South Florida’s office market will continue outperform most parts of the nation, but some buildings will fail or be redeveloped, a commercial real estate advisor said.

David Duckworth, a principal of Avison Young‘s Fort Lauderdale office, said while there are predictions of nationwide commercial mortgage backed security defaults in the office sector, quality office buildings in South Florida continue to attract companies. At least for now.

“The news is worse than the reality at the moment,” Duckworth said. “People are … anticipating that things will get pretty bad, but down here it is not that bad yet. Vacancies are in the mid-teens in the tri-county area. That’s not great. But it’s not run-for-your life terrible either.”

Duckworth said new-to-market and local businesses are still seeking office space with amenities that will encourage employees to return to work. This “flight to quality,” Duckworth said, will create a two-pronged office market.

On one side are the Class A office buildings, particularly in urban centers and downtown areas, which “will be just fine.”

On the other are suburban Class B and Class C offices that were often used as operation call centers. “Those places will be in a lot of trouble,” Duckworth said.

Lenders, though, are reluctant to back any sort of office product of any class or of any locations. “They’re lumping all office into one bad bucket,” he said.

“There are still buyers of office product, but debt is very expensive and challenging,” Duckworth said. “People who have purchased or refinanced … are having a hard time when debt comes due, and their debt will be 100 or 200 basis points higher than when they received the debt. They might have to add additional capital to refinance.”

Nationally, office transactions plummeted 58.6% in the first quarter of 2023. According to recent market reports from Avison Young, investors are buying less office product in Broward and Palm Beach counties.

In Broward, office sales volume fell 56.6% year-over-year to $107.8 million. The price per square foot also fell 6.63% from last year to $205.05 per square foot.

In Palm Beach County, office transactions totaled $100 million in the first quarter, a decline of 25.7% from the last quarter and a drop of 78.5% from last year. Price per square foot for office product fell 17.55% from last year to $230.88 per square foot.

But in Miami-Dade County, the $147.2 million in office transactions in Q1 2023 was 10.5% higher than the end of last year, Avison Young stated. Office product also sold at an average of $365.03 per square foot, a 16.34% increase from last year. However, in the second and third quarters of 2022, office product traded at rates above $270 per square foot, according to graphs from Avison Young. In short, Miami-Dade saw the first drop in price since the Federal Reserve started raising interest rates.

Still, many of the office products acquired will be repurposed for other uses, Duckworth said.

In other cases, developers will add residential and retail to an office product to make it more valuable. For example, WRC Properties plan to add up to 800 apartment units to the 250-acre Waterford Business Park in western Miami-Dade. And Pebb Enterprises and BH Group want to add residential to the 29-acre Office Depot (Nasdaq: ODP) they recently acquired for $104 million.

“It is a trend we will see more and more of, office buildings excess parking areas for other uses,” Duckworth said.

Suburban areas, such as Cypress Creek in Fort Lauderdale, also will see office product demolished and replaced with residential uses, he added.

As time goes on, Duckworth said there will be “some foreclosures” of office buildings by landlords unable to finance or sell their products. But it won’t be anywhere near as rough as it was in the economic downturn of 2008 and 2009.

“I don’t see that much doom and gloom, but six months from now that may look different, but that doesn’t feel that way right now,” he said.

 

Source:  SFBJ