Office markets shrink across South Florida, but new Class A performs well
Urban office markets across South Florida recorded significant negative absorption in the second quarter, although rental rates so far remain unaffected. In the long run, market observers find reasons for optimism in undiminished demand for Class A space, including a tendency of new high-end properties to lease up relatively quickly despite a general falling off in leasing activity.
JLL Research analyzed data from second quarter 2018 to produce an overview of key trends driving three major South Florida office markets.
Amid general erosion of absorption levels, demand for Class A space is resilient.
Countywide, total vacancy rose to 14.2 percent, up from 13.3 percent at the end of 2017. Net absorption for the first half of this year totaled negative 153,698 square feet. Class B properties in particular continue to underperform as demand for this product flounders. The loss of several large Class B tenants was augmented by the flight of a number of 1,000- to 3,000-square-foot lessees, particularly in suburban markets.
The same pattern of attrition is evident among Class A assets, which saw more than 100,000 square feet return to the market in the second quarter due to departures and downsizing. But the resemblance to Class B product ends there. Class A direct asking rental rates have stabilized. Leasing was modest in the second quarter, but demand for new high-end product has been robust. For example, 3 MiamiCentral is 95.0 percent leased, and the soon to be released Sunset Office Center is 70.0 percent pre-leased. An additional 718,026 square feet of Class A space in the pipeline attests to continued optimism in this sector.
Asking rents in Downtown Fort Lauderdale are still climbing as market levels off.
The Broward County office market experienced negative 36,000 square feet of absorption in the second quarter, bringing the total for the year to date to negative 107,000 square feet. Nevertheless, asking rental rates rose 1.3 percent over the quarter. At $47.14 per square foot, Class A rents are now 43.5 percent above their previous peak in 2008. New product scheduled for delivery over the next two years will likely push rates even higher, raising speculation that some landlords may offer existing tenants higher concession packages.
Downtown Fort Lauderdale’s high-end office market is bucking prevailing trends, due to some major deals that will keep absorption in the plus column – including KEMET Corp.’s expansion by 45,000 square feet as part of its relocation to 1 East Broward and Spaces’ lease of 32,000 square feet in Las Olas Square. Recent large leases signed in Plantation by Aetna (85,000 square feet) and Envision Healthcare (88,700 square feet) should have a similar positive effect.
West Palm Beach
Hit by heavy negative absorption, Palm Beach County sees hope in the stability of its trophy assets.
Palm Beach County – the smallest of South Florida’s urban office markets at just under 20 million square feet – has endured negative 243,000 square feet of absorption so far in 2018, bringing total vacancy up to 15.8 percent from 14.5 percent at the end of last year.
A significant portion of that loss is from the departure of two major tenants in the second quarter, an event not likely to be repeated soon. But with market growth trending downhill across South Florida, recovery is likely to be slow. While no new development is underway to date, the resilience of West Palm Beach’s trophy buildings – which have maintained vacancy of around five percent for the past seven quarters – is prompting some developers to take a closer look at the area.