Guest Column by W. Allen Morris
All three sectors with which our organization is engaged – commercial office space, retail leasing and multifamily – were positively impacted during 2015, and we wanted to share our perspective on each for 2016.
Commercial office space
As a whole, 2015 was a year of growth and expansion in the commercial real estate market, both within South Florida, and throughout most of the state. We felt that trend would continue when entering 2016, and we anticipated continued increases in rental rates. The reason is supply and demand. The supply of the more appealing office space options – chiefly Class A and B buildings – continues to diminish throughout South Florida. This has made the market “owner-centric,” which has translated into fewer concessions – such as little to no free rent, and less generous tenant improvement budgets – for tenants.
The average price per square foot in the Brickell market is now in the $41 range, with Coral Gables just slightly behind, at $39. The high end of the office market is in the $46 range, and that price is shared in both downtown/Brickell and Coral Gables. The downtown/Brickell corridor continues to fill up, with Class A and B space being absorbed rapidly. That has expedited the absorption of particularly A space in Coral Gables, where over the past two years we have seen a 15 percent vacancy rate – which is also now quickly diminishing.
Coral Gables continues true to its heritage, attracting great international firms, but we are also seeing traditionally downtown-based entities moving there.
This year, Fiduciary Trust, a renowned wealth management enterprise, moved from downtown Miami, and law firm Devine Goodman Rasco & Watts-FitzGerald LLP moved from Brickell Avenue. Those are but two examples. The chief driver for these moves, in my opinion, is not as much price, as the gap between the two locations continues to narrow, but the lifestyle implications. Some firms feel they need to be in the downtown/Brickell corridor, but more and more people who do not feel they need to be downtown are opting for shorter commute times.
Retail rental rates are experiencing dramatic increases across South Florida, specifically Miami-Dade. It is not uncommon to see $200-a-square-foot rent in the Design District, $100 to $200 in the Brickell area, and upward of $300 net rental rates in the Lincoln Road area of Miami Beach.
The challenge with these high rates is that it tends to shut out the smaller, local shops due to such high overhead. Areas with dramatically increasing rental rates, such as the ones noted above, will drive out small, local stores, to be replaced by national or international retailers.
The major advantage those national and international retailers have over smaller, local companies is that, if they do not meet their sales quotas – which is rare in this environment – the losses are easier absorbed as part of a national marketing strategy to keep their presence in the most important markets. These retailers need to be in Miami-Dade, so if there are some struggles at the beginning, or at some point in their business cycle, it is not as catastrophic as it would be for a smaller, local tenant. They have the staying power local tenants do not.
Multifamily real estate
A significant and growing element of our focus is the multifamily housing market. From high-end condominiums on Brickell to mixed-use communities throughout Florida, the multifamily market experienced significant changes of its own in 2015.
The commonality with office and retail is rising prices. While the volume of rental apartments grows, rental rates have increased across the board. In Miami-Dade, many young professionals living in the Brickell area are looking at secondary locations outside the center of town as their leases expire.
This points to an increase in multifamily construction in general during 2016, as rental apartment owners generate a higher return on their investment. For example, condominium owners are averaging a 2 to 3 percent return on their investment, while rental apartment owners are averaging 6 to 7 percent.
Traffic and commute times are impacting the multifamily market. I see the downtown/Brickell corridor moving toward being a zero-commute corridor. A growing number of people both live and work in the area, creating opportunities for a more convenient way of life, driven by pedestrians and access to mass transit. We are seeing growth in Coral Gables, as well, as more individuals who work in the area are now choosing to reside there. The new flurry of downtown apartments and condos will also create the beginning of a zero-commute lifestyle in Coral Gables. Other areas, such as Doral, will experience the same phenomenon. As Doral’s residential communities grow, multifamily housing is being developed, and more people will be both working and living there.
The key is, of course, mass transit. As one of the original members of the dowtown People Mover Committee, I am very gratified to see how that is being utilized. But it is one small element of the broader commuter puzzle that must be addressed.
As a whole, our organization is very bullish on multifamily. We currently have $600 million under development in this arena, inclusive of our joint venture with the Related Group on the SLS Lux Brickell (96% pre-sold), and our mixed-use rental communities in process in St. Petersburg (The Hermitage Apartment Homes) and Orlando (Maitland City Centre) and Atlanta (West Midtown), with others on the way.
As it relates to commercial office space, I believe that demand in 2016 will not be as strong as in 2015 due to the effects of the economic problems in China, Latin America and especially Brazil, which has traditionally been Miami’s largest international trading partner. That said, and as I note above, with much of the Class A and B office inventory having been absorbed, I see the trend in 2016 as more owner-centric, with tenant incentives such as free rent and generous buildout allowances continuing to diminish until inventory at this level is replenished.
Within the retail arena, the challenge in 2016 will be for smaller, local retailers to compete for space in prime locations. Areas that were extremely affordable a few years ago – such as Wynwood and the Design District – are now out of reach to most but strong national and international tenants. This growth is very positive, for it says a great deal about our evolution as an international community. The issue is accommodating smaller, local tenants. To that end, I believe that will continue to encourage growth in evolving areas within Miami-Dade, which in and of itself is extremely positive.
The multifamily market in Miami-Dade will continue to grow in 2016, with our respective urban cores, in particular, continuing to evolve. We will see the beginnings of zero-commute neighborhoods, particularly within the downtown/Brickell corridor and, to a degree, within Coral Gables. I believe that these communities will be the first to “abandon” their vehicles, at least in daily use, as commutes becomes longer and more burdensome. It is clearly the beginning of a needed trend in our urban evolution.
W. Allen Morris is chairman and CEO of The Allen Morris Co., one of the largest real estate firms in the southeastern U.S., with offices in Miami, Coral Gables, Fort Lauderdale, Orlando, Jacksonville and Atlanta.