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Leasing: Big deals boost property values, but will rental rates keep pace?
September 17,2007
Leasing: Big deals boost property values, but will rental rates keep pace?
September 17, 2007
By Terry Sheridan, Daily Business Review
With commercial property prices going through the roof, will lease rates follow? That’s the question most asked by commercial real estate insiders still shocked by BentleyForbes’ record-setting $492 per square foot purchase of the 350 and 450 Las Olas buildings in Fort Lauderdale.
They figure lease rates must climb to justify top-dollar deals and give new owners the return they need.
That concern trickles down to Class B and C buildings, where rates shored up by nearby Class A properties likely will rise more than they otherwise would.
Just as real estate insiders don’t agree on the effect of the credit market rout on property deals, neither do they uniformly believe rates are moving far too fast.
“As the saying goes, a rising tide raises all boats, and I honestly feel that everyone benefits from the rising [purchase] prices because rental rates follow,” said Peter Harrison, senior vice president of Transwestern Commercial Services in Miami.
Brokers now routinely quote $45 per square foot gross for Class A buildings in Miami’s Brickell Avenue corridor and Coral Gables compared with $37 per square foot generally quoted a year ago in downtown Miami, he said. The rates include operating expenses running about $14 to $17 per square foot.
“At the purchase prices you’ve seen of late, $45 is almost the minimum number that justifies the prices,” Harrison said.
Landlords of lower-tier properties are raising rates in turn with $30 per square foot space now at $35 and so on.
In Fort Lauderdale, brokers expect rate hikes will follow the BentleyForbes deal, but that may prove untrue.
The 350 and 450 buildings currently lease at about $27 per square foot triple net, up $1 since the acquisition.
Harrison figures a jump to $30 would barely justify the purchase price. Grubb & Ellis managing director Jonathan Kingsley said even higher rates are in order for the new landlord to get a 7 percent or 8 percent return.
But “that’s incremental growth you can never forecast,” Kingsley said. “Would they go from about $25 to $32 or $35 triple net? I don’t see it.”
BentleyForbes president David Cobb said the investment firm never buys Class A buildings with the expectation of huge rate increases.
He predicts annual increases of 3 percent to 4 percent for a decade in Fort Lauderdale.
“If you look at the downtown, there are probably two or three Class A or AA properties, and those are all about 98 percent occupied,” Cobb said. “So logically a new owner will push rents as much as possible. You’ll see it all go up because of supply and demand, and what it does in the future is a function of supply and demand.”
Brokers will carefully scrutinize how BentleyForbes’ premier investment performs.
“These numbers being paid don’t translate to true value,” said broker Ken Morris, president of Morris Southeast Group/Corfac International in Plantation. “The institutions can take a lower rate of return because their cost of capital is lower than private investors.”
Even so, Morris believes big investors may be relying on “smoke and mirrors” to make sense of the balance sheets.
“A lot of assumptions have to be made that rents will go up,” he said.
The same concern carries over to the industrial sector, said Jeremy Shapiro, South Florida senior regional director of First Industrial Realty Trust in Miami.
“The whole basis of what’s been fueling industrial activity down here is the belief we’ll continue to see major growth in lease rates and absorption,” he said.
But lease rates are leveling, and “we may have a slowdown coming, if not as we’re speaking,” he said.
Broker Steve Wasserman at Colliers Abood Wood-Fay in Fort Lauderdale said more warehouse space is available in the wake of the home-building slump.
Tenants, meanwhile, will question rate hikes that compound already escalating insurance and other expense costs.
The South Florida market doesn’t yet command the top lease rates seen in other metropolitan markets like the District of Columbia, Morris said.
“The new landlords will say, ‘Hey, we love ya, but for our pro formas to work, your rents will have to climb dramatically,’ and there’s a terminal limit for how many tenants in this marketplace are looking to pay $30 to $40 rates,” he said.
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