Miami's office market, once thriving, now faces challenges as its tallest planned tower struggles to secure tenants

The complexities encircling One Brickell City Centre, set to be Miami's tallest corporate tower at around 1,000 feet, illustrate the shifting dynamics in the city's once-booming office market.

Developers Related Cos. from New York and Swire Properties, an international firm founded by the British Swire family, are grappling with securing an anchor tenant nearly a year post groundbreaking. Related is in the process of restructuring its agreement with Swire, the landowner, as per sources familiar with the matter.

Swire has explored various avenues, including the potential sale of the 1.55-acre downtown Miami site, according to a document seen by The Wall Street Journal. However, Swire clarified that the site, including One Brickell City Centre, is currently not up for sale. Related stated that it remains committed to collaborating with Swire on the project.

The U.S. office market has faced challenges due to rising interest rates and the adoption of hybrid work models. Despite this, Miami has historically fared better than many other cities due to consistent corporate relocations and a controlled supply of office spaces.

Miami's unique position is beginning to erode. Leasing activity in the Miami office market declined by 25% last year compared to 2022, as reported by JLL, a commercial real estate services firm. Additionally, sublease vacancy surged by 66% by the end of the year, indicating a desire among current tenants to reduce their office space.

Steven Hurwitz of JLL noted, "There’s a slowdown of new-to-market activity," suggesting that Miami has reached a new inflection point.

Juan Arias, director of market analytics for CoStar in South Florida, observed a slowdown in office construction starts after a peak in the second quarter of 2023. This decline is attributed to various factors including higher interest rates, increased costs for construction materials and labor, and decreased leasing activity amidst a softer economic environment.

"The office boom is slowing down, and new company relocations are also slowing," observed Arias.

Miami is undergoing a transformation, shifting from an economy traditionally focused on leisure and tourism to positioning itself as a burgeoning business and financial hub. Despite this shift, the city has achieved notable successes, drawing in financial and technology firms from the Northeast and other regions of the country.

Single-family home and rental prices have surged in Miami more than in most other areas, alongside soaring property insurance costs. These trends complicate the relocation process for potential employees, while executives moving to Miami find top private schools at full capacity.

Despite these challenges, Miami's office market remains resilient. It closed last year with the highest annual office rent growth among major U.S. markets. Additionally, its annual net absorption, measuring tenants moving in versus out, ranked third nationwide, with over 500,000 square feet of occupied space. Miami boasts one of the lowest office vacancy rates in the U.S., standing at 8.4%.

Stephen Ross, the chairman of Related, has recently shown increased interest in new South Florida projects. One such project is One Brickell City Centre, a towering structure spanning 1.5 million square feet with 68 floors. During the groundbreaking ceremony, Ross described it as "the most important project in Miami," while Swire president Henry Bott envisioned it as "a beacon" for the city, complete with outdoor terraces on nearly every floor.

Ross had ambitious plans to attract prominent tenants to the tower, slated for completion in 2028. There were discussions between Ross and Ken Griffin about relocating Griffin's hedge-fund firm Citadel to the site, according to insiders.

In November, Ross and Griffin appeared to strengthen their connection further, this time through a shared interest in football. Griffin was reportedly in talks to acquire a minority stake in the Miami Dolphins, of which Ross is the majority owner.

The Citadel chief executive is no longer in talks for a stake in the Dolphins. Additionally, his company decided against becoming the anchor tenant at One Brickell City Centre, opting instead to develop the waterfront property Griffin acquired in 2022. Griffin's plans for the site include a luxury hotel atop the office tower.

Source: Deborah Acosta, Wall Street Journal.