CLIENT NEWS: OFFICE REVIVAL Owners Upgrade Workplaces to Attract more Companies
September 9, 2024Ask real estate insiders what the most challenged sector is now, and most would say office due to the advent of remote and hybrid work schedules.
But that hasn’t kept some investors from going all in and funding pricey upgrades for office buildings to lure tenants willing to pay top-dollar rents.
The strategy has already proven successful in some South Florida buildings. And while more office investors have taken notice, not all buildings are suitable for costly renovations.
Most office markets nationwide are in dire straights, with the value of downtown office towers plummeting more than 50% in major cities. Yet, the scenario is quite different in South Florida due to the onslaught of companies and executives migrating to the area since the onset of the Covid-19 pandemic.
That’s not to say there aren’t offices in the region that have lost value. But there’s also real opportunity to attract companies that continue to relocate here – if landlords can manage to impress those discerning tenants.
The pandemic’s impact on South Florida’s office market
For example, Houston-based Parkway purchased Sabadell Financial Center at 1111 Brickell Ave. in Miami in partnership with KKR in 2018, with Parkway pouring millions of dollars into upgrades.
During the pandemic, when many companies were looking to leave more restrictive states for Florida, 1111 Brickell rolled out a renovated 26,000-square-foot outdoor amenity space, a high-end coffee bar, a concierge desk, a Carrot Express and an enhanced fitness center, said Phil Marchese, Parkway’s senior managing director. It also enhanced the technology to boost cellphone connectivity throughout the building.
Occupancy at 1111 Brickell went from the low 80s at acquisition to 98%, with new tenants including Millennium Management, he said. Its rent shot up from $45-$50 a square foot to $98-$110 a square foot today, he added.
“There was a huge lift in rent in the Brickell market as a whole, but those who pushed the envelop for rents were those who renovated,” Marchese said.
While a near doubling of rent may be tough to swallow for some companies, Marchese said those that prioritize employee retention and recruitment see the return on investment of creating office spaces that employees enjoy. Many of the companies moving to South Florida are in finance and technology, fields where well-paid skilled personnel are crucial.
“Rehiring and training is expensive,” Marchese said. “If I can mitigate that cost by having a premium work environment that is helping people get back into the office, I am willing to pay a higher price for it.”
South Florida’s hospitality industry bolsters office market
Robert Rivani is best known for hospitality investments through his firm Black Lion. Now, he’s bringing upscale hospitality to the office market.
Black Lion purchased the office building at 1691 Michigan Ave. in Miami Beach for $62.5 million in April and announced plans for $50 million in upgrades. To be unveiled as The Rivani, the building will establish a higher standard for offices called Class X, Rivani said.
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“It was a great opportunity, when everyone is running away from office and working from home, to reimagine the entire office building by making it something special and unique,” he said. “We are creating hotel amenities in an office building that is really targeting the 1% of the 1%.”
The Rivani would include a full-time valet, a full-time hospitality-style concierge, a 4,000-square-foot health and fitness center that accepts outside personal trainers, a salon, a sauna, a steam room, a massage room, a podcast room, and a speakeasy where tenants can store their own liquor.
Rivani is creating about 15,000 square feet of amenities in the building by converting the third floor, which was previously all office space. While he will forgo charging rent on that floor, he believes the new upscale amenities will result in higher rents throughout the rest of the building to offset the lost rent revenue.
Rivani is also building about 10,000 square feet of spec suites with high-end finishes similar to those in a luxury condo unit, such as custom kitchens.
“The plan is to feel like you are in a luxury home verses office space,” Rivani said.
Yet, he’s only making this investment because the building is in Miami Beach, where ultra-wealthy people have homes, and it’s only about 100,000 square feet, so it’s not too big, he added.
Not everyone wants to work in a large office building, as there’s also a growing market for boutique offices that feature more privacy, said Jaime Sturgis, CEO of Fort Lauderdale-based Native Realty.
For example, tenants like having private entrances and more control over operating hours, such as in the evening and on weekends, he added,
Sturgis has converted numerous industrial buildings in the Flagler Village and Progresso neighborhoods into office space. He adds private rooms, conference rooms and furnishings that dampen sound, as noise is often a problem in converted warehouse spacse with high ceilings.
