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South Florida’s Office Sector May Be Cooling Off, But the Forecast Remains Sunny

June 4, 2023/in News, Trends/by SFOBA STAFF

While many of the region’s office market fundamentals saw a slight shift this quarter, the numbers along with the region’s continued popularity as a spot to live, play and work all contribute to a favorable outlook for South Florida’s performance throughout the second half of 2023.

What Makes Florida Unique? Sales Tax On Commercial Rent – But Changes Are Coming Sooner Than We Thought

May 29, 2023/in News/by SFOBA STAFF

Last week, I called my contact in Tallahassee and confirmed that my interpretation was correct.

South Florida’s Office Sector May Be Cooling Off, But the Forecast Remains Sunny

June 4, 2023/in News, Trends/by SFOBA STAFF

What Makes Florida Unique? Sales Tax On Commercial Rent – But Changes Are Coming Sooner Than We Thought

May 29, 2023/in News/by SFOBA STAFF

Last week, I called my contact in Tallahassee and confirmed that my interpretation was correct.

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South Florida’s Office Sector May Be Cooling Off, But the Forecast Remains Sunny

June 4, 2023/in News, Trends/by SFOBA STAFF

By Eric Messer

South Florida’s commercial real estate market for the first time demonstrated signs that it may be starting to feel the impacts of the Fed’s interest rate hikes to restrict inflation that began in March 2022.

The region’s office supply barely outpaced demand in South Florida as a whole, but results differed across asset type, location and in urban versus suburban areas, with Class A office in Miami’s central business district outperforming most of the region’s benchmarks.

Overall, the South Florida office market recorded 57,000 square feet of negative absorption in the first quarter of 2023. This was noticeably down from the nearly 383,000 square feet absorbed during the same period one year ago.

Vacancy also ticked upward 10 basis points from the previous quarter, but was down from the 15.3 percent reported at the close of the first quarter last year. New lease deals declined, totaling 1 million square feet of activity, down from the 1.6 million square feet transacted in the previous quarter and well below the 2.2 million square feet leased through the first three months of 2022. Broken out by county, Miami-Dade and Palm Beach counties both saw a similar drop with leasing activity falling just under the 50 percent mark from one year ago to 566,000 square feet and 249,000 square feet, respectively. Broward County had the sharpest drop as new deals were down 64 percent from one year ago to 204,000 square feet for the first quarter of 2023.

It’s no surprise that Miami-Dade County continued to make headlines and lead office demand throughout the tri-county area with nearly 125,000 square feet of positive absorption as vacancy fell 30 basis points year-over-year. This marked one of the strongest performances in the country — Miami recorded greater quarterly occupancy gains than any market in the South or West.

Broward County on the other hand experienced a more balanced performance, returning a minuscule 27,000 square feet of increased office space back to the market during the first quarter with vacancy only rising 10 basis points from the previous quarter. During 2022, Broward recorded a more substantial rise in vacancy when construction completed on the state’s largest project of the year, the 277,000-square-foot Optima Onyx Tower which remained almost 90 percent vacant in the first quarter of 2023.

Palm Beach was the county that took the biggest hit, with 144,000 square feet of net occupancy losses, the majority of which came from the exit of Newell, which vacated 100,000 square feet at in a Boca Raton submarket. The county’s vacancy stood at 11 percent, up 30 basis points from the previous quarter’s record-low rate, but still down 130 basis points year-over-year.

Top of the class

Two trends that have held throughout South Florida’s office sector overall included the flight-to-quality and desire for proximity to a downtown location. Class A space dominated in new leasing activity in the first quarter of 2023 with over 700,000 square feet of deals signed for high-end space, making up over 70 percent of South Florida’s office leasing transactions. Demand for these spaces continued to outpace supply within the region’s central business districts by a modest 20,000 square feet during this year’s first quarter.

Notably, Miami-Dade County’s central business district led in demand performance with nearly 79,000 square feet of absorbed space. Broward County’s central business district followed suit with 26,691 square feet of positive net absorption, while Palm Beach’s downtown submarket was, again, the only central business district to see a return of 17,735 square feet in supply. At first glance, it appears as if the downtown submarkets are seeing a slowdown in demand growth, but these modest numbers are more indicative of the lack of available space within key trophy buildings in the region’s central business districts. Downtown Miami led all submarkets in Class A leasing activity with over 168,000 square feet of deals signed during the first quarter. Downtown Fort Lauderdale also led in Broward County and followed closely behind Miami’s downtown area with 69,000 square feet.

