New York City-headquartered The Related Cos. LP just closed on its purchase of Phillips Point office towers in West Palm Beach (pictured right) in a $282 million deal, reportedly the largest office transaction in South Florida in more than a year.
Source: Richard Sagredo via Unsplash

The revitalization of the U.S. office market in the wake of the coronavirus pandemic is already underway, far from the historical centers of power in New York and on the West Coast.

Financial institutions, wealth managers, private equity firms and other major businesses have long had an interest in South Florida for its proximity to Latin American markets, and many have maintained satellite offices there for years. But the pandemic, alongside local leaders' recruiting efforts, has made the region a focus for major institutions experimenting with smaller real estate footprints and comprehensive remote work policies. Reports in recent weeks have placed many prominent New York City and West Coast-based names either buying, leasing or shopping for space in the area, where the tax burden is lower and high-quality office space is cheaper but the luxury lifestyle can still be had.

The Blackstone Group Inc. signed a long-term lease in downtown Miami, where it plans to build out a tech office. Goldman Sachs is said to be considering moving its asset management division to the area. And two prominent hedge funds, New York City-based Elliott Management Corp. and Chicago-based Citadel LLC, were reported to be shopping for space in West Palm Beach and Miami, respectively.

Colony Capital Inc., meanwhile, officially relocated its headquarters to Boca Raton from Los Angeles in early January. And billionaire investor Carl Icahn, who left New York City for South Florida with more than half his staff in 2020, had reportedly been planning his exit since 2019.

The pandemic and shutdown of major urban centers, alongside the explosion of telecommuting, created a perfect storm of incentives for firms to re-imagine their real estate needs. The previously socially "unacceptable" move — decamping New York City and other major markets deemed essential to business for warmer, less congested climes — is now acceptable, according to Stephen Rutchik, Colliers' executive managing director of office services for the South Florida region.

"It's happening," Rutchik said of the business migration. "And it's happening at a scale that is beyond anything that you're reading about, or that I have ever experienced in my career."

Seeking quality

The influx of business interest in South Florida has helped float its office market, which expanded significantly via new deliveries and comprehensive upgrades in 2020, through a period of deflated demand nationally. While vacancy rates ticked up last year in the Miami, Broward County and Palm Beach markets — the approximate southern, middle and northern segments of the Miami metropolitan statistical area — prospective tenant interest is at record highs and has not faded in the weeks since the roll-out of a coronavirus vaccine, Rutchik said. Those that have been shopping the market for months are increasing their requirements. And the majority of prospective tenants are still focused on class A product.

"They're trying to find things that are similar to what they're accustomed to in the Northeast and in New York, which doesn't exist here in abundance," Rutchik said. "So it's causing a real tightening of our class A market, which is going to have an effect on the class B market, and also all of the feeder companies that want to be close to these companies."

Asking rents for office space in South Florida, from Miami to Palm Beach about 70 miles up the coast, showed remarkable strength in 2020, when the national office market heaved under the weight of the pandemic and the uncertainty that new remote work policies forced on landlords, CBRE data showed. Rates for class A space actually increased year over year in Miami, Broward County and Palm Beach, while rates for class B space held about steady.

While there have been few major headquarters relocation deals so far, there is a handful exploring such moves. Others are looking at expanding satellite offices. Rutchik said he is under a "half dozen" nondisclosure agreements with large tenants seeking 10,000 to 80,000 square feet — "whales," by historical standards in the South Florida market. Typically the requirements range from 2,000 to 10,000 square feet, he said.

Most financial firms in the market are focusing on West Palm Beach and Brickell, Miami's financial district, according to Clay Sidner, director and tenant representative specialist in the Miami office of Newmark Group Inc. Sidner described prospective tenants as still cautious, but he said landlords are not giving up much on rents, choosing instead to offer greater tenant improvement allowances or free rent. Prospective tenants are downsizing while allocating more square feet per employee.

"People were jamming employees in, but now I think you're seeing kind of a push and pull," Sidner said in an interview. "The remote model will allow them to reduce their size but also increasing their square foot per person. I think you're going to see about a 10% to 15% decrease in the size of the office, just with a different layout."

Class B office product also has experienced a lift, although landlords with lower-quality space are having to be more creative with concession packages to attract a share of the demand — particularly since ambitious redevelopments are off the table at present, according to David Bateman, managing director at CBRE and leader of the firm's operations in Broward County and Palm Beach.

"While the new demand definitely gravitates toward newer products, the existing offerings are definitely putting on their best dress, so to speak, to attract those new-to-market tenants," Bateman said.

The pandemic significantly curtailed new development in South Florida, but some new projects are starting to come out of the ground, Bateman added. The extant and emerging class A product should be sufficient to meet near term demand, he said.

"Developers that were already contemplating projects are getting very, very comfortable moving forward with projects," he said. "I would say there's going to be enough new class A beautiful product to meet this new demand wave."