Market Data

Welcome to Miami

A hot hospitality market leads to the city's commercial real estate activity.

Miami's sun-drenched beaches draw millions of people each year, yet the city continues to add cultural and recreational attractions to lure both tourists and new residents. Numerous new or planned destinations line the causeway between downtown and South Beach, including Parrot Jungle Island, which opened last June and is expected to net more than 1 million tourists by year-end, and a park that eventually will contain Miami's art and science museums.

Increased Tourism Helps Hospitality

Miami's hotel industry is benefiting from the city's focus on developing tourist destinations. "After a couple years of negative revenue per available room growth, year-end 2003 RevPAR was up 8 percent, and 2004 is expected to be up an additional 10 percent," says Mark A. Lunt, Ernst & Young's Florida and Caribbean hospitality practice leader. First-quarter 2004 indicators point to continued recovery: Compared to one year previous, average daily rates and occupancy increased 7 percent and 5.5 percent respectively, according to Smith Travel Research. "The market finally has caught up with its peak in 2000," Lunt says.

Despite considerable new construction, "Miami's hospitality market is responding positively to changes in new supply," he says. The addition of several high-profile luxury properties is helping the city compete for tourists and business travelers. For example, last October Four Seasons Hotels and Resorts built its first Miami property, which features 14,210 square feet of meeting space, a 5,830-square-foot conference room, three pools, and spa and fitness facilities.

Developers also are capitalizing on investor interest in condominium-hotel units, and several new projects soon will hit the crowded market. In Miami Beach, Turnberry Associates and Fontainebleau Hilton's $230 million Fontainebleau II will be completed later this year; the development features 462 residences ranging from $400,000 to more than $1.3 million. In December, Sunny Isles Beach will receive two new condominium-hotels: Rosewood Hotels & Resort's Acqualina and the 210-unit La Méridien Beach Resort and Spa. South Beach Resort Development currently is constructing the $67 million Regent South Beach, scheduled for completion next year; the project's 80 units range from $400,000 to $800,000.

Condominium Conversion Boom

Condominium interest isn't limited to Miami's hospitality market. Finding rental units in the city is becoming increasingly difficult, as investors continue to purchase available apartment buildings and redevelop them into condominiums, despite record-high prices and record-low capitalization rates. "Nearly half of all assets marketed for sale in Miami are sold to condominium converters," says Douglas E. Driver, CCIM, of Madison-LaPaul. Last year such investors bought more than $500 million of multifamily assets priced above $10 million, and total purchases this year should be even higher: In the first quarter alone condominium converters acquired more than $231 million of assets, Driver says.

Several economic factors contribute to this phenomenon. Due to steady job and population growth, South Florida has not experienced the concessionary environment plaguing many U.S. multifamily markets. In addition, Miami lacks available land for new development, and apartment demand is expected to exceed supply over the next few years, Driver says.

For South Florida multifamily properties priced above $10 million, the average price per unit increased to $106,500 in first-quarter 2004 from $80,033 one year previous; however, this statistic is skewed by several record-high sales to condominium converters, Driver says. For example, the 246-unit Bridgeside Place Apartments on Fort Lauderdale Beach represented the highest first-quarter per-unit price: $236,179.

New Projects Transform Downtown

To capitalize on the condominium craze, several developers are constructing or planning projects to help revitalize Miami's central business district.

MDM Development Group currently is building Metropolitan Miami, a $600 million mixed-use project on a six-acre Biscayne Boulevard parcel of former parking lots. When complete in 2007, the development will feature three multifamily properties, an office high-rise, and a retail and entertainment complex in a pedestrian-friendly setting. The project's $200 million first phase includes a 1,500-space parking garage, a 40-story tower comprising 447 luxury condominiums 50 percent of which were presold as of January as well as retail and restaurant space, and the neighborhood's centerpiece, Met Square, which will offer 120,000 sf of restaurants, shops, entertainment venues, and a 12-screen theater. In May, Whole Foods signed a lease for a 45,000-sf store in the development, its first in Miami.