He stresses that the adaptive reuse strategy works best in neighborhoods that are attractive for workers because they have many restaurants and housing options, so areas like Flagler Village are ideal.
“The same business plan here versus 2 miles down the road could have drastically different results,” Sturgis said. “The urban core and emerging markets have outperformed the suburbs. It’s night and day.”
For offices outside urban hubs, one way to boost amenities is by incorporating the office into a mixed-use project.
Adam Starr, senior VP of leasing at Boca Raton-based Pebb Enterprises, said that’s a big selling point for the 214,684 square feet of office space it’s leasing at the ODP Corp. headquarters campus in Boca Raton. In partnership with BH Group and Related Group, Pebb will build 500 apartments, a gym and 42,000 square feet of restaurants and retail.
“The biggest enticement companies are coming up with to get employees to come back to the office is providing amenities they otherwise wouldn’t have at home,” Starr said. “Everything will be close by your building. In the middle of the day, you can have a quick nail appointment or grab a bite to eat.”
CP Group is working on plans to build 1,250 residential units, 140,000 square feet of retail, a hotel and an event center at the Boca Raton Innovation Campus, Managing Partner Angelo Bianco said.
On top of the millions of dollars of upgrades in recent years that added more places for food, gatherings and fitness at BRIC, the mixed-use element will make it a more exciting place to work and increase the restaurants and services within walking distance, he said.
“The office business is becoming a lot more like the hotel business,” Bianco said. “It’s much more flexible and service-oriented.”
Office owners work to elevate the workplace experience
In addition to maintaining a great physical space, offering winning services is a big plus for office landlords.
Blanca Commercial Real Estate helped the owners of the Waterford Business District in Miami enhance services with fitness classes, popular food trucks and shuttle service for workers, CEO Tere Blanca said. It’s completed nearly 1 million square feet of leases there since 2019, and rents have increased.
“We worked with the [landlord] to create the kind of spaces and programming to attract high-quality tenants and keep existing ones,” Blanca said. “Other buildings near the Miami airport were not able to continually drive rents like we have in the last three or four years.”
Providing hospitality-style concierge services can help bring employees back to the office, said Steven Hurwitz, senior managing director with JLL in Miami.
At Citigroup Center in Miami, JLL helped the owners invest $10 million in renovations, including a new lobby, but enhanced services were also crucial. There are QR codes at the outdoor tables that link to coffee delivery orders. Tenants can use the building app to book amenities, order food, get dry cleaning or interact with electric vehicle chargers. A concierge can help them book restaurants and events. They added a valet in the parking garage, plus seating and Wi-Fi connectivity in the elevator lobby.
“We tried to take things typically handled in a commodity fashion in an office building and make them a more bespoke experience,” Hurwitz said. “Those who are not doing this are being left behind.”
Not all South Florida buildings worthy of investment
Many office buildings in South Florida could use some upgrades, but it may not make financial sense to do so.
A lot of it depends on the location of the building and what the best-case scenario is for rent. Pebb’s Starr said some tenants in the Research Park at FAU required $100 a square foot in buildouts, but the rent is only $25 a square foot, so it doesn’t make sense to fund those improvements unless it’s a long-term lease.
“Unless that is a 10-year deal, you can’t justify it,” he said. “You would rather keep the spaceempty and keep the $100 [a square foot] in your pocket.”
There’s a lot of older office stock in Boca Raton, but not all of it can be treated the same way, said Mark M. Rubin, executive VP with Colliers in Boca Raton. Owners of nicer buildings aim to attract tenants in the market for high-quality space by upgrading their buildings and creating move-in-ready spec suites as large as 5,000 square feet. Wealthy company owners relocating from New York and California are willing to pay top dollar for office space, but you need to deliver the quality space and the location they desire, which has been Related Ross’ strategy in West Palm Beach, he said.
However, that’s not the right strategy for all buildings.
“If you have a suburban office building that is locationally challenged without access to amenities, you may just be throwing away money [with upgrades],” Rubin said. “That is not where the high-end tenants want to be.”
On the bright side, those offices may benefit from having mixed-use projects developed in their parking lots, or by being redeveloped entirely, he added. He sees the trend playing out in Boca Raton, Fort Lauderdale’s Cypress Creek area and Sunrise.
“Tenants in South Florida, at any price point, want high-quality space,” Rubin said. “Old, broken buildings don’t get leased.”
