The continued wave of corporate migrations washing ashore in Miami, partly driven by lower costs than traditional business hubs, is pushing those costs up at a rate that has shocked local operators.
“Our clients that have come from New York and Chicago and Latin America, they get sticker shock,” Juliana Fernández, who founded an architecture firm called AEI Spaces that works with new-to-market firms from around the globe, said at Bisnow's South Florida Office event last week.
“They think Miami is going to be so cheap,” Fernández added. “Construction costs are actually more expensive than in other places because there are not as many vendors here as in other markets. People are busy, prices have gone up.”
As new-to-market tenants continue to arrive in Miami, they are being met by high demand, rising build-out costs and a limited pool of contractors, surprising the leaders of some firms that had chosen Miami because of its reputation for being underpriced compared to many major cities. Rents spiking close to $100 per SF in some areas are adding to the cost burden.
“There is a big sticker shock,” JLL Managing Director Zach Wendelin said on a panel at the event, which was held at the InterContinental Miami hotel. “Part of my job is that I effectively portray and share the reality of the market we’re in. I could tell people it’s $90 a foot and they say, ‘Yeah, right, Zach, you don’t know what you’re doing.’"
A record 57 companies either relocated or expanded in Miami-Dade in 2022, the Miami-Dade Beacon Council reported, and the state added 318,855 new residents last year, according to the National Association of Realtors. This has stretched the limited pool of vendors and contractors in South Florida, leading to construction delays that have frustrated some tenants from markets where it’s easier to both get permits and complete build-outs.
“They want fast,” Fernández said of new-to-market tenants. “Permits are taking three to four months, and a project from start to finish takes a year. And many of them are coming from New York where the permitting process is very different.”
In some cases, high construction costs have put deals in jeopardy.
Laura Kozelouzek, CEO of flexible office provider Quest Workspaces, said that a deal she is working on in a “smaller suburban building” might not happen because the cost to “build out something simple” has risen above what she feels comfortable paying.
From a landlord's perspective, she said the rising costs could make it even harder for older buildings to stay competitive.
“Some of these buildings can’t afford the construction to bring certain tenants in,” Kozelouzek said.
Office rents have also risen dramatically in recent years, reaching $51.88 per SF at the end of the first quarter, according to data from Blanca Commercial Real Estate, up nearly 21% since 2020. Trophy rents in Brickell are almost at $100 per SF, up over 27% year-over-year.
The rising costs are part of a broader shift in the market as a wave of new office tenants demanding top-tier office space encourages developers to build new, expensive properties to meet their needs.
“830 Brickell, the building was the only building that was under construction at the time Covid hit,” Wendelin said of the office development being built by OKO Group and Cain International that has signed leases with Citadel, Microsoft and Thoma Bravo. “It’s fully leased, and it’s not delivered yet. That was a good example of the future. How do you compare that building to a different building in Brickell that was built in 2010?"
Swire Properties, along with Related Cos., is building the next generation. Recently appointed President Henry Bott said that his firm is planning to begin construction next year on 1 Brickell City Centre, a 1.5M SF, 68-story office project in the 9-acre Brickell City Centre development. The company announced Friday that it will begin demolition of the site on May 4.
Bott said new-to-market tenants are looking for a class of office building that hasn’t historically existed in Miami. He said that mixed-use schemes focused on amenities that offer modular floor plans and provide experiences outside of the 9-to-5 workday will excel as businesses shift expectations around office space and attendance.
“The office market in Miami is certainly hotter than ever, but there are factors that set properties apart from the rest,” Bott said.
He said it is Swire's "mission to transform what’s possible for Miami into reality."
"Instead of gimmicks, we’re doubling down on quality."
Spencer Levine, president of the New York City-based developer RAL, said that his company is hoping to break ground in the next couple of weeks on Lynq Wynwood, a 363K SF office development with ground-floor and rooftop restaurant spaces that is targeted squarely at the highest-end users.
“We found that the true Class-A experience happened in very few places here in Miami,” Levine said. “Tenants are looking for access control, security and redundancy of infrastructure. These are things that we as the upper end of the user group don't think about, but these are the things that the people actually leasing the space are thinking about."
As developers construct new properties built for financial and law firms opening their first South Florida offices, owners of older buildings still have an opportunity to capitalize on the relocations, said Todd Rosenberg, co-founder of PEBB Capital.
“Everyone talks about the huge tenants coming down, but what they don’t talk about is that all of those companies had huge service providers that didn’t exist in this market, and none of them want to be left out,” Rosenberg said. “They’re all making different amounts of money, they all need different types of spaces, but they all want to be local.”
Some tenants facing rising costs and construction hurdles are adjusting their plans by looking in suburban submarkets where rates are lower or opting to lease smaller spaces as a way to contain build-out costs.
“Tenants are looking at double the rates on renewals, and it’s a big challenge,” Wendelin said, adding that some tenants are opting to relocate rather than sign renewals. “Maybe instead of Brickell, you look downtown, or maybe you look in Coral Gables.”
As Miami continues to benefit from the shift in worker expectations and office use, there is consensus among developers, brokers and commercial real estate professionals that the pandemic has had a profound and permanent impact on the Miami office market.
“For the first time in my life, we’re going to see a paradigm shift in South Florida where the region becomes a global powerhouse,” Rosenberg said. “There hasn’t been a lot of truly backed and supported growth, and for the first time in my career, I truly believe that this is real.”