Posted on Saturday, January 22, 2011
MIAMI-Ask 10 people for their take on Downtown Miami's office market and you'll get at least three different answers. Some pundits expect a faster recovery than others-and some don't predict much of a recovery for the next decade.
The overall office vacancy rate for Miami-Dade County fell to 18.1% at the end of the third quarter of 2010, down from 18.4% reported at mid-year, according to Cushman & Wakefield. This decline marked the second consecutive quarter of falling vacancy rates after peaking first quarter this year. But those stats are not convincing all the local brokerages that good days are just around the corner in 2011-or even 2015.
GlobeSt.com caught up with CresaPartners' Miami Founding Partner David Prevé, to discuss the flood of office space in Miami, the prospects for tenants in the current climate, and the potential for a short-term recovery.
LeClaire: In Miami so much new office space has come on line and one day Brickell Financial Center will be delivered to the market. Are there enough tenants to fill the locations from outside of Miami or is this just business musical chairs?
Prevé: Historically, during good to great economic times, the Downtown Miami and Brickell submarkets absorb between 200,000 and 250,000 square feet a year. The introduction of 1,335,306 rentable square feet of new product-not including Brickell Financial Center-represents about five years of absorption if these were good to great economic times.
Factoring in the delivery of Brickell Financial Center with an additional 605,886 rentable square feet, at a minimum there is another two and a half years of absorption. And this is a best-case scenario, which we know has not been the case to date. We believe the new product represents about 10 years of absorption, and while the new buildings may experience significant lease up it will be at the expense of the existing older class A buildings in the market.
LeClaire: With the cost to build, the debt service the owners are asked to carry and the global economic downturn all converging together, are tenants in a great position to squeeze a great deal?
Prevé: The short answer is yes. However, it comes with many caveats such as credit worthiness of the tenant, cost to build out the tenant's premises, lease term, etc. etc.
Some of the new buildings have entered into provisions that restrict the aggressiveness of the landlord to pursue economic transactions that are, in essence, "better" than that which was given the lead tenant or tenants. This will artificially prop up the market in the new building. However, it will also stall the velocity of leasing in that same building.
LeClaire: Are any of these properties placing themselves on a financial tightrope with the concessions?
Prevé: In general, we believe the class A buildings delivered or to be delivered to the market have or will weather the financial turmoil of the previous two years. However, those buildings purchased during the height of the acquisition boom with highly leveraged debt are more apt to be pressured to renegotiate the debt, return the property to the lenders, or walk that financial tightrope in hopes of maintaining an existing tenant or securing a new tenant without necessarily disclosing the impact of the debt on the operation of the building or on the transaction as it is implemented.
LeClaire: When do you predict enough absorption will take place to get Miami back to steady footing?
Prevé: The market will not reach equilibrium for seven to nine years. However, there are scenarios which could have a major user relocate to a new building from within the market and be reflective as net absorption if the space they are leaving is no longer used for office space. These scenarios could accelerate the absorption process significantly.
LeClaire: How are new tax laws going to affect the way business view long term leasing in the future?
Prevé: Until we have a more stable financial recovery we do not think there will be an immediate impact by the accounting rule changes. The supposition by some pundits is that corporations may be more inclined to purchase buildings for their space needs. However, given corporate America's risk avoidance and the need for flexibility in terms of growth and contraction we believe this will not be the case, at least not for everyone.
LeClaire: Any X factors that could shake up the commercial markets this year?
Prevé: Any seismic activity in the economy could always be the new X factor. But we also see that due to our close proximity to Latin America that both the good and the bad emanating from South American has an effect on this market. So anything negative or positive in Latin America will be felt to some extent in South Florida.
By Jennifer LeClaire, GlobeSt.com