Offices emptied out during the pandemic. Now, they’re filling back up again, and Florida has one of the nation’s healthiest office markets. Central business districts in Miami and West Palm Beach are experiencing building booms, while the CBDs of Tampa and St. Petersburg are showing robust occupancy and rent growth.
In South Florida, more than 1,000 tenants signed leases totaling 3.3 million square feet of space in the third quarter of 2022, Newmark reports. While that was down from the second-quarter pace of 3.6 million square feet, the overall trend is clear: despite headwinds from the shift to virtual work and a slowing economy, employers continue to value office space – particularly in Florida.
Office tenants view physical workspaces as places where collaboration and culture-building can be achieved far more effectively than by Zoom meetings. With respect to Florida office users, there is a caveat, though: Florida office users prefer downtown space to the suburbs.
The return to the office hasn’t been entirely smooth, of course. Debt markets have been rattled by the Federal Reserve’s aggressive rate hikes in 2022, layoffs are on the rise and the virtual work trend created by Covid-19 remains a challenge. Some workers remain reluctant to resume commuting to work, and some employers have decided not to force the issue.
However, Florida’s office market is outperforming by many measures. This trend is driven in part by an in-migration of people and companies from the high taxed states in the Northeast, Midwest and California. Corporate relocations and population growth in Florida are offsetting work-from-home trends.
Office demand goes hand in hand with a thriving job market. Florida’s unemployment rate of 2.7% in October was a full percentage point lower than the national average, according to the U.S. Labor Department. And Florida’s annual job growth rate of 5% was No. 2 in the nation, trailing only Texas.
Within Florida, downtown office buildings continue to outperform suburban properties. Prominent tenants are moving in, and they’re flocking toward new, well-located space.
In Miami, for instance, the 55-story tower at 830 Brickell is landing large tenants. Santander Bank is taking 95,000 square feet at the trophy tower, and financial firm Citadel took a 97,000-square-foot space. Other tenants include Microsoft, private equity firm Thoma Bravo and law firm Sidley Austin, which signed a deal for 57,000 square feet.
Demand has pushed rents at 830 Brickell to over $120 a square foot, a number once unthinkable south of Manhattan. Reflecting strong demand for Class A office, a 1,000-foot-tall office tower is in development on a site near 830 Brickell.
North of Miami, West Palm Beach is experiencing an office building boom of its own. Downtown office rents there have surged to $75 per square foot, spurring a development boom. More than 1 million square feet of new space is planned or under development at six downtown addresses.
Reflecting tenant’s preference for higher-quality office space, South Florida’s Class A properties boasted 126,000 square feet of net positive absorption in the third quarter, and a decrease in vacancy to 18.4% from 18.7% in the second quarter, Newmark reports. The region’s Class B space, by contrast, suffered negative absorption.
Across the state in the Tampa Bay area, the story is similar. JLL’s Tampa Office Insight Report for the third quarter of 2022 shows office users are snapping up space in the region’s central business districts.
In the first quarter, St. Petersburg’s central business district had a direct vacancy rate of just 3.7% – a historically low rate for the city and one of the lowest vacancy rates in the United States. Meanwhile, Tampa’s downtown office market had a 9.8% direct vacancy rate. Combined, the two downtowns have an average direct vacancy rate of just 8.5%, according to JLL.
Feldman Equities’ Park Tower is a case in point. The 475,000-square-foot, Class A office tower in Downtown Tampa is 92% occupied and has seen continued strength in both renewals and new leases. ConnectWise, a global technology provider, signed a 65,000 square foot lease at Park Tower late last year and has begun to occupy the building.
City Center in Downtown St. Petersburg has performed ever better. The 244,000-square-foot Class A building is 94% full.
As office users aim to coax their employees back into the office, they’re dangling highly amenitized, modern spaces in thriving downtowns. Best-in-class office space is increasingly seen by landlords as a strategy to win tenants from competing building with fewer amenities. By contrast, the region’s suburban markets have double-digit vacancy rates.
Much of the Class A vacancy is in recently completed buildings that now are filling up as the pandemic fades and economic growth accelerates. The most desirable office towers are commanding rents above $50 per square foot, record highs for the area. The average asking rent for Class A space in downtown Tampa was $38.68 in the third quarter, according to JLL.
Contributing to the tight market, JLL reported no new buildings being completed in the third quarter of 2022 in the Tampa and St. Petersburg CBDs, and no new space under development. In combination with higher rents for newly built buildings, the very low occupancy rates and continued, growing demand, we are finding that the economics of ground-up development are increasingly attractive.
While Tampa Bay’s downtown areas are performing well, the region’s suburban markets show weaker results. Direct vacancy in Class B office space in the Pinellas County suburbs, for instance, was 16.5% in the third quarter, JLL reported.
“Tenants flock towards mixed-use, centralized and amenity-rich submarkets,” JLL said.
Of course, some skeptics note that there’s a difference between official occupancy rates and actual use of office buildings. The long-term nature of office leases means that a five-year deal signed in 2018 and 2019 counts as occupied space, even if workers barely set foot in their offices after the pandemic hit in March 2020.
However, downtown St. Petersburg office buildings are showing that workers are indeed returning to the office. Feldman Equities’ downtown St. Pete buildings average nearly 75% day-to-day occupancy by workers, up from 50% or less during the peak of Covid in 2020. Note: the three buildings that Feldman owns in downtown St. Pete average about 95% leased.
That trend is good news for the vibrancy of office buildings themselves and for the downtown service providers – restaurants, cleaners and others – who cater to office users.
Meanwhile, as the hiring boom slows and the U.S. economy moves toward recession, the balance of power between employees and employers is shifting. In 2020 and 2021, workers called the shots – they didn’t come into the office if they didn’t want to. Now, however, the momentum is swinging towards employers, who want workers back in the office.
As a result, Florida office owners are defying a national narrative of declining office occupancies. Many landlords – at least those marketing well-amenitized space in prime locations– are experiencing sufficient demand to boost rental rates.