On a recent visit to New York, Todd Rosenberg tested lenders’ appetite to bankroll his planned purchase of a trophy Sunshine State office tower.
He expected a slam dunk financing deal. After all, Rosenberg isn’t betting on any office market but on the it office market: South Florida.
The ballyhoo over corporate newcomers to the tri-county region has reached a near-deafening pitch. Elliott Management. CI Financial. Founders Fund. Atomic. OpenStore. Vibrant Capital Partners. And, of course, Ken Griffin’s Citadel. They are among the high-profile companies making splashy expansions or relocations to South Florida over the past two years.
As the U.S. office market’s vibrancy remains in question amid patchy returns to cubicles, South Florida has emerged as an unexpected outlier, nabbing tenants fleeing high-tax states. Rents at glitzy towers have reached a new local high of over $100 per square foot, and formerly off-the-radar areas have gained national recognition. Case in point: Downtown West Palm Beach is recast as the “Wall Street of the South.”
By all means, what lender wouldn’t want to bet on South Florida offices?
As Rosenberg learned, the leasing frenzy is not enough to offset high borrowing costs precipitated by the Federal Reserve’s interest rate hikes. And many financiers now have stepped back from office lending altogether. No exceptions. Not even for South Florida.
“You do have a situation where a lot of institutional capital just makes a macro decision,” said Rosenberg, co-founder of Boca Raton-based Pebb Capital. “And they throw the baby out with the bathwater.”
In the ensuing quandary, owners and potential buyers have been unable to see eye-to-eye on pricing. It has led to a slowdown in sales, and prompted sellers to take properties off the market, according to brokers. While sellers expect plump payment for their buildings due to tenant demand, buyers who have to borrow at high interest rates can’t meet the prices.
“The last few months,” said Dominic Montazemi of Cushman & Wakefield, “have been particularly tough for sales.”
In the first half of this year, Miami-Dade County office investment sales reached $740.6 million, largely bolstered by Citadel’s $286.5 million purchase of 1221 Brickell. That represented just 39 percent of last year’s total deal volume, according to Avison Young.
From the first quarter to the second quarter, Broward County investment sales dropped 74 percent to $320 million, and Palm Beach County’s dropped 55 percent to $632 million, Avison’s reports show.
Properties were put on the market early this year, only to be taken off over the past four months once the bid-ask gap became evident. Among them: the 110 Tower near downtown Fort Lauderdale, according to sources. IP Capital Partners, a co-owner of the tower, declined comment.
Fort Lauderdale, however, is not the epicenter of the new-to-market company influx. Many firms are opting instead for West Palm Beach and Miami.
Wynwood is now portrayed as the “Silicon Valley of the South” and Brickell is essentially becoming not only a financial mecca but also Griffin and Citadel’s domain. So investment sales there surely won’t feel the sting of high borrowing costs, right?
Not so.
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The Sabadell Financial Center at 1111 Brickell was taken off the market this year, sources said. This, even though the tower reaped its own bonanza from the influx of Northeast firms. Billionaire Israel Englander’s New York-based hedge fund Millennium Management took 74,000 square feet. KKR, which co-owns the building, declined to comment.
In Wynwood, brokers consistently boast about quick office lease-ups and bemoan the lack of available space due to incessant demand. Yet, The Gateway at Wynwood building was put on the market in the second quarter and taken off mid-summer.
“The value was not appreciated in today’s market,” said Shelby Rosenberg, of R&B Realty Group, which developed Gateway.
His strategy reflects that of many others who opted to take their buildings off the market: Keep leasing and bet that the high costs of materials and labor, as well as of construction financing, will preempt office development, keeping supply tight. Then, test the sales market again.
“We felt that there is not going to be an oversupply in the coming months, and that bodes well for an asset that is complete and [located] where the demand is still high,” Rosenberg said. “There’s better value tomorrow.”
Bridging the gap
Exactly when this “tomorrow” of higher valuations and closing of the bid-ask chasm will come remains unclear. Some brokers are betting on a pickup in sales in the fourth quarter, and others expect it early next year.
As the Fed signals more interest rate hikes this year, trade activity will depend on whether higher rents will be enough to balance buyers’ borrowing costs.
Across Miami-Dade County, asking rents climbed 8.7 percent, year-over-year, to $47.65 a square foot in the second quarter, according to Colliers. In the first half of the year, almost 3 million square feet of office space was leased.
That is the “tip of the iceberg,” said Chris Lee, of CBRE, as more tenants are on tap.
“We are coming to a point where the rise in rents is offsetting the rise of interest rates,” he said.
But J.C. De Ona, president of Centennial Bank’s Southeast Florida division, isn’t seeing it yet. Plus, “not every property is going to see some of these record-breaking [rent] numbers we have seen in Brickell and West Palm Beach,” he said.
South Florida commercial real estate in general remains a hedge against inflation, which bodes well for an uptick in office sales, said Charles Foschini of Berkadia. Buyers who can purchase with cash have nothing stopping them.
As for Rosenberg, his Pebb Capital isn’t giving up on its planned office building purchase.
Pebb, which negotiated down the original price that was set prior to the summer, is looking at putting in more equity to reduce the level of debt, Rosenberg said.
During his early September trip to New York, it became evident that higher borrowing costs aren’t as much of an issue as lenders’ blanket decision to recede from office lending, even when Rosenberg explained South Florida is an anomaly market.
“So the individual person I am speaking with gets it,” Rosenberg said. “But it’s out of their hands.”