Like leasing activity in the region’s key central business districts, office vacancy rates in the first quarter of 2023 also fluctuated by submarket and asset type. West Palm Beach’s downtown vacancy rate of 11.3 percent was the lowest throughout the region, while Class A space vacancy stood at 9.1 percent and is projected to hold until new construction is completed, which will be in 2024 at the earliest.

Miami’s overall vacancy rate of 13.3 percent in the central business district’s Class A office sector includes secondary older buildings that may not be considered “trophy.” When removing the A-minus buildings out of the inventory set, vacancy falls to around the 10 percent mark, and if isolating that figure to depict only the Brickell submarket, it falls even further to 9.1 percent. Broward County held the highest vacancy rate for any of the central business districts in the region with 18 percent at the close of the first quarter, but vacant space in the Las Olas Corridor fell to the 14 percent mark. Demand for high-end inventory pushed first-quarter asking rents past the $100-per-square-foot mark for both Miami-Dade and Palm Beach Counties while downtown Fort Lauderdale asking rents peaked over the $70-per-square-foot mark for the first time in recorded history.

Suburbia

Suburban submarkets told a slightly different story for office and continued to see a stronger return of supply with 77,000 square feet of negative absorption throughout the region at the close of the first quarter. Broward County’s suburban submarkets totaled over 54,000 square feet of negative absorption in the form of smaller tenants downsizing or moving out. Miami’s suburban sector was the only one to record positive net absorption in the first quarter, combining for more than 113,000 square feet, with the Airport West submarket making up over 60 percent of that total. This aided in allowing the 15.7 percent vacancy rate throughout the South Florida region’s suburban areas to hold level from the previous quarter and year-over-year. First-quarter leasing activity totaled over 772,000 square feet in South Florida’s suburban submarkets, a noticeable decrease from the nearly 1.6 million square feet leased during the same period one year ago.

What’s coming

The construction pipeline for office product is also beginning to dissipate across much of the country, but more than 2.3 million square feet of construction remained underway across South Florida at the close of 2023’s first quarter. Nearly two-thirds of this product was in Miami-Dade County — almost 40 percent of which came from 830 Brickell — and the remainder in Palm Beach County. The limited amount of new supply should keep vacancy well below the 20 percent threshold, signifying a more friendly tenant market during lease negotiations.

Ask and you shall receive

Finally, asking rents continued their record climbs, with all counties experiencing new peaks. South Florida’s overall average asking rate increased 3.4 percent year-over-year to $44.32 per square foot full service at the close of the first quarter in 2023. Palm Beach County led the region in growth, escalating 6.4 percent to $44.40 per square foot full service, while Broward County followed suit with a 4.8 percent year-over-year hike to $38.04 per square foot full service. Miami-Dade County’s growth noticeably slowed in comparison to the past three years, with a 3.3 percent increase year-over-year to $48.89 per square foot full service and can be attributed to the limited amount of available space in higher-tier Class A buildings. This allowed asking rents from lower-tier Class A and Class B office buildings to have more of an impact on average rates than previous quarters.

Source: Commercial Observer

What Makes Florida Unique? Sales Tax On Commercial Rent – But Changes Are Coming Sooner Than We Thought

May 29, 2023/in News/by SFOBA STAFF

If you asked me what makes Florida unique, I would probably say our reputation for strange and unusual news stories. But today, I’d like to focus on something completely different affecting business in our State. Florida is also unique as the only state charging sales tax on commercial leases. It should also be noted that we are one of only eight states with no state income tax. But the sales tax does put Florida at a competitive disadvantage when it comes to attracting corporate relocations.

That is about to change. Two years ago, on April 19, 2021, our governor signed Senate Bill 50. The bill expanded sales tax on online purchases, but also plotted a path to reduce the state sales tax on rent from the current 5.5 percent to 2 percent (plus a 1% surtax in Miami-Dade, Broward and Palm Beach counties). That is projected to save Florida businesses approximately $1 billion per year.

Just as I was about to post this article, it changed again. On May 5, 2023, the State House and Senate unanimously passed House Bill 7063, which upon approval from the Governor, will reduce the tax from 5.5% to 4.5% effective December 2023.

