How Miami’s Limited Supply Affects Office Investment
- Oct 12, 2018
With more than 60 million square feet of office inventory, Miami has been characterized by steadily rising demand in the face of constrained supply. According to Yardi Matrix data, less than 1 million square feet are under construction. The slowly growing amount of office product has led to shifts in acquisition strategies, balanced with the needs of today’s commercial tenants.
Tom Farmer, vice president of office leasing at Colliers International South Florida, possesses more than 13 years of experience in the area’s commercial real estate market. In an interview with Commercial Property Executive, he discusses the opportunities and challenges in the Miami market from the perspective of both investors and tenants.
What can you tell us about the current investment trends in Miami’s office market?
Farmer: Demand remains extremely strong for all product types in South Florida from institutional to local investors. One trend we’re seeing is that non-institutional product types are now being considered and acquired by the institutions. Another trend growing in popularity is mixed-use and transit-oriented developments, which are outperforming the traditional alternatives.
How would you describe the current investment opportunities in Miami?
Farmer: Investment opportunities are no longer abundant in Miami. We have seen so much trade in the last three years that there are fewer opportunities available now and in the foreseeable future. We’re seeing office buildings being acquired by institutional investors that a few years ago would never have been considered by them.
What challenges are present in the office market?
Farmer: Overall, the lack of supply is a huge challenge. New-to-market tenants coupled with the organic growth of the existing tenant base have pushed our vacancy rate into the single digits for Class A office space. Good office space may be available today but is often gone tomorrow, and investors need to move quickly.
Another challenge is rising construction costs. A decade ago, you could conceivably construct nice office space for nearly $45 per rentable square foot. Currently, that number has increased to $70-$80 for second generation space. Considering the existing supply of vacant space doesn’t meet the needs and wants of today’s office tenant, new modern buildouts can be problematic, given rising construction costs and the need to redesign existing office space.
Tell us about a recent transaction you were involved in, and how it is indicative of current trends in the market.
Farmer: We recently completed a 10,000-rentable-square-foot transaction in the Airport West submarket, where our client elected to relocate from their existing traditional office space to a new and modern office building. The client was willing to pay premium rents and felt that they would have greater success creating a modern space in a new building, improving their recruitment efforts in attracting and retaining young talented professionals.
Which submarket within Miami stands out, and what has contributed to its success?
Farmer: The Brickell submarket in Miami stands out for its rent appreciation, low vacancy rates and overall appeal for new-to-market tenants. Its live-work-play environment, created by the addition of Brickell City Centre and Mary Brickell Village, has been a large contributor to the submarket’s success.
Looking northward, now that Brightline links Miami to West Palm Beach, how has the intercity service impacted office demand?
Farmer: We recently completed a transaction at 801 Brickell for TIAA-CREF, where a prominent financial services firm chose to relocate to the Brickell submarket from Fort Lauderdale. The main driver for the relocation was the convenience that the Brightline train offers.
What amenities or characteristics are office tenants looking for today, compared with five years ago? How are investors and developers responding?
Farmer: Five years ago, tenants focused on creating an efficient office space—for example, how to better utilize an office space on a cost-effective basis. Today, tenants have shifted their focus. While they still want an efficient office space, they are focused on creating space that best helps them recruit and retain young, talented professionals—clean modern offices with emphasis on natural light, open collaborative areas with the latest furniture layouts and lighting choices. Companies are searching for office buildings rich in amenities such as fitness centers, wellness rooms, on-site cafés and sit-down restaurants, outside green areas with Wi-Fi etc., as a starting point from where they can create their new offices.
As a result, investors and developers have started to take notice. Investors are looking for opportunities to increase the value proposition of an asset by adding missing amenities where they can—taking an old, outdated and stale office space and creating modern spec suites to entice new tenants. Developers are taking this into account during their planning and designing phase as evidenced by new products rich with amenities to attract tenants.
Image courtesy of Colliers International