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Time For Caution
Lenders remain wary because leasing rates remain too low to justify new construction.
By the end of 1996, South Florida's first speculative office tower since the recession of the early 1990s is scheduled to open in downtown Fort Lauderdale. The $35 million Las Olas Centre already has 98% of its 207,000 square feet preleased, according to developer Terry Stiles, chairman and CEO, Stiles Corporation, Fort Lauderdale. Tenants include Huizenga Holdings, Republic Industries, Extended Stay America, KPMG Peat Marwick and Merrill Lynch.
In addition, the Stiles Corp. is looking at developing Las Olas Centre phase II, a similar-size tower on adjacent property, and has begun rehabilitating two nearby buildings totaling 130,000 square feet that were 70% vacant. At a time when Florida's downtown office markets from Tampa to Miami are struggling, what makes Fort Lauderdale special? "The difference is, we were not overbuilt in the first place," says Stiles. "We were getting requests from tenants with larger space requirements and felt it was the proper timing to go forward. Today it looks like we're right. But I'm hopeful that anyone planning new buildings really understands the depth of the market, so overbuilding doesn't occur." So far in this real estate cycle, there's little danger of overbuilding. At mid-year, lenders remained wary, and leasing rates in many markets were still too low to justify new construction. Without a steep rise in leasing rates - which is unlikely in most markets for at least a year - Florida is likely to see only a limited amount of new construction, mostly in suburban areas. In most downtown areas, new buildings make little economic sense.
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Steady increase in occupancy
Florida's major office markets are expected to continue improving into 1997. "Demand is up, the economy has been relatively healthy and we've seen white-collar employment growth," says Larry D. Richey, managing director for Cushman & Wakefield in Tampa. "That's creating steady increases in occupancies, in rental rates, in values of real estate assets and in investor interest." Richey and other real estate analysts expect Florida's downtowns will continue to be outpaced by suburban markets. Statewide, Florida's office vacancy rate is about 15%, Richey says, with suburbs being two or three percentage points lower and downtowns an equivalent amount higher, according to the firm's first-quarter market survey.
High downtown vacancy rates are often caused by large amounts of empty space in older and less desirable buildings, Richey says. In downtown Tampa, for instance, the vacancy rate is 23%, according to a first-quarter survey by CB Commercial. "Tampa had more development later in the cycle," Richey adds. "We have passed the bottom of the market, and rates are beginning to firm, if not increase."
It's a similar story in downtown Miami, where class B and C space is "extremely soft," according to Laura Kessel, sales associate, Grubb & Ellis in Miami. International banks, law firms, accounting firms and other professional services make up most of the demand for class A Brickell Avenue and downtown Miami space.
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High vacancy in Jacksonville
Jacksonville's downtown vacancy rate is high - 16.4% in the CB Commercial survey - primarily because there are several class A buildings that are being vacated, according to Jerry Frockt, president, Summit Commercial Properties. "Activity for class B and C space is very sluggish," he adds. "About the only good news is that CSX and Wellspring, a high-tech medical billing company, have taken space in the BellSouth building downtown."
Orlando has one of Florida's strongest downtown markets, with a vacancy rate of just 7.3%. Bill Moss, executive vice president and Florida regional manager, CB Commercial in Orlando, says, "Orlando benefits from being a downtown with retail and residential components. That keeps people in the downtown after 6 p.m. In Miami, Tampa and Jacksonville, the downtowns empty out and people head to the suburbs."
Suburban office markets throughout the state are much healthier than downtowns. In Coral Gables, for instance, two new speculative office buildings are under construction. In Jacksonville, Liberty Property Trust is building a new 104,000-square-foot office building in the Southside market.
But most new construction in the suburbs continues to be build-to-suits that meet the needs of specific companies. In Orlando's northern Lake Mary/Heathrow market, for instance, AT&T, CIBIS and Dixon-Ticonderoga recently expanded or relocated because of larger space needs, Richey says. "Maitland Center, Orlando's largest suburban market, was down to single-digit vacancy rates. Those companies chose to go a little to the north, instead."
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Opportunities in Boca
Both Boca Raton and western Broward County may offer opportunities for new construction in the coming year, says Thomas J. Crocker, chairman of Boca Raton-based Crocker Realty Trust, which is selling its $540 million portfolio of 70 class A office buildings to Highwoods Properties in August, while retaining 243 acres of land for future development. "We like the underlying fundamentals of western Broward," he says. "We're also considering a speculative office building in Boca Raton if absorption remains strong." Demand in Boca Raton and the rest of Palm Beach County, which has had one of the highest office vacancy rates in the state for the past five years, is picking up, says Richard Tambone, president, Tambone Real Estate Development Corp. in Palm Beach Gardens. "We've seen companies moving up from Dade and Broward counties, as well as local companies that needed larger facilities," says Tambone, whose recent projects have included a new 100,000-square-foot corporate headquarters for Wackenhut in Palm Beach Gardens and a 100,000-square-foot expansion for Motorola in Boynton Beach. "One of the largest trends we've seen is that in the past, most clients did not consider the need for possible expansions," Tambone says. "In a lot of the build-to-suits we're doing, the companies have built in 20% to 25% expansion capabilities, so they don't get themselves in a position of outgrowing their space in the near future."
Another trend in the office market: a greater emphasis on function, rather than decoration. "We're seeing less mahogany and expensive stone, fewer large atriums and less bells and whistles," Moss says. "Lenders and users are both sensitive to cost. By doing away with some of the frills, they can have a less expensive, but still very functional environment."
Despite their concerns, lenders are far more willing to finance office construction today than in previous years, according to Stiles. "It was very tough to get financing for Las Olas Centre last year. Now, more and more money is available. Lenders are requiring higher amounts of equity and conducting more due diligence than in the past. Hopefully, that will prevent a repeat of the overbuilding of the 1980s."
