HFF Q&A: What’s Driving Office Decisions in South Florida?

By Dennis Kaiser

Miami and South Florida’s office market is experiencing record-high rental rates at a time when there is a new office submarket emerging, Wynwood, and selective and needed new supply is coming online. Additionally, the demand for capital is at an all-time high at a time when Florida is growing immensely

Connect Media asked HFF’s Miami-based office team of Hermen Rodriguez, Ike Ojala and Matthew McCormack (pictured), who specialize in office investment sales transactions throughout the state of Florida, to share insights about what they are seeing in the market as we gear up to launch our dedicated daily news for Florida next week. Check out their responses in our latest 3 CRE Q&A.

Q: Construction costs across the board have increased not only to build new buildings but also for tenant buildouts and building renovations. How is that affecting owners and tenants?
A: With replacement cost at or above previous peak levels, landlords have had the opportunity to push rents to match, and, in some cases, even surpass rents justified by current replacement cost. Florida landlords can exceed those benchmarks, as there is strong demand for best-in-class office space, and we have seen historically low new supply developed this cycle due to stringent construction loan requirements for traditionally capitalized developers. While the increase in rent has certainly benefited landlords, marquee tenants are being courted by developers looking to anchor new projects and break through the pre-leasing requirement outlined by construction lenders. This has landlords playing defense, since the average age of a trophy CBD office building in South Florida is over 22 years old and tenants are being presented options that didn’t previously exist.

For tenants, the increase in occupancy cost has forced them to become more efficient with their space plans as well as look to the landlord to provide additional “value” within their building, i.e. tenant amenity centers, gyms, cafés, conference centers and multi-purpose gathering spaces. Tenants are looking to do more with less, and the amenity arms race that landlords are engaging in benefits the users.

Q: You’ve touched on buildouts and how tenants use their space, so how is competition for employees and record-low unemployment rates influencing building selection and office location?
A: Tenants are actively seeking out space that aligns with their brand and vision, as they feel it is imperative to attract and retain talent. While penthouse office space with tony Brickell, Biscayne, Las Olas or Okeechobee addresses are certainly impressive and desired by some tenants, others would rather be in creative office hubs like the new Wynwood district or boutique properties in markets like Coconut Grove, which might align more with their companies’ brand culture and DNA. Alternatively, some tenants need access to large and diverse workforces, where drive times and parking needs still strongly influence the decision on where to office. In all building selection and office locations, the overall tenant experience is at forefront of the selection process.

Q: As office occupancy costs rise in the CBDs, where are tenants/investors looking for office? What are they looking for?
A: Tenants and investors are increasingly attracted to urban/suburban office submarkets and assets that offer walkable, CBD-like amenities but are outside of the CBD. Typically, these tenants still demand best-in-class space, but have chosen to be closer to certain experiences. Investor appetite has increased for this product as they see more yield on investment compared to CBD assets, while offering some downside protection compared to run-of-the-mill suburban office. That being said, tenant and investor demand for all office properties remains strong due to the strong job growth, demographic trends and pro-business climate in Florida.

For comments, questions or concerns, please contact Dennis Kaiser