Rates Rise, Brickell Ave. Tenants Adapt

At the outset of the second quarter of 2008, the Miami Central Business District, comprised of the Downtown and Brickell submarkets, is one of two distinct economic realities. The differences relate to future office occupancy costs and depend on the timing of a tenant’s lease renewal or new space requirement.

Office tenants with near-term (next 12–18 months) needs are facing the most challenging economic conditions in years. Rents are at an all time high and rate quotes can yield occupancy cost increases in the 30% to 50% range. Asking class A space rates have reached the $50 per sf mark, a watershed level for Miami, though no deal has yet been signed at these numbers. Faced with such grim prospects, users are reevaluating their need for high profile space with the Brickell address and eyeing alternatives in the less impacted suburban markets of West Miami-Dade. Such a move can yield savings of $10 to $15 per sf when total occupancy costs are considered. Difficult market realities merit strong measures and out-of-the-box thinking, and tenants are doing just that, leaving no stone unturned in the quest for reasonable solutions to record high rental rates.

Conversely, those tenants who have managed to avoid the near-term “pinch-point” in the market with lease expirations subsequent to early to mid 2010 are experiencing the start of unbridled competition for occupants in any one of three class A projects under development in the CBD, and totaling some 1.8 million sf. By our measure, this construction will expand the CBD’s class A inventory more than 25%, an unprecedented rise unaccompanied by even modest pre-leasing. The result? Full-service rental rates for large users at levels below $40 per sf and concession packages of over $80 per sf. Developers not willing to proffer competing terms at what is viewed as “early in the game” risk losing signature deals in the market in hopes that the competitive landscape is less aggressive a year or more from now. This is a difficult choice given present economic forecasts and consumer confidence levels at historic lows.