[Photo: Daniel Portnoy]

Most Florida markets are seeing a robust wave of office construction. “The commercial market has been strong both in Tampa and Orlando, even though the recent residential condo craze has driven up land costs for both office and industrial products,” says Jerry Shaw, senior vice president of Opus South in Tampa, which has two 103,000-sq.-ft. office buildings under construction in Florida, one in Tampa and one in Orlando.

Tere Blanca, senior managing director and south Florida branch manager of Cushman & Wakefield of Florida, expects that south Florida will see “a new supply of office product being delivered next year and that flow will continue through 2011.”

The high costs of land, labor and construction materials indicate that there’s little risk of an immediate oversupply of new office buildings. However, as of midyear, land prices appear to have flattened, and a number of parcels once designated for multifamily residential use are likely to be resold for commercial purposes.

The Green Factor

[Photo: Daniel Portnoy]

For office developers, incorporating energy-saving or hurricane-resistant features helps their buildings stand out in an increasingly crowded market and offers cost savings to buyers. By incorporating water-, air- and energy-saving features into his 13-story office condo project called Miami Green, developer William Holly is looking forward to completing one of the first certified “green” office buildings in south Florida next year.

“Corporate America is on board with the green concept,” says Holly, president of Holly Real Estate. “We’re seeing more south Florida buildings with energy-efficient features, and that trend will be moving northward to central Florida in the next year.”

Brickell Financial Center [Photo: Daniel Portnoy]

Foram Development CEO Loretta Cockrum is also aiming for Leadership in Energy and Environmental Design (LEED) certification from the U.S. Green Building Council on her company’s 1.5-million-sq.-ft. Brickell Financial Centre, which broke ground this spring in Miami. In West Palm Beach, Navarro Lowrey’s EcoPlex at Centrepark West is expected to become Palm Beach County’s first LEED-certified green multitenant office building when completed in the first quarter of 2008.

Meanwhile, a number of developers are marketing hurricane-resistant construction. Crocker Partners and ING Clarion Partners are taking that approach with Atlantic Center, a mixed-use development in downtown Fort Lauderdale with 400,000 square feet of office space. “Our technology infrastructure and hurricane-resistant construction and systems are designed to enable tenants to operate continuously during the most severe conditions,” says Thomas J. Crocker, CEO of Crocker Partners. Construction on Atlantic Center is scheduled to begin in first quarter of 2008.

Office Space Snapshot
Market	Sq. Ft. Construction (millions)	Vacancy	Under Construction (sq. ft.)
Miami	38.9	10.8%	1,578,000
Orlando	32.9	8.0	1,344,000
Tampa	27.4	10.9	452,000
Jacksonville	24.5	13.8	413,000
Fort Lauderdale	23.8	7.3	993,000
Palm Beach	21.4	10.5	1,320,000
St. Petersburg	9.6	14.2	125,000
Industrial Space Snapshot
Market	Sq. Ft. Construction (millions)	Vacancy	Under Construction (sq. ft.)
Miami	212.5	4.2%	2,932,000
Fort Lauderdale	113.5	4.4	1,641,000
Orlando	99.7	9.5	2,560,000
Jacksonville	89.3	4.8	567,000
Tampa	87.5	3.3	1,806,000
Palm Beach	49.6	5.7	946,000
St. Petersburg	44.9	5.3	519,000
Source: RealtyTrac

The Office Condo Niche

[Photo: Daniel Portnoy]

Many office leases allow owners and landlords to pass along higher insurance premiums and other costs to their tenants in the form of higher rents. So it’s not surprising that some office users — especially entrepreneurs and medical businesses — prefer to purchase office condominiums and gain more control over their costs while also benefiting from appreciation.

But office condominium ownership remains very much a niche market, as larger businesses and professional firms continue to opt for the flexibility of leased space while letting their landlords worry about operating costs. In many Florida markets, the cost of office condominium ownership is significantly higher than renting, putting a damper on that market segment.

