Will financial, tech firm influx save South Florida office market?
This article appeared originally on Daily Business Review.
A ballyhoo of excitement is resonating among South Florida real estate circles, business leaders and some public officials — mainly Miami Mayor Francis Suarez — over financial and technology firms zeroing in on the region.
Expansions by behemoths like Blackstone and Goldman Sachs come at a welcome time, nearly a year into the coronavirus pandemic that sent employees working from home indefinitely and raised questions over the vitality of office space.
But will financial and tech firms truly turn out to be the office savior they have been touted to be, or is this just overinflated hype? It depends on whom you ask. Most landlord brokers say this is the time South Florida has been waiting for and the market won’t just rebound but prosper. Their chorus of excitement is deafening over a smaller group of mostly tenant brokers who disagree and say the fanfare is ignoring reality.
Stephen Rutchik of Colliers International said both the number of financial firms flocking to Miami and the square footage they are looking for are pronounced.
“The impact that financial service firms are having on our market in South Florida is significant. We have executed a number of leases going back to the fourth quarter of last year with new-to-market financial service firms,” said Rutchik, executive managing director of office services. “And the pace with which we are engaged with these new-to-market financial service firms has increased exponentially since Jan. 1, as has the size of many of the requirements that we are talking to.”
Aside from leasing 801 Brickell, Rutchik’s team is showing Miami’s newest Gateway at Wynwood, due in July, and recently finished 135,000-square-foot office space at Miami River Landing Shops & Residences on the Miami River. Between 25 and 30 firms have either signed leases there or are in negotiations across the three buildings, he said. Some are looking for smaller floor plates at less than 10,000 square feet, but many are opting to take out up to 80,000 square feet to accommodate as many as 300 employees.
“It is nothing short of historic in my reference, in my career, what we are experiencing today,” Rutchik said.
Drinking the Kook-Aid
Cresa principal Robert Orban, who oversees the South Florida office practice, isn’t convinced.
“It’s a ‘Drinking the Kool-Aid’ groupthink mentality of, ‘Gee, if we just pretend nothing is happening, everything will be all right and we won’t have to give more than minor concessions,’ ” Orban said. “ I think looking at it through rose-colored glasses isn’t really healthy as well.”
The days when employees sat in traffic to go to an office five days a week in downtown, Brickell or Coral Gables are over, Orban added.
At one point last year, roughly 10,000 square feet of office space was freed up per week for six weeks in a row and it’s still without commitments. Once those leases expire, the space will go back to landlords, Orban added. Tenants who are renewing leases are doing it for a few months instead of the typical 10-year term, in a more cautious approach.
“I think we are in for a bumpy ride here for several years,” Orban said. “We are going to see rents decrease, supply surpassing demand.”
Market reports indicate he might have a point. Broward County sublease availability grew 24.4.% last year to 770,000 square feet, which represents 3.4% of inventory, according to JLL.
Broward and Miami-Dade counties saw negative absorption, at 167,676 square feet in Broward and 511,569 square feet in Miami-Dade, while the pandemic is suppressing rent growth and vacancy increased from pre-COVID-19 times.
But Rutchik countered the market reports aren’t a good indicator because brokers could be getting commitments now that aren’t reflected in data until three quarters later. In some cases, tenants don’t want publicity over their relocation or expansion.
“A market report really doesn’t do justice,” he said. “A lot of what we are working on could take months to execute and, even once executed, many of these deals will still be in stealth mode for another quarter or two as they have a number of logistical items to address. Last year, there was a pause in the middle of the year in the market.”
Landlords held their ground on rental rates and didn’t give more than minor concessions, such as a month of free rent, he added. They also are open to reducing lease terms.
A better gauge, Rutchik said, is the busy residential sales market. Since last year, billionaires leading hedge funds and fintechs have been scooping multi-million dollar waterfront mansions in Palm Beach and Miami Beach. Most recently, New York hedge-fund executive Dan Loeb picked up a Miami Beach mansion for $20 million.
The buyers are expected to then move their families, and eventually their companies, or at least expand them here.