But the $1 billion question remains: When will the full reduction to 2% take effect? As a commercial tenant representation specialist, I am very interested in anything that will save my clients money. But after an extensive search, I couldn’t find an answer. So, as a former market research guru, I rolled out my yoga mat and did the investigation myself.

The reduction in SB50 is tied to the Florida Unemployment Compensation Trust Fund. As of March 2020, the state had $4.07 billion in the Fund. But unemployment benefits due to COVID drained the fund to a low of $623 million in April 2021. Senate Bill 50 stipulates that the sales tax reduction will commence 2 months after the fund balance exceeds the pre-COVID level of $4,071,519,600 .

Are we there yet? Not quite, but according to my research, in addition to the 1 percent reduction this December, Florida commercial tenants will see an additional 2.5% reduction on their rent bills around August of 2024.

Upon passage of Senate Bill 50, the State began to apply funds from the online sales tax to the Fund. I spoke to the economist in charge of fund projections at the Florida Legislature, Office of Economic and Demographic Research. She referred me to the results of the State’s Consensus Estimating Conferences which are posted online. The most recent forecast was published on March 2, 2023. It showed that the fund balance had increased to $2.56 million and that the State will be allocating $90 million to the fund every month. According to the March forecast, the balance will cross the $4.07 billion mark in May 2024, which means that the reduction would take effect in August. Last week, I called my contact in Tallahassee and confirmed that my interpretation was correct.

But is that projection accurate? At the moment, there are more jobs than applicants in Florida indicating that the state should not be paying out a lot of unemployment claims. While no one could have predicted COVID and there is the potential for an economic downturn or even a natural disaster, it would take some unforeseen event to significantly alter the state’s projections. I also confirmed that the projected December tax reduction will not affect the projections from March 2nd.

When I first started researching this topic back in January, the latest forecast was from August 2022. The August forecast projected a balance in March 2023 of $2.52 billion and showed it crossing the $4.07 billion threshold in May 2024 with a balance of $4.2 billion. The state economist told me to watch for the upcoming March 2023 forecast (above) which I recently downloaded and reviewed.

As of March 2023, the balance was at $2.56 billion, 1.02% higher than the August 2022 forecast. More importantly, it showed that my friends at the State were highly accurate with their projections. I am therefore reasonably confident in the March forecast, which projects that the 2% state sales tax on commercial rents will take effect in August 2024.

So hats off to the Office of Economic and Demographic Research, and a thank you to our Governor, whether you love him or hate him. All signs point toward a sales tax reduction in 2024, providing corporations additional incentive to bring high-paying jobs to Florida. Now if we can only get our residents to stop throwing alligators into drive-thru windows or breaking into their neighbor’s house to pet their cat.

Ken Silberling is Senior Vice President of Brokerage and Tenant Representation at Levy Realty Advisors, LLC and South Florida Regional Partner for TenantBase. He specializes in tenant and buyer representation for office and industrial properties in Miami-Dade, Broward and Palm Beach Counties. For over 30 years, Ken has been a go-to source for his market expertise and has been quoted in major regional and national publications. He has been blogging on the South Florida commercial market since 2010 and is a contributor to numerous industry websites. Ken’s personal website and blog is at www.kenstrends.com. Ken holds a Master of Business Administration from Georgetown University.

About Levy Realty Advisors: Founded in 1977, Levy Realty Advisors has emerged as one of South Florida’s largest privately held commercial property management and brokerage companies. Levy operates a portfolio of over 4 million square feet for our private equity clients. Through proactive acquisition, leasing, and management services, Levy has delivered outstanding year over year returns to their clients and continues to manage over 1,100 tenant relationships.

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South Florida’s Office Sector May Be Cooling Off, But the Forecast Remains Sunny

What Makes Florida Unique? Sales Tax On Commercial Rent – But Changes Are Coming Sooner Than We Thought

South Florida’s Office Sector May Be Cooling Off, But the Forecast Remains Sunny

What Makes Florida Unique? Sales Tax On Commercial Rent – But Changes Are Coming Sooner Than We Thought

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South Florida’s Office Sector May Be Cooling Off, But the Forecast Remains Sunny

What Makes Florida Unique? Sales Tax On Commercial Rent – But Changes Are Coming Sooner Than We Thought

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