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One Flagler

Article from DBR

Nearby, One Flagler at 14 NE First Ave. in downtown Miami plans a condo conversion that will sell its 141,000 square feet to investors, the Daily Business Review has learned. Following a $7 million renovation of the 1952 building, the goal is to sell office suites at $285 per square foot, according to a broker arranging the marketing.

Fabio Faerman, commercial division vice president at Fortune International Realty, told the DBR that investors can expect returns of 4.5 percent from renting the properties. Like Ballestas, he said the influx of money is coming from Latin American and European buyers looking for a cash-producing assets and feeling squeezed by the thin margins on residential condo rentals.

“The condo office product always gets hot when the residential market gets too saturated with product available for sale,” Faerman said.

 
Read full article at: http://www.dailybusinessreview.com/id=1202667920431/Downtown-Miami-Office-Space-Being-Sold-Off-To-Investors#ixzz3BVm3SOtI

Another new year is upon us and, as we do every year, we will look back at the past twelve months and marvel at the swiftness with which they raced by. However, rather than being taken aback by this perpetual occurrence, perhaps it is vital to accept that a year is actually not that long a span of time to begin with.

Through this lens, the upward statistical trends that commercial real estate experienced in 2013 may just be the beginning of strong momentum in 2014 and beyond. This idea is supported through research in a recent article from the Wall Street Journal.

Investment & Leasing Markets

The expectation is that investment sales in the commercial real estate sector will continue to grow in volume through 2014. In 2013, lending actually began to accelerate once again after having stalled in recent years. This along with an increased volume of money flowing to the asset class attributed to the recovery of investment sales. The ball is expected to keep rolling in the coming months and the expectation for 2014 is 10 percent year-over-year growth.

For the most part, the leasing market in the past year has been flat. This has certainly led to some worries of a gap between investment and leasing. However, there are a few indicators that leasing will soon be tipping in the right direction, none the least of which is the strong improvements in occupier sentiment. Corporate profitability is also soaring, specifically in the retail sector where large retailers are having their best year since 2010.

Office Market

We recently discussed the snail-like pace of the office market, but this is a sector that is tied heavily to the tech and energy industries. As those sectors continue their economic growth, we can also expect the office market to make a marked improvement in the coming year. Forecasters expect office rents to grow at about 5.5 percent. Despite this increase, trends in construction are expected to be below average until around 2015. However, in tech and energy heavy geographies, progress is clearly on the horizon for the office market.

Other Factors

Once again, the millennial generation will play a critical role in the improvement that we do or do not see in the coming year. As we know, this demographic holds a special place in their heart for urban environments. Most would project activity to continue to increase in these areas, but this does not spell doom and gloom for the suburbs, though we do expect them to adjust accordingly.

Most importantly, 2014 should see a genuine increase in demand, which is the most important factor for generating sales. The labor market has seen a long and steady pace of moderate monthly job growth. As a result, most industries have recouped job losses from the recession and demand is ready to be stimulated once again.

Lastly, a key contributing factor to the growth in commercial real estate is the accelerated growth in housing. Though the housing market has steadied in the past couple of months, experts had been waiting for a recovery like we saw in 2013 for several years. Continued growth in housing during 2014 will lead to more development, lending, retail and jobs growth.

Envision, if you will, a stadium in Miami that actually manages to represent the luxury that the city has to offer. If you were to do so, you might imagine attending a sporting event in which the vibrant environment is contrasted with a view of the calm waters of Biscayne Bay and nighttime events accentuate the glittering Brickell skyline.

This is also the vision that David Beckham’s group, Beckham Brand Limited, has for their potential Major League Soccer franchise in Miami.

As many local soccer enthusiasts may have heard, the group has been scouting locations for a 25,000-seat stadium for quite some time, with Arquitectonica as the rumored choice to design and plan the project. Though the group has surveyed around 30 potential sites, one has generated enough interest to inspire talks with Miami-Dade County.

