South Florida Real Estate Costs Rising in Commercial, Industrial Sectors

When Jim Cahlin, a broker for Cushman & Wakefield, looks at commercial real estate in South Florida, he’s starting to see New York.

“We’re getting closer and closer to rental rates in major metropolitan markets,” he said.

At the end of 2006, the average rental rate for luxury downtown office space in Palm Beach County was $40.69 a square foot, up from $36.42 at year-end 2005, according to a Cushman report. Broward County’s rental rate for comparable digs was $31.08 a square foot, up from $29.29.

Rents in the Big Apple and other large cities are north of $50. Why are South Florida landlords charging so much? Because they can.

The high cost of construction is really limiting the number of new office buildings in Palm Beach and Broward counties, and the landlords have to pay the Florida mortgage somehow.

What’s more, a rash of record building sales is driving up operating expenses. Broward and Palm Beach property taxes are reassessed when buildings sell, just like houses, forcing owners to pay more. They, in turn, pass their increased costs on to the tenants.

Palm Beach County’s office vacancy rate dropped to 11.3 percent at year-end 2006 from 13.7 percent at year-end 2005, according to Cushman’s report. Broward’s rate dipped to 11.7 percent from 12.9 percent.

And if you think that’s tight, check out the region’s industrial markets, where vacancies are below 5 percent.

“I’ve been here 20 years, and I haven’t seen the industrial market in the condition it’s in today,” Cahlin said.

The bulk of Palm Beach County office leases last year were in Boca Raton, which had 1.71 million square feet of deals. Most of Broward County’s office leasing during 2006 occurred in Cypress Creek. New and expanded leases there totaled more than 730,000 square feet.

NAI Merin Hunter Codman, Palm Beach County’s largest commercial real estate brokerage, handled more than $327 million in sales and leases last year, a record for the firm. It’s planning to do more work in Broward in 2007.

Chairman Neil Merin said landlords eventually will find they can’t keep passing on higher costs because tenants won’t be able to afford them. He did say South Florida will remain attractive to institutional investors because of the growth here and a lack of land for development.

“There is tons and tons of [investment] money,” Merin said. “Blame the baby boomers.”

Stephen Bartlett is trying to sell a three-bedroom house with a new roof and kitchen and other upgrades. He’s asking $265,000 and recently decided to give the buyer’s real estate agents a 10 percent commission.

“I’ve already had more people call me on that property in the last weeks than I had in the last year,” Bartlett said.

Bartlett, a real estate agent, is portfolio manager for CT Capital, a Fort Lauderdale lender and investor. CT Capital acquired the Lauderhill property through foreclosure and is pricing it below fair market value, he said.

A standard commission is 6 percent, with the buyer’s agent and seller’s agent each pocketing 3 percent.

But given how slow the South Florida housing market is, area sellers should prepare to make huge concessions on price and commission, lest they want the properties to sit unsold for months, he said.

“I think this is going to be the norm from now on,” Bartlett said.

Many sellers have tried to attract the attention of agents in this soft market by offering large commissions, bonuses, cruises, a certain period free of Florida home mortgage payments, and other perks. Some agents, in turn, share those perks with their clients.

But Debbie Anderson of Prudential Florida WCI Realty in Coral Springs and other agents say they doubt 10 percent commission will become more common.