings. The next
three years will require the guidance of an
experienced professional to identify and
seize upon the opportunities in this evolving market.
ERIC R. GROFFMAN is a Vice President in Transwestern’s South Florida office. Reach him at eric.groffman@transwestern.net or
(305) 808-7821.
