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Front Page » Top Stories » Office Rents Rising After Years Of Flatlining

Office Rents Rising After Years Of Flatlining

Written by on August 31, 2006

By Marilyn Bowden
After several years of near-stagnation, office rental rates are on the rise, a trend likely to continue at least until new construction takes some of the pressure off tight vacancies, brokers say.

"The Miami-Dade submarket is seeing an incredible evaporation of available space in submarkets across the board," said Diana Parker, a director at Cushman & Wakefield of South Florida. "As a result, we have seen increases in rental rates of $1.50-$4.00 across the board since the beginning of this year, and there will be more appreciations."

According to Cushman & Wakefield’s midyear market report, rates across all classes countywide now average $25.01 a square foot – a $1.35 increase from a year earlier.

In Airport West, overall vacancy is at 7%, 8.3% in Class A buildings, said Richard Schuchts, a vice president at Flagler Development who handles leasing at Westside Plaza

Asking rates are at $22.78 overall, he said, and $25.49 in Class A.

"Compared to the first quarter, that’s about a 10% increase on paper," he said, "but because concessions were so high and landlords were doing deals well below their asking prices, it’s more like a 25% increase."

Because current vacancy figures don’t take into account several deals that are committed but not fully executed, Mr. Schuchts said, appreciation will continue.

"There are very few options for new buildings," he said, "and they will have rents in the range of $30 and up, because the cost of new construction has been driven by high land and constructions costs. That means that Class A in the rest of the Airport West market will probably rise to the high $20s."

Relocating tenants will also have to deal with those higher construction costs in building out their space, which today will cost 20 to 30% more than last year, Ms. Parker said – and most landlords aren’t as willing to provide reasonable tenant improvement allowances.

"If the lease has a five-year term," she said, "it’s going by the wayside. It would have to be for a minimum seven- to 10-year lease. Otherwise they can’t justify it."

While it makes sense for tenants in this environment to renew early, Ms. Parker said, with lease rates slated to continue rising, most landlords aren’t willing to lock in a deal at today’s rates.

In most cases, rents aren’t rising fast enough to balance out landlord expenses, said Eric Siegrist, vice president of leasing for Crescent Real Estate Equities Ltd. Partnership, whose Miami properties include The Miami Center downtown, The Alhambra and The Colonnade in Coral Gables and Datran Center in South Dade.

"Our net rents today, after you take out commissions, tenant improvement dollars and operating expenses, are less than a couple of years ago," he said. "Insurance is going up, and in any instance where the landlord is doing the work construction costs have gone up. Rents are not rising proportionally."

That equation will affect new buildings conceptualized, Mr. Siegrist said. "With operating costs increasing and construction costs in some cases 40% higher, developers are going to have an amazingly low threshold of return even if they get $40 a foot. This will be a major obstacle, because a lot of Miami’s tenants are law firms, and they can’t afford what Fortune 500 companies could pay."

A typical Fortune 500 company budgets $120 to $150 a square foot to build out new space and put in the technology and furniture, Mr. Siegrist said – so even if a tenant in a new building could get a landlord to agree to a $50 tenant improvement allowance, "they would have a $100 shortfall per square foot on top of paying the highest rent in the market." Advertisement