The Fort Lauderdale office recovery continues. Early on, employment growth was supported by gains in the low wage sectors, but recent growth in white-collar jobs like the Professional and Business Services sector should continue to drive office demand for the next few years. Vacancy, at about 8.6%, is on par with rates in Miami and Palm Beach, but landlords have been able to maintain much stronger rent growth here. Part of the reason fundamentals has been so sound is the relative lack of building. Since 2010, metro deliveries have amounted to less than 15% of the historical annual average. These conditions have enabled significant price appreciation and sales volume, though activity has cooled off.
After years of vacancy compression, fundamentals have recently loosened. A large move-out caused negative net absorption in 18Q1, but there is no cause for alarm. American Express relocated its headquarters from 777 Center to its brand-new 400,000 SF asset in Sunrise, which completed in early 2017. The new $200 million regional headquarters will house about 3,000 employees, many of them relocating from the company’s existing offices in Plantation, Miramar, and Miami. The company’s old headquarters is planned to be converted into apartments in early 2019. Vacancies are still below the national average, at 8.6%.
This metro draws outsiders with rents and business costs that are cheaper than those of nearby Miami. Despite the recent increase, vacancies have improved dramatically over the cycle. During the recession, rates approached 23% for 4 & 5 Star space and are now closer 15%. Outside of the American Express move-out, Fort Lauderdale has enjoyed strong demand over the last two calendar years, absorbing more square feet than Miami.
Leasing has picked up, and most large leases signed in the last two years have been for spaces in Sawgrass and Plantation. One of the past year’s largest deals was for Centerfield, a sales and marketing company that signed a five-year lease for four floors of the Jacaranda Park of Commerce in Plantation. In another notable signing, Sheridan Healthcare took more than 85,000 SF in a recently renovated 3 Star space, also in Plantation. Submarkets in the southernmost part of the metro seem to maintain the lowest vacancies, perhaps due to the proximity to Miami-Dade. The Sawgrass Park Submarket also contains a large office node near the junction of I-75 and I-595 that experiences a lot of lease signings.
Downtown Fort Lauderdale office market is also seeing stronger leasing activity, and is beginning to attract tenants from outside the state, as evidenced by the recent lease of about 60,000 SF by electronics company Kemet, who relocated their headquarters from Greenville, SC to the 1 E Broward building.
Rent growth remains strong, with vacancy near a cycle low. While growth has remained flat over the last year, it is still strong, at about 5.4%. Additionally, a lack of supply has generated greater competition for space, and landlords have been able to negotiate higher rents as a result. Even with significant growth, rents should remain below or just near the national average for the near term. Rents are unlikely to surpass rates in neighboring Miami, keeping Fort Lauderdale viable as a less-expensive alternative.
While construction has started to pick up, it is still low compared to historical averages. An average of about 300,000 SF has been built each year since 2010 which is about a fifth of last cycle’s average. New projects are evenly dispersed around the metro, with new towers being added in Southwest Broward, Northwest Broward, and Downtown. Almost 1 million SF has been built since the beginning of 2017, and new supply has absorbed well. Butters Realty & Management built an 87,068-SF building at 220 Hillsboro Technology Drive at the end of 2017. As of 18Q4, the building was about 90% leased. One of the largest projects to deliver in 2017 was American Express’s new 400,00-SF, Class A office that was built at the beginning of 2017. American Express moved out of its older, Class B building at the beginning of 2018. The building is planned to be redeveloped into a multifamily complex. Close to 1,100,000 SF is under construction in the metro, and a majority of the space is Downtown. One of the largest projects underway is the 400,000-SF office development that is part of The Main Las Olas, a mixed-use development that will also include 341-unit apartment units and ground-floor retail space. This project is being developed by Stiles Realty and should deliver by the end of 2020. The 550 Building has broken ground and is expected to deliver almost 100,000 SF of speculative space in late 2019. It will be the largest new office tower in Fort Lauderdale since the 200,000 SF AutoNation building opened in 2008. The seven-story property will also feature 20,000 SF of ground-floor shops and restaurants.
Pricing gains appear to be slowing but have been strong for most of the cycle. So far this cycle, investors have targeted assets in Downtown Fort Lauderdale as well as larger, high-quality space in or around the many suburban office parks in submarkets like Southwest Broward, Cypress Creek, and Sawgrass Park.
Many trophy assets (4 & 5 Star buildings over 200,000 SF) have traded multiple times this cycle and have seen strong gains. In October, 1 East Boward, a 351,705-SF office building, traded for $109 million, or about $308.50/SF, to NAI/Merin Hunter Codman, Inc. This is about more than double the price that the sellers, Ivy Realty, paid for the asset in 2011. The Sawgrass Lake Center sold to American Realty Advisors for $57.4 million, or $240/SF, in March 2018. The property was 80% occupied at the time of sale and sold for $189/SF in 2013.
After a significant drop in annual employment growth from 2017-18, Fort Lauderdale’s gains are outperforming the national average. Like all of South Florida, Fort Lauderdale is benefiting from sizable population growth, which will help maintain job growth in the education and health services sector. The metro has a higher-than average concentration of jobs in the professional and business services sector. Growth in these white-collar jobs has outpaced the national average over the last 10 years and is expected to continue to do so. Notably, office jobs account for a slightly higher concentration of employment in Fort Lauderdale than they do in the Miami metro. The Fort Lauderdale economy also benefits from Miami’s tourism spillover, and the area provides advantages from a white-collar office-market perspective. The costs of doing business are no less than the national average, but the more meaningful comparison is with nearby Miami. Fort Lauderdale’s business costs are more than 10% lower than Miami’s, making it a more affordable alternative that still presents many of the global connection perks of occupying space in South Florida.
Source: This is an excerpt from a CoStar Copyrighted report licensed to Diaz Commercial – 545617.