Cousins Properties and America's Capital Partners' proposed $181 million Columbus Center at the 1.3-acre Columbus Bazaar site would add more than 660,000 sf of office, 29,500 sf of retail, and possibly condominiums to the downtown market. Also included in the tower's plans is a stop for Metromover, the city's free people-mover system.

Several new projects will remedy Miami's lack of major downtown shopping venues and restaurants. After several years of planning, construction of the Brickell submarket's first retail center, Mary Brickell Village, began last December. Scheduled to open in early 2005, the 200,000-sf lifestyle center features a variety of retailers including a Publix supermarket, Bally's Total Fitness, and P.F. Chang's China Bistro. Last May Developers Diversified Realty broke ground on the 600,000-sf Shops at Midtown Miami, located on four blocks just north of the CBD and adjacent to the Design District and Wynwood Art District.

Limited development space accounts for the city's dearth of large retail centers and its low retail vacancy rates. Year-end 2003's 4.8 percent vacancy rate is expected to remain flat this year, according to Marcus & Millichap.

Tenants Flock to New Office Space

The first-quarter addition of 500,000 sf of new office space outpaced net absorption, leading to a 14 percent vacancy rate, says Rolando A. Alvarez, CCIM, CPM, of Coldwell Banker Commercial NRT. Yet leasing remains active, as landlords offer incentives such as high tenant improvement allowances to attract tenants and keep lease rates stable. Second-quarter's $29.01-per-square-foot class A lease rates were 0.2 percent higher than one year previous, and, while class B rates fell 2.3 percent to $20.03 psf, class C rates increased to $19.12 psf, according to CB Richard Ellis.

More than 1.5 million sf of leasing activity occurred in the first half of 2004 led by class A properties in the suburban submarkets which made up 71.6 percent of all transactions, according to CB Richard Ellis. Many large tenants also are relocating within the CBD to new properties, such as Espirito Santo Plaza, which as of May was more than 80 percent preleased to companies including Espirito Santo Bank, Wachovia Bank, and BCI. Major first-quarter transactions include law firm Tew Cardenas' 38,420-sf lease and Pricewaterhouse- Coopers' 28,763-sf lease at the Offices at Four Seasons Hotel and Tower on Brickell Avenue, according to Cushman & Wakefield.

"With new product in the CBD substantially preleased and fewer sublets available, most of the submarkets within the Miami area will continue to see a reduction in vacancy," Alvarez says.

Industrial Sales Increase

After several years of little investment activity, Miami's industrial market, particularly the Airport West submarket, is seeing substantial sales volume, says Scott Sime, CB Richard Ellis' managing director of industrial services. Approximately 10 percent of Airport West's 60 million sf traded hands in fourth-quarter 2003 and first-quarter 2004, which represents huge institutional investor confidence in South Florida's industrial sector, he says.

For example, PS Business Parks purchased the 3.4 million-sf Miami International Commerce Center from Heitman Capital Management for $5 million more than the asking price; the sale generated more than 20 offers from a "who's who of industrial investors," Sime says. Other major sales include Keystone Property Trust's acquisition of the 1.7 million-sf International Corporate Park from the Easton Group for $114.4 million and Principal Financial Group's $45 million purchase of 709,000 sf at Dolphin Commerce Center.

The heightened sales activity is occurring despite a flat leasing market. For instance, MICC was only 82 percent occupied when it traded, Sime says. First-quarter lease rates increased only 10 cents to $5.78 psf from year-end 2003, according to CB Richard Ellis. Due to the area's physical limitations the Atlantic Ocean to the east and Everglades to the west the amount of developable industrial land is almost depleted. Approximately 605,000 sf of space was completed in the first quarter, 68 percent of which is occupied. The slow construction pace is helping the market absorb excess space; nearly 150,000 sf was absorbed in the first quarter, compared to first-quarter 2003's negative 700,000-sf absorption, according to CB Richard Ellis. By year-end, lease rates and activity should experience modest growth, Sime says.

Gretchen Pienta

William T. Adams, CCIM, CRB, is owner of Adams Realtors in Atlanta. Contact him at 404.688.1222 or wtadams@ccim.net.Gretchen Pienta is associate editor of Commercial Investment Real Estate.

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