Miami Commercial Market to Come Unglued

Miami commercial has dodged the bullets...until now. Be aware this isn't just the press looking for blood, even seasoned commercial brokers are predicting a meltdown. Read on.

Real estate market in Miami finally succumbing to economy

By J.W. ELPHINSTONE
THE ASSOCIATED PRESS

Published: Sunday, January 11, 2009 at 1:00 a.m.
Last Modified: Saturday, January 10, 2009 at 11:55 p.m.

MIAMI - Despite record foreclosures, despite double-digit home price declines, and despite scary job losses, Miami's commercial real estate market has rolled with the punches -- until now.

"We're in a better place than where people thought we would be because of the collapse in the residential market," said Stephen Nostrand, an executive vice president at Colliers Abood Wood Fay. "It's true, it's horrible, but it could be a lot worse.

The fear now is that it soon will be.

Industry watchers expect the national recession, new supply of offices and shopping centers and a crippled housing market to finally hit the city's property rents and vacancies this year.

Retail shops will suffer the most. Even though the retail vacancy rate in the greater South Florida area hovered around 5 percent, which is lower than the national average of about 7.5 percent, it is expected to climb steadily this year.

The few retailers entering the market like Kohl's and Ikea will be offset by many other small and mid-size stores closing shop. Job losses this year in Miami are expected to total 15,300, according to CBRE Torto Wheaton Research. That will curb consumer spending, while the national recession will hurt tourism.

"Anecdotally, every week there are more leasing signs up and more dark store fronts," said Nostrand.

Last month, Whole Foods pulled out of its commitment at Met 2, a retail, office and a hotel complex in downtown Miami. The grocer would have been the first supermarket downtown.

"That's huge. Definitely trauma and sign of the times," said Jonathan Kingsley, managing director of Grubb & Ellis Co.'s South Florida office.

Met 2 is one of three new office projects under construction in downtown, and they are a source of concern for many office landlords. Together with the Brickell Financial Center and 1450 Brickell, the trio will add about 2 million square feet of space to the downtown market. That's about 20 percent of the total current market.

And only 10 percent of that office space has been leased, said Scott Strickland, senior vice president at Jones Lang LaSalle. If more of that space is not leased before the projects are completed it could drive the vacancy rate for top-quality downtown offices to 15 percent from 8.6 percent, he estimates.

"Even in a good market, you would be cautious of putting up that much inventory at one time," Kingsley said.

Although the three buildings are not set to be completed until 2010, tenants already are smelling the blood in the water. With years left on their leases, tenants are going in early for renewal talks to wring the best deals out of their landlords. Others are waiting until the last day to take advantage of renewal options to make landlords sweat. Tenants are getting a month's free rent, building improvements and lower rental rates.

Some are negotiating so-called "out clauses" into their contracts in case they have to downsize. An out clause allows a tenant to give back a certain amount of space during a set period of time without penalty.

Big time tenants in the market, like Merrill Lynch, Bank of America, Citigroup and Wachovia, might just need an out. They have announced layoffs nationwide that could affect Miami.

"It's a whole new world for landlords negotiating leases with tenants," Nostrand said. "Today, everything is on the table."

In the last two years, rents in the downtown market rose through the $40 per square foot rent threshold for the first time. But Kingsley said rents for top-notch offices will likely fall about 20 to 25 percent in the next two years, mostly because of the excess space from new offices.

The industrial market, meanwhile, should fare better. Rents are expected to slip some in 2009, but not drastically, according to a Grubb & Ellis report. There has been little overbuilding in the sector and vacancy rates, now at about 8 percent, will creep up to about 9 percent by year end.

Large leases over 50,000 square feet are nearly nonexistent. Landlords are seeing smaller users, those occupying 15,000 to 50,000 square feet, cut back. Many of them are housing related businesses -- flooring, roofing or plumbing suppliers -- that have left the market altogether as the housing market crashed.

Housing here is nerve-wracking. Prices have fallen more than 38 percent from the peak in December 2006. Flippers who cannot sell the 15 or so condos they bought as investments are renting them out at below-market rents.

All this bodes well for the Miami renter, but not for the landlord. Vacancy is expected to rise to over 5 percent this year from 4.4 percent at the end of last year, and rents should fall about 1.8 percent to $1,066.28 a unit, according to CBRE Torto Wheaton Research.