Values of South Florida office properties are rapidly eroding, including those of some marquee buildings that sold at premium prices during the industry's boom years. Per-square-foot prices of class A buildings have plummeted 29.4% in Miami, 25.8% in West Palm Beach and 18.6 % in Fort Lauderdale, according to property research firm Reis Inc. That outpaced a 19.7 % national decline.

"Every office building purchased in the last three years, with very few exceptions, is under water," says Robert Kaplan, founder of Olympian Capital Group in Miami. As bad as the situation is locally, the news is worse for the nation's South Atlantic region, which includes Florida, where prices fell 31.3% in a year, to $191 per square foot in the fourth quarter of 2008 compared with $278 at the end of 2007, according to Reis.

Despite the decline in values, a wave of foreclosures is not considered imminent. But building owners and lenders still have reason to worry, considering the sector's rising capitalization rates, reduced lease rates and occupancies, fewer buyers and the frozen, CMBS market that once provided a steady stream of financing.

Cap rates measure the ratio between a building's cash flow and its market price. The higher the cap rate, the lower the value. Fewer tenants and lower lease rates reduce that cash flow. Combine those factors with far tougher financing, and that means fewer buyers. And for existing property owners, it's tougher to refinance or win extensions on maturing loans.

Institutional investors and big investment firms that paid top dollar for premier office buildings typically avoid burdening individual properties with huge debt. With their investments and risk spread throughout many markets, they can hold the buildings and wait out the downturn or sell under-performing assets and reinvest elsewhere.

ING Clarion's recent sale of the 20-story Esperante building in West Palm Beach at a $36 million loss to CB Richard Ellis Investors is a case in point. At a purchase price of $67.6 million, CBRE paid $274.79 per square foot for the building. According to Reis, the building is valued even lower at $260 per square foot. New York-based ING paid $104 million in late 2005 for the 246,000-square-foot building at 222 Lakeview Ave. At $418 per square foot, the deal set a South Florida record.

"CBRE made a brilliant buy of Esperante," Kaplan says. "And ING Clarion is a big, sophisticated investment group that spreads their risk among many markets. When an asset doesn't meet investment expectations, they sell it. There is zero distress."

Big-office owners that have reason to worry are retirement and so-called opportunity funds whose individual investors have a right of redemption. They can redeem their investments on call, explains Charles Foschini, vice chairman of CBRE-Melody in Miami. "In this environment, that will force the sale of assets. And those will sell at whatever the market will bear with little differentiation as to purchase price."

Owners who paid top dollar for buildings took on substantial debt then saw property values drop have most reason to worry, says Jay Caplin, executive director at Cushman & Wakefield in Miami.

In Fort Lauderdale, BentleyForbes, as BF Las Olas LLC, paid $230.9 million in July 2007 for offices at 350 and 450 Las Olas Blvd.--buildings considered among the city's top office properties. At $492 per square foot, the deal set a state record for office sales. Wachovia Bank loaned $166 million, or 72% of the purchase price. Less than a year later, Los Angeles-based BentleyForbes began seeking joint venture equity partners. That failed, as did a later effort to sell the buildings.

"There's absolutely been a value diminution there," Caplin explains. "It's fairly highly leveraged. I don't know if it'll be a foreclosure, or if the lender will sell [the mortgage] or what will happen."

BentleyForbes president David Cobb said in several interviews that the buildings will not be foreclosed. But Reis estimates the value of the 350 and 450 building at close to $300 per square foot, according to research director Victor Calanog. That value reflects lower-than-expected rental rates, and that in turn means investors would be far less willing to pay even close to what BentleyForbes paid, he said.

Reis uses property information supplied by owners and broader market information to calculate future growth of specific buildings, then discounts that to a current value, Calanog says. The company studies tenant rolls, rent rates and other income sources like retail or parking space to determine cash flow. "Final figures may well be higher than first-cut estimates if property owners or lenders believe their specific buildings will truly outperform comparable properties in the submarket."

In a separate report, Reis predicted the US office vacancy rate will rise to 16.7% this year and could rise to 17.6% next year, the highest since 1992 when it hit 18.7% after the savings and loan crisis.

Terry Sheridan can be reached at [email protected].