Today, a substantial percentage of Florida office condominium properties are being offered by relatively inexperienced developers. In turn, a high percentage of their buyers have been investors, rather than actual users. That’s the same scenario that resulted in the disastrous overbuilding of the state’s residential condo market. While users may be willing to pay more for office space, compared to a rental, in the hope of future profitability, most investors in office condos appear to have unrealistic expectations about what the market will bear.

Rising Rents

With property taxes, insurance premiums and energy costs all on the rise, rental rates are increasing at unprecedented levels throughout central Florida, says Larry Richey, senior managing director of Cushman & Wakefield in Tampa and central Florida.

[Photo: Daniel Portnoy]

“We all have to adjust our thinking,” he says, “because Florida is no longer a low-cost market in terms of office space.”

Clearly, office tenants are basing location decisions on costs.

“Operating expenses have gotten so significant that a certain percentage of businesses will make decisions to relocate their offices and mitigate the costs,” says Edgar Jones, vice president and Florida regional development officer of Rockefeller Group Development in Miami. “That might mean tenants moving from downtown to the suburbs or even relocating to lower-cost regions like northern Florida.”

Lower Return Expectations

Just as Florida school districts have miscalculated future student enrollments based on residential activity because of a high level of speculation, developers may well be overestimating demand for office space because of overly optimistic forecasts of residential and hotel/condo activity.

[Photo: Daniel Portnoy]

Nevertheless, many investors, including pension funds and real estate trusts continue to snap up Florida office properties, pushing up prices and lowering potential return, at least when measured by capitalization rates (an indicator of the current value of a property’s future income stream). Those rates for Florida office properties, traditionally 8% to 10%, have fallen to 5% to 6%, reducing buyers’ return expectations.

However, says Cushman & Wakefield’s Larry Richey, most investors are not basing their purchases on “cap rate” methodology when buying office buildings. “Rather than profit from ownership,” says Richey, “they are now planning to make their profits when they sell. It’s the exit strategy that counts.”

Strong Industrial Demand

The law of supply and demand indicates that now’s a good time to invest in Florida’s industrial market. In most major markets, the supply of suitable land is extremely limited due to zoning rules and rising construction costs. At the same time, demand for warehouses, distribution and manufacturing facilities is rising due to the state’s growth in population, business activity and international trade.

[Photo: Daniel Portnoy]

“Leasing is very solid, and occupancy rates around the state will get tighter this year by one or two percentage points,” says Ed Easton, chairman of the Easton Group, a longtime Miami real estate entrepreneur. “On the other hand, rents haven’t gone up much. Therefore, most new construction consists of build-to-suits rather than speculative projects.”

In the area near Miami International Airport, the state’s leading industrial market, occupancies are in the 95% range, says Cushman & Wakefield’s Tere Blanca. “This location is highly desired by companies that want to service the Caribbean and Latin America,” she says. “That’s not likely to change.”

But shifts in global trade patterns could benefit other parts of the state as well, says Larry Richey, of Cushman & Wakefield. The widening of the Panama Canal in the next decade will allow larger freighters from Asia to dock at Florida ports rather than in Los Angeles and Long Beach and shipping by rail to the East Coast.

“It’s very expensive to ship goods to the Southeast U.S. via trains or trucks from the West Coast,” Richey says. “And because Florida is not a manufacturing state, they usually return with empty loads.”

That pattern could change in the next decade as Africa becomes a major site for low-cost manufacturing. Since the closest U.S. ports are in Florida, the state could see a greater flow of imported goods. That would push up demand for industrial space in Tampa, Jacksonville and even central Florida, where CSX is building a major intermodal facility near Winter Haven. “Florida could become a major distribution center for the entire U.S. East Coast,” says Richey, “changing the dynamics of the global supply chain.”

Lewis M. Goodkin is president of Goodkin Consulting in Miami.