South Florida’s office market experienced an uptick in investment sales over the past year, marking a comeback after a slowdown. Yet, distress and discounted deals are lingering, as elevated interest rates and other economic headwinds remain.
Deal volume reached nearly $2.2 billion in the tri-county region in the 12-month period that ended Sept. 30, marking a 28 percent increase from the same period last year, according to data from CBRE. It also is a nearly 100 percent boost from the $1.1 billion sales volume during the 12-month period that ended Sept. 30 2023, when investment sales hit their lowest point in the past five years, the data shows.
Deal volume is nowhere near the apex it reached during South Florida’s pandemic-era market boom when out-of-state companies leased big blocks of space, prompting record rents and an investment sales bonanza. In the 12-month period that ended Sept. 30, 2021, $3.9 billion in deals closed, according to CBRE.
“It’s definitely gotten better than it was two years ago. It will come back like a Phoenix,” said broker C. Todd Everett of Lee & Associates. There’s “starting to be an appetite for office.”
Financing, which dried up during the climate of higher interest rates in recent years, is slowly coming back. Commercial mortgage-backed securities and debt funds are back into office lending. Life insurance companies and pension funds are slowly coming back, and banks remain the most skittish office lender, experts said.
“The big banks are willing to selectively do high-quality office properties, and the local and regional banks are now making some office loans, and it’s very borrower specific,” said Chris Lee of CBRE. “They might want to see deposits increased by the borrower, and some recourse worked in.”
Loan spreads, or the lenders’ profit margins, have decreased, and loan-to-value ratios have only slightly budged, Lee said.
This year, several all-cash deals were recorded.
Spanish billionaire Amancio Ortega, known for buying all cash, paid $274.4 million last month for the 30-story Sabadell Financial Center at 1111 Brickell Avenue in Miami. Generally, cash buyers are able to negotiate a better price because sellers prefer to avoid the uncertainty of financing.
Troubles persist
Distress still appeared in South Florida. R&B Realty parted with its Gateway at Wynwood building, which the firm completed in 2021 and this year lost in foreclosure.
Yet, others were able to stave off losing their buildings in foreclosure auctions. Chris Neilson, court-appointed receiver overseeing Coral Gables’ Columbus Center, sold it in March for $76 million, after previous owner Affinius Capital was hit with a foreclosure suit over an allegedly delinquent $71.6 million loan.
Orlando-based Foundry Commercial sold the six-story Sawgrass Lake Center at 13450 West Sunrise Boulevard in Sunrise for $36.5 million in January, marking a 36.4 percent discount from its 2018 price.
In May, Boston-based Rockpoint, Miami-based Tricera, Palm Beach-based NDT Development and Boston-based New England Development sold the 18-story One Clearlake tower at 250 South Australian Avenue in West Palm Beach for $45 million. That’s nearly 26 percent less than their purchase price four years ago.
Landlords selling at a discount and even those just breaking even likely are trying to wiggle out of debt woes.
“The trades you are seeing in the market are largely due to debt maturities,” said broker Douglas K. Mandel of Marcus & Millichap. “If you put floating-rate debt on loans [issued] in 2022, I think you are in a bad situation. … They are kind of forced to make a decision, whether they put new equity into a deal, or they sell it.”
But, he cautioned, a discounted sale “isn’t the end of the world” and doesn’t signify widespread distress. The current climate also allows investors to have more buying power and afford higher tier buildings than they generally would have purchased, Mandel said.
That’s why private investors and family offices permeated the buying pool during the slowdown in recent years. Institutional investors, which generally steered clear from office buildings in the past two years, are returning, albeit slowly.
After the Federal Reserve imposed 12 aggressive interest rate hikes in 2022 and 2023, it twice dropped rates by 25 basis points this year. But this isn’t enough to make a difference for landlords with floating-rate debt or seeking to refinance, experts said. The 10-year Treasury yields, which dictate rates on fixed-interest loans, remain higher.
Due to the higher cost of capital, prices remain somewhat lower, but that pressure is easing, experts said.
“I don’t think we are going to see ‘21 prices soon,” Lee said. “But we are absolutely above ‘23 pricing.”