Steven Hurwitz, managing director at JLL, said he sees Orban’s point but argues things won’t be as bad as Orban describes.
Hurwitz takes a more midline approach, reasoning the new-to-market leases won’t be enough to wipe out COVID-19′s impacts on the office market but will help.
“While I know we are enjoying a substantial amount of unprecedented inbound business from new and other places, I don’t think it’s going to completely erase the impact that COVID has had nationally on the office market,” Hurwitz said. “I just think it makes us a little bit more resilient and it has mitigated the impact for us a little bit.”
Case in point: Miami-Dade’s sublease availability during COVID-19 is 2.2%, not ideal but among the lowest in the U.S., JLL data shows.
The yay-sayers got their biggest boost in January when New York-based investment behemoth Blackstone took out a 41,000-square-foot lease at 2 MiamiCentral — where it plans to expand in-house technology capabilities, hiring 200 employees.
“Blackstone, being the first in this era of being reported, that and Carl Icahn, were the beginning of the story,” Hurwitz said. “Now we are seeing a lot more of it. It’s helping diversify the demand and the demographic, which suggests a more stable and diverse office market in the future.”
Icahn Enterprises LP last year moved its headquarters to Sunny Isles Beach from New York.
Orban pointed out Blackstone merely absorbed space another tenant, co-working group Regis, freed up after stepping back from its commitment at 2 MiamiCentral.
“It wasn’t real estate that was vacant,” he said.
Joe Hernandez, who leads the real estate practice at Weiss Serota Helfman Cole & Bierman, last year before the pandemic told the Daily Business Review that South Florida had failed to make a splash with big company relocations (https://www.law.com/dailybusinessreview/2020/02/24/south-orida-fails-to-make-a-splash-with-big-corporate-relocations/). At the time, the region was fresh from losing its bid for Amazon’s second headquarters.
Hernandez at the time said that financial service firms only add a few hundred employees and take out small floor plans, but now he has a different take.
Goldman Sachs plans to move its asset management division to South Florida, most likely downtown West Palm Beach, where it will take out several floors of space for thousands of employees. Hernandez said this bodes well.
“Historically, we see a branch office of a Morgan Stanley or a branch office of a Goldman Sachs and they take up a sizeable amount of space but not taking multiple floors,” he said. “But Goldman Sachs made an announcement of moving to a sizeable space.”
On its heels are giants Microsoft and Chicago-based hedge fund Citadel, led by billionaire Ken Griffin, both reportedly looking at 830 Brickell Class A office tower under construction.
Hedge fund Elliott Management, founded by Paul Singer, is looking to lease 40,000 square feet at 360 Rosemary, to be completed this year in downtown West Palm Beach. Also reportedly on tap in downtown West Palm Beach are Comvest Partners, fund Point72 and mortgage servicer New Day USA.
Andrew Trench of Cushman & Wakefield is charged with leasing 830 Brickell, a groundbreaking project as it’s the first Class A office tower in Miami’s Central Business District in a decade. And it’s not just any Class A tower: it’s a New York-type office building and is getting equally high-caliber interest, he said.
Trench and his team are negotiating about 350,000 square feet of leases, mostly with new-to-market financial and tech firms, he said.
“A tremendous amount of them are primarily out of New York, Chicago and San Francisco, but also some others from South Florida,” Trench said.
WeWork was first to lease at 830 Brickell, committing before the pandemic to 140,000 square feet at the 640,000-square-foot tower.
“The new-to-market activity was happening but it was somewhat tepid leading into the pandemic and, very unexpectedly, the pandemic has had a positive effect on the outlook of Miami,” Trench said.
He echoed the common sentiment that coronavirus may have upended almost everything, including the office market with some firms declining to renew or downsizing, but at the same time opened the door to the financial and tech firms’ growth.
Trench said interest in 830 Brickell has picked up over the last six months.
“Almost every week, or if not every other week, we are signing another nondisclosure agreement for a confidential, large, significant company looking to open an office in Miami,” he said.
Sunshine state of mind?
