Opportunity: Florida office is getting thrown out with the national bathwater

Read the headlines about the office market, and listen to the chatter among industry leaders, and the message is clear: The U.S. office market is in a dramatic downturn. Distress is sweeping through New York, Los Angeles, San Francisco, Chicago and other major business centers.

The broad contours of the story are generally true. But all real estate is local, as they say. And that certainly applies to the Florida office market. In the Sunshine State, occupancy rates are strong – especially for well-amenitized space in thriving downtowns. And rental rates are firm to rising. The mismatched narrative creates an opportunity. Yes, office is struggling in most of the U.S. But not in Florida.

The pessimistic case

There is solid logic behind the drumbeat of dreary headlines about distress in the office sector. Work-from-home is here to stay, it seems. Turns out workers prefer not to commute, and they are not all that keen on water-cooler chats. As a result, daytime traffic to many downtowns has fallen dramatically. Few cities have returned to pre-pandemic levels of central business activity.

Some office markets are really struggling. San Francisco’s office vacancy rate remains north of 30%. Chicago is incentivizing developers to convert office buildings to residential. The city of Atlanta bought a downtown office tower with plans for affordable housing. Louisville, Kentucky, recently approved $3 million in incentives to woo office users downtown.

All of that bad news is real, and it is creating distress for trophy towers and for suburban office parks. Some building owners are walking away. Some office towers are trading at deep discounts.

Yes, but …

The office market is not monolithic. There are some corners of the country where offices are performing well – and Florida is leading this trend.

For instance, rental rates keep rising in the Tampa Bay region. In the fourth quarter, they hit a new all-time high of $28.53 a square foot, up 4.1% from a year earlier, according to Newmark. And vacancy rates dipped to 14.7%, down from 15% a year earlier. With less than 450,000 square feet of new office space in the construction pipeline, the pace of development in Tampa favors landlords.

In Miami-Dade County, office rents rose in the fourth quarter to another all-time high. The average asking rate increased for the sixth consecutive quarter, increasing $3.51 per square foot to $51.20, a 7.4% increase, Cushman & Wakefield reported. The Class A direct average asking rate rose by $3.93 per square foot to $56.87 from a year ago. Class B space showed an 11% annual increase to $44.19.

Asking rents are much higher in the urban core. Average asking rents for Class A offices in the Brickell Avenue district were an eye-popping $102.59 as new office towers command massive rents. And Class A space in Downtown Miami averaged $65.40 a foot.

In another hot part of Florida, Palm Beach County’s overall asking rents rose to $46.21 per square foot, up 5.9% from a year earlier, Cushman & Wakefield said. Class A rents rose 4.2% to $52.43. Class B product recorded a 5% annual increase, closing out the year at an average asking rent of $41.12 per foot.

Downtown rents jumped 11.5% in the past 12 months, to $64.90 per square foot. Class A space in the submarket recorded a 14% increase during the same timeframe, up to $77.27.

Clearly, the office market is a study in regional contrasts. While storm clouds loom over much of the country, there are blue skies in Florida. This disconnect means Florida’s office market is undervalued – the best-performing properties are being discounted through guilt by association, while distressed properties are bigger bargains that Florida’s underlying economics dictate. You might say that investors are throwing the Florida office baby out with the bathwater of office elsewhere in the US – making now the perfect time to be looking at distressed deals in Florida. 

The Florida success story

Population inflows and job growth are important drivers of office demand. As employers and employees gravitate toward amenitized buildings in bustling downtowns, Feldman Equities remains hyper-focused on our strategic sweet spot. We reposition struggling office space, and we build new space in downtown markets.

Florida’s attractive mix of warm weather, reasonable regulations and a modest tax burden is luring employers south. Financial firms from New York and Chicago and tech companies from California have been flocking to Florida.

Feldman Equities remains laser-focused on our strategic sweet spot. We reposition struggling office space, and we build new space in downtown markets. The trend is clear: Employers and workers are gravitating toward Florida’s combination of warm weather, low taxes and common-sense regulation. And once they are here, they want to work in vibrant downtowns, with plenty of access to restaurants and entertainment.

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