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PortMiami has been interested for quite some time in creating a better connection with the mainland

According to the Mayor’s office, Beckham’s group has asked them to consider allowing the stadium to be built in the southwest corner of PortMiami in Dodge Island. PortMiami has been interested for quite some time in creating a better connection with the mainland. A soccer stadium may fit perfectly with their 25-year master plan for the southwest corner that would include a hotel, retail and office space.

25 acres would be available for the group to lease and build on, but the location raises some questions. For one, the port is only accessible through Port Boulevard and the Port Tunnel that is scheduled to open next year. Adding the event traffic to roads already clogged with cruise ship travelers on weekends may add up to a local nightmare. Similarly, the issue of parking would cause a major stir, though the idea to build an underground garage like that of the American Airlines Arena has been discussed.

Either way, the discussion between Beckham’s group and the county has just begun and any plan would eventually require approval from the Miami-Dade County commission. As a matter of fact, MLS has yet to formally announce an expansion franchise for the city of Miami.

However, a professional soccer stadium built with private money could be a boon to the local economy and provide a large opportunity for retail in the underutilized PortMiami area.

This summer, Swire acquired the rights to the 1.5 acre site at 700 Brickell Avenue for $64 million. We all knew that their plans for the property were big. Now it turns out those plans could actually be the largest that Miami has ever seen.

Swire has proposed a project to the City of Miami that, if approved, could end up becoming Miami’s tallest building and easily the tallest project currently under construction in the crane-flooded streets of South Florida. One Brickell CityCentre, the proposed 80-story tower, would be connected to phase one of the CityCentre project in downtown and would be covered by the project’s climate control trellis.

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Rendering of One Brickell CityCentre

Designed by Arquitectonica, the tower would add more Class-A office space, condos, retail and even another hotel to downtown’s development. Upon completion, One Brickell CityCentre would be seen as the gateway to the entire mega-project. The tower would be built not only on the 700 Brickell site, but also on the Eastern National Bank building property that Swire acquired in 2011 for just over $13 million in 2011, combining for a total of 2.7 acres of land area ready for development.

Swire has estimated the total economic impact of One Brickell CityCentre at $851 million. The project would create over 2,000 construction jobs at peak manpower and nearly 2,500 permanent jobs once it is completed according to an analysis by the Miami Economic Associates. They also project the tower to bring in over $137 million in sales tax to the state of Florida.

The hope for Swire is that the city will approve One Brickell CityCentre as an extension of the current project. If this were to happen, it would save them the trouble of going through a new grueling approval process with the City of Miami. Phase one of the Brickell CityCentre is still currently set for completion in 2015.

“A planned passenger rail service would be an ideal way to link the nation’s most visited city with Florida’s gateway city for business and leisure travel.”

This is the sales pitch to citizens that can be found on the website for All Aboard Florida, the new railway project that hopes to create an Orlando-to-Miami passenger train service. The train would provide the vital mass transit that so many have longed for in this large state. Stops would include Miami, Fort Lauderdale, West Palm and, of course, Orlando.

The project would create tens of thousands of jobs, not only in the railway industry, but by connecting major cities and granting Floridians more flexibility to travel to work. However, another industry that would benefit greatly from All Aboard Florida is commercial real estate.

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Rendering of All Aboard Florida train

All Aboard Florida is currently in negotiations with Miami’s Community Redevelopment Agency to acquire land in downtown Miami to build a large transportation hub. As a matter of fact, a compromise was reached yesterday and is currently awaiting approval from the county. The transportation hub would include restaurants, retail, office space, and residential apartments.

Commercial real estate is extremely important to revenues for All Aboard Florida. The project will dedicate $325 million to develop about 1 million square feet of commercial real estate. They are expecting a yield of around $35 million in rent.

The money being put into the $2.4 billion project by All Aboard Florida will amount to about $125 million, or around 5 percent of total costs. A large sum of the money will be provided by institutional investors, paying up to $600 million for a preferred investment. The organization is counting on the federal government to play a part in the development as well. All Aboard Florida is expecting a federal loan to aid them with the $1.5 billion in infrastructure costs.

The next step for All Aboard Florida would be the most important, bringing in revenues through ridership. All Aboard is currently projected to attract 4 million riders by 2018, a mark that took the Tri-Rail service about two decades to hit. If All Aboard Florida can achieve these numbers, it would yield a return of $785 million.

