A 'Choppy' South Florida Office Market Sees Sales Volume Fall As Prices Rise

After years of avoiding the swells belting office space across the country, South Florida is starting to see a few whitecaps.

The region has mirrored the steep decline in the number of office building sales as the rest of the country, falling 54% through the first three quarters of this year compared to the same period last year, according to Cushman & Wakefield data provided to Bisnow.

But the price of the sales has defied gravity, holding steady above pre-pandemic levels as institutional owners have sold off high-performing assets in one of the few markets nationally that is still drawing interest from buyers — without having to accept huge discounts.

“This is typical of every one of these cycles, where often you have to get rid of your most beautiful and treasured real estate because that's how you create liquidity in a time where there is no liquidity,” said Dominic Montazemi, an executive managing director at Cushman & Wakefield who co-leads the firm’s South Florida capital markets team.

“You're going to see assets come out in South Florida, basically, to pay bills elsewhere.” 

South Florida saw 12 deals close in the first three quarters of this year, compared to 26 trades over the same period in 2022. But what limited activity there has been has been among the priciest assets, rather than distressed trades. South Florida offices have sold at an average of $347.13 per SF year to date in 2023, a slight dip from last year but far above the $242.76 average price of 2019, according to C&W data.

The upward momentum on pricing stands in contrast to struggling office markets like New York City, which saw its average price per SF fall 41% in the third quarter from the trailing four-quarter average, according to Avison Young data.

Two Miami properties under contract and expected to close before the end of the year would alone total $332M. If those deals close, the fourth quarter would outperform seven of the last eight quarters in terms of dollar volume on transactions even as the number of transactions remains stunted.  

“Smaller, all-cash transactions are happening, and you're seeing a lot less transactions, but they seem to be really big and really small,” said Mark Rubin, an executive vice president at Colliers and member of the firm’s South Florida investment services team. “The middle has kind of gone away.” 

The data reflects a market caught between macroeconomic trends — primarily the increased cost of lending as a result of higher interest rates — and a sense that South Florida has until now avoided the office market pressures plaguing major markets like New York and San Francisco.  

“The bidding pool today is a function of a lack of liquidity, not a function of office demand by investors,” Montazemi said. 

A combination of limited debt availability and high-interest rates is keeping public and institutional investors on the sidelines. Only one of the 12 South Florida properties that sold through the third quarter was purchased by an institutional investor, but even that sale could be classified as a private acquisition. 

Ken Griffin, the head of Citadel, paid $83M for a 49K SF Palm Beach office building in July — a spokesperson for the hedge fund told Bisnow that the deal was executed by Griffin, and not his firm. 

“There is liquidity for office, but it's significantly reduced to those that are fortunate to be in a position where they don't have legacy assets that they're dealing with and they have raised capital and can take advantage of market timing,” Montazemi said. 

Institutional investors have instead recently become the main class of sellers in the South Florida region. The two other office buildings that traded in the third quarter were both high-quality assets in the wealthy enclave of Coral Gables sold by institutional owners. 

PGIM, the investment management arm of Prudential Financial, sold a Class-A office tower at 355 Alhambra Circle for $90M in September to Princeton International Properties Corp., a private investment firm based in New York.

A month earlier, a fund managed by Deutsche Bank shed a 220K SF office building a few blocks away at 255 Alhambra Circle to a trio of Miami firms that paid $54.4M for the property, a $5.5M markdown from the fund’s acquisition in 2006.

Nuveen, the investment arm of TIAA, is also under contract to sell the 695K SF 801 Brickell Ave. tower in a $250M deal that would be the most expensive sale of a South Florida office building this year. 

The price per SF of office assets in South Florida has risen for three consecutive quarters, which is more a reflection of the quality of assets coming to market than continued price growth, brokers said. 

The trend is likely to continue as institutional owners look to shore up balance sheets or raise capital to return to investors, Rubin said, because it’s less difficult to find buyers and protect value in a market like South Florida that saw its perceived value jump during the height of the pandemic. 

“What we’re seeing is kind of a choppy market with selective deals, and if you look at each deal they have a story to it, they weren’t cookie cutter,” Rubin said. “The deals that got done were motivated capital that kind of hung it out because they really needed to. Just your usual buy and sell that you see, all those deals have kind of gone away.”

There are few more motivated sellers than Nightingale Properties. The embattled New York real estate firm is the subject of federal investigations for an alleged fraud of crowdfunding investors, has a deal in place to sell one of the buildings at the center of that scandal in Miami Beach.

Two Miami-based investment firms have the Nightingale-owned property at 1601 Washington Ave. under contract for $80M in a deal that’s expected to close by the end of the year.

The property, the former headquarters of Starwood Capital that has been mostly vacant since last year, was the subject of an $8.8M crowdfunding campaign on the investment platform CrowdStreet that was meant to pay for renovations.

Nightingale CEO Elie Schwartz drained the account and misappropriated investors' cash, according to officials overseeing the ownership entity, which was placed into bankruptcy.

Schwartz reached a tentative settlement with CrowdStreet earlier this week to return investors’ cash for the renovations and a $54M fundraising effort in a failed deal to purchase an Atlanta office complex. CrowdStreet investors in 1601 Washington would be repaid by the sale of that building, according to a filing in bankruptcy court.

The South Florida sales are being executed in a market where interest is strong but limited capital liquidity and the high cost of debt restricts the buyer pool, Montazemi and Rubin said.

In addition to the high-interest rate environment, the market’s perceived resilience has kept asset prices high even as others are trading for a loss. 

Miami-Dade County has seen 1.7M SF of leasing activity through the third quarter, and asking rates for Class-A space were at $57.24, up 7.2% from the previous year, according to data from Cushman & Wakefield. Annual leasing activity in Broward and Palm Beach Counties both topped 1M SF in the third quarter and both markets also saw modest increases in Class-A rents. 

“Your average investor who has a choice to invest at the returns that are available in South Florida, versus elsewhere in the country, are actually taking their money elsewhere in the country because there's better buying opportunities,” Rubin said.

There are, however, signs that the market is cooling. Year-over-year leasing activity has seen a steep decline from 2022, with a 39.8% drop-off in Miami-Dade County.

A slowing pace of leasing activity and rent growth is now combining with limited capital availability and few comparable sales to create a market where price discovery is fluid. Rubin said he has seen rising interest from institutional owners to shed assets, but added some are quietly bringing properties to market and finding that offers aren’t matching their expectations, if they even come in at all. 

“There's a lot of institutional sellers who kind of put their toe in the pool, off-market or on-market, and then did calls for offers and didn't like what they received and said, ‘You know what, thanks for that market, you gave us an assessment of how you're viewing our asset, but we're still going to hold it,’” he said.