Economy

The office market is moving alongside the national economy at similar velocity as other international cities. The worst of the global recession appears to be over; however the recovery process as it relates to real estate lags the economic cycle. Market fundamentals suggest that the Miami office market could report historic highs for vacancy as a result of diminished demand and additional supply as the real estate development cycle comes full tilt. Although inflows of capital from Europe and Latin American countries have boosted Miami’s economy to stay above the fray historically, these regions are also feeling the effects of the downturn in the economy.

As a byproduct, unemployment continued to grow steadily in the region as the Florida Department of Labor indicated that Miami’s unemployment reached 9.6%, up from 5.3% reported last year at this time. The industries that drive Miami’s economy- finance, trade and tourism- have faltered under the weight of the international economy. The distressed financial markets combined with declining housing values have taken the liquidity out of the marketplace consequently limiting businesses and consumers alike to find adequate financing. As a result, growth in the overall market place is constrained.

Overview

Inventory: Vacant inventory increased by 2.1 million square feet (msf) from this time last year, approximately 4.7% of the total office market. The new spaces were highlighted by One Park Square at Doral which recently completed a 231,500-square feet (sf) building in Airport West. An additional 90,000 sf of space came on the market with the receivership and liquidation of Stanford Financial Group in the Miami Center building.  The overall vacancy rate in Miami increased 0.9 percentage point to 16.1% from first quarter’s mark of 15.2%.  Currently Miami has over 2.6 msf under construction, and vacancy is forecasted to continue to rise steadily throughout 2009.

Rental rates continued to fluctuate downward in Miami, however a flight to quality trend is evident as a few class A buildings in the Miami Central Business District (CBD) held rates despite the excess pressure of the market. The market reported an overall rental rate average of $30.55 per square foot (psf) in second quarter, slightly below the rate last year of $30.87 psf and up 4.7% from 2007 totals. Fundamentals suggest the market has reached the peak of the real estate pricing cycle, and rental rates will continue to stabilize in 2009.

Absorption Miami reported negative 569,886 sf of absorption, while last year at this time Miami reported negative 779,998 sf of absorption. A lack of demand resulting in negative absorption is expected to continue throughout the year and the market should be positioned for positive growth in 2010.

Sales volume fell 80.1% from second quarter 2008 to second quarter 2009 and totaled 261,186 sf.  The deceleration in investment sales is a result of the constriction on lending.  The lack of liquidity in the financial markets has decreased the commercial markets’ ability to buy and sell office properties.

Forecast
Miami is experiencing the country’s economic contraction; however many key market fundamentals indicate the economy is ready to bounce back. Nevertheless, the Miami office markets’ next challenge will be absorbing 2.6 msf of construction completions. The region is still well-positioned for long-term growth and strong international business. Tracking models suggest tenants whose lease expirations coincide within the next 12 to 16 months have historic leveraging power to negotiate favorable lease terms as landlords look to fill vacancies in today’s market.

AT A GLANCE

• Inventory: Vacant inventory in Airport West increased by 229,109 square feet (sf) during the first quarter, only 2.0% of the total Airport West office market. The new spaces were highlighted by Flagler Stations 156,000 sf construction completion. This combined with a weak economy and stagnant growth increased vacancy rates from 14.6% in the fourth quarter of 2008 to 16.4% in the first quarter of 2009. Currently, the market has slightly below 500,000 sf under construction.
• Absorption: measures augmentation and deceleration of space in a given market, a key indicator of volatility in businesses. Last year the Airport West market experienced an overall negative absorption of 306,590 sf, the first quarter of 2009 reported negative -75,716 sf which indicated businesses gave back more space then they acquired at a lesser rate than fourth quarters high of negative 283,957 sf. This indicates a bear market will bottom sometime in the fourth quarter of 2009.
• Leasing bounced back 40.6% from its 48 month low reported in the fourth quarter of 2008. Increasing from 118,479 sf to 199,701 sf in the first quarter of 2009.
• Rental Rates fluctuated as pricing gaps continued to rise between landlords and tenants, and new market equilibriums merged. The market is experiencing an overall asking rental rate average of $29.23 per square foot (psf) in the first quarter for class A space, slightly below the year-end 2008 rate of $29.73 psf. Fundamentals indicate the market has reached the peak of the real estate pricing cycle. As a result, rental rates will continue to fluctuate in 2009.
• Sales- The lack of liquidity in the financial markets has disrupted the commercial markets’ ability to buy and sell office properties. Only highly liquid institutions have the elasticity and necessary carry capital to close and acquire properties in the current market and with values decreasing savvy investors are sitting on the sidelines waiting for the current real estate cycle to bottom out.

AT A GLANCE

• Inventory: Vacant inventory in Coconut Grove increased by 18,078 square feet (sf) during the first quarter, only 1.7% of the total Coconut Grove office market. The weakened economy and stagnant growth increased vacancy rates from 17.6% in the fourth quarter of 2008 to 19.3% in the first quarter of 2009.
• Absorption: measures augmentation and deceleration of space in a given market, a key indicator of volatility in businesses. Last year the Coconut Grove market experienced an overall negative absorption of -15,693 sf, the first quarter of 2009 reported negative -17,588 sf which indicated businesses gave back more space then they acquired at similar velocity as 2008. This indicates a bear market, which historically gives leveraging power to tenants over landlords to negotiate favorable lease terms.
• Leasing slowed 73.2% from 2008 end-year, reporting 13,187 sf leased compared to 49,246 sf in the fourth quarter.
• Rental Rates fluctuated as pricing gaps continued to rise between landlords and tenants, and new market equilibriums merged. The market is experiencing an overall asking rental rate average of $39.26 per square foot (psf) in the first quarter, slightly above 2008 year-end rate of $38.26 psf. Fundamentals indicate the market has reached the peak of the real estate pricing cycle. As a result, rental rates will continue to fluctuate in 2009.
• Sales- The lack of liquidity in the financial markets has disrupted the commercial markets’ ability to buy and sell office properties. Only highly liquid institutions have the elasticity and necessary carry capital to close and acquire properties in the current market and with values decreasing savvy investors are sitting on the sidelines waiting for the current real estate cycle to bottom out.

AT A GLANCE

• Inventory: Vacant inventory in Coral Gables increased by 88,608 square feet (sf) during the first quarter, only 1.6 % of the total Coral Gables office market. The construction completion of 2020 Ponce in the first quarter combined with a weak economy and stagnant growth increased vacancy rates from 14.6% in the fourth quarter of 2008 to 15.9% in the first quarter of 2009.
• Absorption: measures augmentation and deceleration of space in a given market, a key indicator of volatility in businesses. Last year Coral Gables experienced an overall negative absorption of 84,602 sf, the first quarter of 2009 reported negative 11,118 sf which indicated businesses are still giving back space at a high rate. This indicates a bear market, which historically gives leveraging power to tenants over landlords to negotiate favorable lease terms.
• Rental Rates fluctuated as pricing gaps continued to rise between landlords and tenants, and new market equilibriums merged. The market is experiencing an overall asking rental rate average of $41.53 per square foot (psf) in the first quarter for class A space, slightly below the year-end 2008 rate of $42.60 psf and up 7.8% from 2007 rents. Fundamentals indicate the market has reached the peak of the real estate pricing cycle. As a result, rental rates will continue to fluctuate downward in 2009.
• Sales- The lack of liquidity in the financial markets has disrupted the commercial markets’ ability to buy and sell office properties. Only highly liquid institutions have the elasticity and necessary carry capital to close and acquire properties in the current market and with values decreasing savvy investors are sitting on the sidelines waiting for the current real estate cycle to bottom out.