As we have previously discussed, the South Florida market is, for better or worse, in the midst of a development boom. The origins of this boom, however, may not be coming from the community itself. More and more it seems as though foreign buyers are the ones leading the climb back to prosperity for South Florida’s real estate market. Cash buyers from Brazil are at the top of that list.

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The Miami Tower shining for Brazil

In 2012, approximately 690,000 Brazilians visited Miami and injected $1.5 billion into the local economy. Brazilians officially overtook Canadians as the city’s top international tourists and, more importantly, the top international buyers of Miami real estate. This feat was made possible by the 123 weekly flights between Brazil and Florida, a number which is expected to continue rising before the end of the year.

Another factor that continues to stimulate Brazilian tourism in Miami is the extremely favorable exchange rate. What does this mean for those looking to invest in Miami’s recovering real estate market? For the same price of a property investment in Miami, buyers would end up spending nearly three times as much in Sao Paulo or Rio de Janeiro. Ironically, Brazilian buyers may have been driven to South Florida’s real estate market after the global crash in order to take advantage of softer pricing.

Not only did Brazilians lead the pack amongst foreign buyers of real estate last year, according to the Miami Real Estate Agents’ Association they represented 6 out of 10 foreign buyers. A good portion of the buyers (41.9 percent) intend to use their property as a vacation home for themselves and their families. On top of that, 78 percent of Brazilians paid for their property in all cash purchases, a trend that may prove troublesome for U.S. tax authorities in Brazil.

Brazilians have created a massive trend of investment in the South Florida real estate market, not simply because of the previously mentioned factors, but also due to their close-knit culture. Local brokers that have worked with Brazilians claim that if you can sell to one, you can sell to more, given that they tend to enjoy living near one another. This characteristic makes Brazilians a truly great friend for the South Floridian economy.

In the United States, office occupancy growth and rental rates saw some progress in the 2nd quarter. Office rents experienced a 2 percent increase in the first half of the year. While still not ideal, it is more momentum than was seen in the first half of 2012 when rents increased by 1.7 percent. The increase in rent should lead to stronger net operating income for investors in office properties as leases expire and are renegotiated at the current higher rates.

National office vacancy also inched closer to 12 percent in the previous quarter. On a more local level, 61 percent of U.S. submarkets have seen a decline in vacancy rates. Over the past year, national vacancy has moved from 12.7 percent to it’s current state at 12.1 percent. The positive news is that it is heading in the right direction, closer to the 11 percent mark needed for a healthy office vacancy rate. However, at the current pace, most forecasters do not expect that mark to be reached until around 2016.

On the downside, there are also several negative indicators for the office market. For example, the historically low rates of new office construction, which most believe are assisting in the decline of the national vacancy rates. Once the demolition of obsolete office space is factored in, net office completion only grew by 5 million square feet or 0.06 percent of nationwide office inventory. Demolition of office space is also playing a role in the decline. The country has seen a decrease of 80 million square feet in office inventory.

If the office market does see a pick up in activity any time soon, the key factor will end up being the jobs recovery. While corporate profits have seen all-time highs, companies have been adding more workers, which means that they will soon need to start leasing more space. An initial worry we had when discussing the challenges of the office market was that the modern worker would not commute to an office, but instead work from home as an independent contractor. For now, however, office-using employment growth has been outperforming the results of the broader job market.

For more on the current office market, take a look at this piece by Mark Heschmey in which he discusses some road blocks to closing deals on office investment properties.

The economic data is in and things are just heating up. In May of 2013, prices in the commercial real estate sector continued building on a strong recovery according to the CoStar Commercial Repeat-Sale Indices (CCRSI). According to CoStar, the indices measure the change in prices by using a repeat sales methodology. Simply put, when a commercial property is sold, the indices calculate the difference between that sale and the previous sale of the same property.

However, there are several indices used to give a clearer picture of the environment in commercial real estate. This past May, commercial real estate saw price growth across the board.

