While questions remain about the office market in states like New York or California, Florida office landlords are surviving, even thriving. Thanks to the state’s robust job growth and strong in-migration, there’s still demand from office tenants in Florida, even as office markets in other corners of the country struggle.
Office occupancies are holding up, especially for well-located, Class A buildings that have been thoughtfully designed (or redesigned) and are fully amenitized. Throughout Florida’s downtowns, Class A rental rates are touching new highs.
But if Florida’s office market is performing well, another sector is absolutely on fire. Luxury condos are selling for eye-popping prices.
The post-pandemic migration to Florida has brought wealthy buyers of condos to the state en masse. And the result has been an all-time gap in valuation between the highest-priced office towers in the state and the most luxurious condos.
In the Tampa market, the most richly valued office transaction saw a price per square foot of $500. But luxury condos are trading for a princely sum of up to $1,600 a foot.
In South Florida, the gap is even more pronounced. For instance, a unit at the Bristol, a super-luxury tower in West Palm Beach, sold in January for $21 million. That price came out to nearly $3,800 per square foot. The 2021 sale of CityPlace Tower, an office building about half a mile away, worked out to $577 a foot.
In another sign of the times, New England Patriots owner Robert Kraft in December paid $23.8 million, or nearly $4,700 per square foot, for a condo in the town of Palm Beach. By contrast, a 2021 sale of an office building on Palm Beach’s Bankers Row came in at $614 a square foot, according to Palm Beach County property records. And a 2022 sale of another office building on Bankers Row, this one in 2022, weighed in at $785 a foot.
Office space as ‘pedestal’
This valuation gap is surprising. In the past, the fanciest condo towers might have eclipsed the price-per-square-foot valuation of a Class A building. But in today’s market, the reality is impossible to ignore: High-end condos are worth far more than even the most well-appointed offices.
Rather than ignore this trend, Feldman Equities is adapting. We are now looking at buildings that include offices on the lower floors and then, on the highest floors, the upper levels that command the biggest premium, luxury condos.
This mixed-use approach allows the office space to act as a pedestal that lifts up the condos to get the best possible water views. In Tampa Bay, we are studying various scenarios where workspaces on lower floors will create value for residential space on the higher floors.
This mixed-use strategy makes construction loan financing more available for office construction as lenders tighten the screws. In 2022, interest rates soared as the Federal Reserve moved aggressively to tamp down inflation. As a result, many lenders worried that the U.S. economy was headed for a recession. What’s more, the persistence of work-from-home trends created headwinds for office demand nationally.
As a result of all that, construction lenders remain leery about financing new office construction. But the profitability of a condo component in a mixed-use tower gives lenders more comfort that they will be repaid upon completion of the project.
Another advantage of condos is that pre-sales lower a building’s risk profile. If a developer can pre-sell some of the condo units, then the financing calculus greatly improves.
Florida’s office market has experienced relatively little new construction. In Tampa Bay for more than a decade after the Great Recession, not a single new speculative office building (one for rent to multiple tenants) broke ground. The economics just haven’t worked. Say construction costs $500 a square foot. To support that investment, gross rents would need to be nearly $60 per square foot.
That rental number would have seemed a stretch a few years ago. But now that tech companies and financiers are moving to Florida, $60 a foot no longer seems unachievable. In fact, it’s being achieved throughout South Florida and perhaps even in Tampa. But landing construction financing on an office-only building remains a challenge. In addition to live-work synergies, that’s why we’re thinking very seriously about mixed-use development.
Amid a flight to quality in the office market, best-in-class buildings are commanding huge premiums. Companies are moving in from out of state, where they’re used to paying big rents. For instance, Ken Griffin of Citadel, one of the nation’s top hedge funds, is moving into a brand-new office building in the Brickell corridor of Miami. Occupancy costs will be upwards of $150 a square foot.
Walkability creates synergy
Another advantage to mixed-use building is that both condo buyers and office tenants want the bustle and vibrancy that’s created by both types of uses. It’s a tired expression by now, but 24/7 activity is what today’s consumer wants. They like the action of an all-day restaurant scene, plus the possibility of networking at happy hours later in the day.
Office tenants prize a restaurant scene. If workers and executives can stay in the building, or within walking distance, for meal breaks or for client meetings, everyone works more efficiently.
Another opportunity for synergy is that executives can live and work in the same building. The commute to the C-suite requires nothing more than changing elevator banks. Of course, the majority of workers can’t afford condos that sell for $1,600 per square foot. But the executives who make the leasing decisions value that sort of convenience.
Downtown living isn’t just for the wealthy, of course. In downtown St. Petersburg, many high-rise condos are in walking distance of more moderately priced rental buildings in the central business district. Workers and executives don’t need to worry about fighting traffic or searching for parking. They simply stroll or cycle a few blocks to get to work.
Another tailwind for mixed-use buildings comes from municipalities. Politicians get elected to create jobs, and elected officials look favorably at mixed-use buildings with a strong office component. Sometimes, they even offer incentives to sweeten the deal for developers. That’s just one more reason that new office construction is likely to feature a mix of condo units.