Amid the lockdown, well-heeled company heads looked to get out of crowded high-rises in New York and came to South Florida, attracted by the warm climate, open space for recreation and luxury mansions with big back yards. This set in motion a chain of events as, after they experienced living in South Florida and liked it, they opted to either expand or move their companies here altogether.
It helps that the Sunshine State has no income tax, relatively loose local COVID-19 restrictions and doesn’t rely on public transportation, allowing residents to get around without health and safety fears.
It also helped that Miami’s own mayor seized on the momentum on Twitter.
When Delian Asparouhov, principal of San Francisco-based venture capital firm Founders Fund, in early December tweeted about moving from Silicon Valley to Miami, Suarez jumped on it.
“OK guys hear me out, what if we move silicon valley to miami,” Asparouhov posted on Twitter.
“How can I help?” the mayor responded.
What started as an impromptu social medial campaign has since turned serious, attracting other techies. Most recently, Suarez met with Elon Musk, who told the mayor he wants to build an electric vehicles tunnel underneath Brickell Avenue.
The mayor’s strong outreach added fuel to the financial firm fire, said Shelby Rosenberg, an executive of the group developing Gateway at Wynwood.
His R&B Realty Group, where Rosenberg is head of development and acquisitions, asset and property manager for the U.S. portfolio, is based in New York but spotted the trend of firms heading to the Magic City years ago. So R&B opted to build Gateway to fulfill the office demand in Wynwood.
“In 2016, probably even earlier, we focused some of our investments in South Florida,” Rosenberg said. “Over the years, we grew our Miami portfolio.”
Wynwood, for some time known internationally for its galleries, edgy bars and restaurants, evolved into an office market and most recently added residences as well.
Wynwood started as a play district, then became a work-play district and is now a live-work-play district — exactly what workers migrating from out of state want, Rosenberg said.
A trend with legs?
Experts’ views on how the South Florida office market will fare in the coming years remain split.
“We are not going to offset negative absorption with in-migration in the near term anyway,” said Orban, of Cresa. “There just isn’t enough of it.”
The prognosis will be clearer come summer, but the fact remains that
companies are downsizing or exiting leases. One law firm client is downsizing from 15,000 square feet to 10,000, Orban said.
“That’s a 33% decrease right there and you are going to see that across the board with firms,” he added.
The hype is history repeating itself, as financial firms in the past have expanded to South Florida only to leave once regional issues reared their heads, Orban said. These issues include hurricanes, public school standards and a lack of a trained workforce. A hospitality mecca, South Florida’s workforce largely caters to that industry.
“We will see how long the Blackstones and Goldman Sachs stay,” Orban said.
Hurwitz of JLL said he understands there is going to be doubt because what’s happening is almost too good to be true, he added.
“People are wondering sort of, ‘Is it real? Are these tenants coming down here? Is it limited to financial service firms or are there others coming down here, and are they actually not only going to sign leases but will it continue?’” he said. “My take on that, being close to the trend, is that this is absolutely a sticky trend. I think that the concept of financial service firms, tech firms and even others will continue. The trend has legs.”
If firms do stay, then the fundamentals of the office market won’t turn around until 2023, Orban said. The Great Recession, the longest economic downturn since World War II, lasted 30 months and rental rates took seven and a half years to bounce back up afterward, according to analysis by Orban’s Cresa. And that didn’t even involve a global pandemic, he added.
Before any significant rebound, the South Florida office market is headed for a correction at year’s end, Orban added.
But Hurwitz countered that if a correction was in store, it already would have happened.
“We are a year into the pandemic,” Hurwitz said. “You got people getting inoculated now and at least an indication of what the end game looks like, where nine, six months ago we had no idea.”
The out-of-towners influx will be reflected in market fundamentals much sooner, in a year or two, Hurwitz added.
For his part, Orban said landlords and their brokers are calling him looking for tenants for vacated offices. The fact is they are willing to give more than concessions, but have offered to lower rents, some going down to mid-$40s per square foot from the usual mid-$50s per square foot.
“The reality,” he said, “will be the reality.”