Beginning with the value-weighted U.S. Composite Index, a measure which is influenced by the fewer, but larger commercial real estate transactions. In May, the value-weighted index saw an increase of 0.7 percent, but that does not tell the entire story. From the low point of the index in 2010, the measure has increased by 41 percent. That’s a rate of about 3.4 percent per quarter.WEB-SoldSign-SubjecttoContract-WP_304

The other important measure in the CCRSI report is called the equal-weighted U.S. Composite Index. This measure is the counter-balance to the value-weighted, as it is heavily influenced by many smaller magnitude commercial sales. The equal-weighted index increased by 2 percent in May, bringing the measure to a 10 percent increase from it’s bottom in 2011. With this strong May number, there is reason to remain hopeful that this index may just be hitting it’s stride.

The second quarter of 2013 has also been extremely strong for Net Absorption, which measures the change in space for the three main commercial sub-categories: office, retail, and industrial. This measurement, however, has been strong for the past three years, indicating that the fundamentals of commercial real estate may be stronger than previously perceived. The investment grade, a part of the equal-weighted index that measures upper-middle tier properties, also grew by 2.6 percent in May and by 24.6 percent since a 2009 trough.

Perhaps the most optimistic data comes from the decline in distressed sales. No measurement points more strongly to a fundamental commercial real estate recovery. In April and May, properties sold at distressed prices decreased to 14.1 percent, this two-month average is the lowest it has been since 2008. Less properties sold at distressed prices indicates that prices are moving in an upwards direction, giving both buyers and sellers the necessary confidence to achieve stronger deals.

As those in the market continue to remain weary of economic headwinds, the data is pointing in the right direction. With rapid increase in prices, a bigger fear could possibly be pricing certain buyers out of the market. However, the fundamentals of the commercial real estate sectors are strong for the moment and the momentum seems to be in our favor.

With the pace of development rising and home prices ticking upwards, it seems we may finally be reaching the light at the end of the tunnel for real estate markets. However, a failure to acknowledge future problems will only lead to more of the same. In an article for the National Real Estate Investor, David J. Lynn, Ph.D. discusses the following two issues facing commercial real estate in depth.

The Modern Office Space

Technological advancements have clearly redefined the structure of the typical office. As employees have gained the ability to connect to their clients, co-workers, and supervisors through various electronic mediums, the need for cubicles and offices has dwindled. Lynn cites CoreNet Global, stating that dedicated space per office has reduced to 176 sq. ft. in 2012 from 225 sq. ft. in 2010.

Beyond this, technological advancements have raised questions about whether employees even need to commute to their office. There has been a rise of independent contractors working from home and participating in meetings and conferences through virtual means.

Businesses that do encourage their employees to work from the office have also changed their way of thinking. The traditional cubicle setting has been exchanged in favor of more open space, giving employees the flexibility to move around and collaborate with each other.

Investments must be adjusted accordingly from the traditional office space to the more progressive, technology-friendly settings in order to move with the times. As of now, however, there is a fear that office space could be facing a grim future.

The ‘Echo Boomers’

From 1982 to 1995, the baby boom generation spawned a new large group of young people now known as the “echo boom” generation. This group of young adults is ready to move out and create a huge impact on the national economy through demand for housing.

The problem seems to lie in the fact that the echo boomers are leaving their homes for more urban areas. This is due to a variety of reasons including the vast nightlife, amenities, and restaurants offered by cities. However, this phenomenon is mostly due to the increased employment opportunities that cities provide in comparison to suburban areas. Echo-boomers are even willing to trade size of residence for proximity to these locations.

The echo boomers are not necessarily dependent on motor vehicles. They enjoy walking, riding bicycles, and even mass transit. Echo boomers are also not looking to buy homes, but choose to rent instead. These characteristics all make the city more appealing than the suburbs for the echo boom generation.

As there is increased demand in these urban areas, the suburbs will begin to see bumps in the road. Demand for housing and/or retail space will very likely decline and tax revenues will shrink. Lynn suggests that suburbs take action to modernize by investing in mass transit, parks, and other ways to create more urban surroundings in hope of attracting future generations.