South Florida Office Markets Show Signs of Slower Growth

MIAMI—The office market in South Florida in the second quarter was a mixed bag for most major markets, with negative absorption and lower leasing volume, according to research reports released by brokerage firm JLL.

The Miami office market in the second quarter continued to show signs of leveling off, JLL reports. The market year-to-date has registered 153,698 square feet of negative office space absorption and a total vacancy rate of 14.2%. Oliver Maene, research analyst for JLL, noted in the brokerage firm’s first quarter 2018 market report that the overall Miami market posted 40,355 square feet in positive office space absorption during the first three months of this year and an overall vacancy rate of 13.5%.

The gross average asking rent in the greater Miami office market rose from $37.65-per-square-foot in the first quarter of this year to $38.23-per-square-foot at the half-year mark.

“As we cross the halfway point of 2018, Miami’s office market continues to level off,” Maene states in the second quarter report. “The large net absorption gains that marked the recovery period of this cycle are gradually making way for net absorption losses across nearly all segments of the market.”

He continues that Class B assets continue to underperform as tenants moved out of lower quality space. Class A properties are performing well even though more than 100,000 square feet of Class A space was vacated in the second quarter. A significant number of small-sized tenants under 5,000 square feet made up a large portion of the move-outs and downsizings in the Class A segment in the second quarter.

“While leasing activity has been modest, recently delivered properties, such as Three Miami Central and Canal Park Office have managed to sign up tenants relatively fast, indicating continued robust demand for high-end office space,” Maene states. “Two more properties are scheduled for delivery in the first couple of days of the third quarter—Giralda Place-West Tower and Sunset Office Center—the latter of which is now 70% pre-leased.”

He notes that with Brightline Station’s recent opening, along with ongoing investments in MiamiCentral and Miami WorldCenter, demand for office space, particularly Downtown, may ratchet up as the area continues to attract new residents.

The Fort Lauderdale-Broward County office market saw its overall office vacancy rate rise slightly to 12.7% at the end of the second quarter as compared to 12.5% at the end of the first three months of this year. The market now has 107,000 square feet of negative absorption year-to-date after posting 30,100 square feet on the negative side of the ledger in the first quarter.

Office rental rates remain at all-time highs, although overall rent growth slowed in the second quarter. The gross overall asking rent increased in the second quarter to $31.95-per-square-foot, a 50-cent increase from the first-quarter’s average. JLL says in its report that it believes that there is not much rent growth in the offing, since most submarkets have average asking rents at or above the peaks seen in the last cycle.

One notable exception is the Fort Lauderdale CBD, which currently is enjoying average asking rents 43.5% over its 2008 peak rates at $47.14-per-square-foot. With new product expected to come online in the near future, JLL predicts that while the average rental rate will likely rise, some existing building owners may start offering higher concession packages to retain tenants, thus shifting the net effective rents.

JLL research analyst Ilyssa Shacter states in the second quarter report that the Fort Lauderdale market did not suffer any large-scale move-outs. Instead, the region saw numerous downsizes and small move-outs that outweighed the new tenant lease signings and expansions.

There were some significant expansions in the market in the second quarter, including KEMET Corp. growing its Downtown Fort Lauderdale operations by 45,000 square feet and Spaces leasing 32,000 square feet of space in Las Olas Square. In addition, Plantation saw some significant lease deals, including Aetna’s recent 85,000 square-foot lease in Plantation Walk and Envision Healthcare’s 88,700-square-foot transaction in the Pointe 1801 building.

The Palm Beach County office market suffered a significant increase in negative absorption in the second quarter. After posting a modest 5,100 square feet of negative absorption in the first quarter of this year, the market now has year-to-date 243,000 square feet of negative absorption. The overall vacancy rate in the West Palm Beach-Palm Beach County market rose from 14.7% in the first quarter to 15.8% in the second quarter. It should be noted, however, that the regions’ vacancy rate has declined from its market peak in 2008 of 16.9%.

JLL’s Shacter says the large increase in negative absorption was due to a number of factors—no new major move-ins and numerous small move-outs and downsizing initiatives. Two major large moves also contributed to the inflated negative absorption level—Shoes for Crews vacating 37,000 square feet of space at One Clearlake in a move to Boca Raton North and NTT America’s move-out of 56,000 square feet in the Boca Raton Innovation Campus. JLL notes the firm has downsized to less than 2,000 square feet of space outside of the Palm Beach County marketplace.

Trophy assets in Downtown West Palm Beach remain tight and had maintained a vacancy around or below 5% for the past seven quarters. The current vacancy rate for top CBD office assets at the end of the second quarter was still a very respectable 5.9%.

JLL notes that the average time on the market for available blocks of space more than 20,000 square feet in the Palm Beach County market is 25.6 months and the Boca Raton North market currently has 29 available spaces in that category.

Shacter says that the degree of negative absorption posted in the second quarter is not expected to be duplicated in the near term. However, she says the trajectory of growth is expected to be slower in 2018 than in recent years with one significant caveat—the tight market conditions in the CBD have enticed developers to the area. She notes that the One West Palm and City Place expansion projects remain at the forefront of development talks in the market.