BUSINESS

The (office) rent's too high? Not if business is good, Related exec says

Alexandra Clough
Palm Beach Post
515 Fern, a new office building planned for downtown West Palm Beach by Related Cos. Rendering  courtesy Red Leaf New York.

How much is that waterview from the window?

That's an issue several downtown West Palm Beach tenants will be facing soon, as office leases come up for renewal in a city dominated by one office space owner, Related Cos.

In some Related-owned downtown office buildings rents are hitting $75 a square foot, not including an additional $30 per square foot for taxes and maintenance. 

In a statement, Related said rental rates "range from the mid $30’s per square foot and up to accommodate all types of business looking to locate in the downtown West Palm market."

Northeastern U.S. companies used to paying high-priced rents in skyscraper canyons might not blink at paying this kind of money for views of the Intracoastal Waterway and Atlantic Ocean.

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Rendering of 1 Flagler, a tower planned for downtown West Palm Beach by The Related Cos. of New York.

But the rapidly rising cost of office space is prompting local real estate brokers, city leaders and some business leaders to wonder: Are the city's office rents growing faster than its longtime businesses can keep up?

For Related Cos., the New York-based developer that owns four Class A office towers downtown and plans to build four more, the answer is no.

Legal, accounting or other professional service firms benefit when Related brings new financial tenants to West Palm Beach, said Ken Himmel, chief executive of Related Urban, the company's mixed-use arm.

And since the pandemic began in March 2020, Related has brought down a lot of tenants that bring new business opportunities with them, including Wall Street and private equity firms, hedge funds and corporate offices.

Many of them need professional services, which boosts business for existing downtown tenants, including attorneys.

Law firms "have never been busier," Himmel said in a recent interview. "I would argue they can afford the rents."

Is West Palm Beach becoming a one-Class A-office landlord town?

But some brokers worry that longtime downtown tenants may not be able to afford prices in a market largely controlled by one owner.

"When their leases come up, they could be looking at paying 50% more in rent," said Peter Reed, managing principal of Commercial Florida Realty Services. "They could be priced out."

The city of West Palm Beach is aware of fears that Related is becoming a dominant landlord, said Rick Greene, development services director. 

Related now controls nearly 1 million square feet of the choicest office space in the city. If Related builds four more office towers, it would be the owner and operator of more than 3 million square feet in the city's downtown core.

"We have a concern about one company monopolizing the entire Class A office market," Greene said, "but there are other developers that will keep the pricing per square foot competitive."

Greene cited several office projects in the works that would add another 1.3 million square feet.

New office buildings include West Palm Point by New York developer Charles Cohen; the Transit Village by Related Group of Miami, which is unaffiliated with the Related Cos. of New York, led by billionaire Miami Dolphins owner Stephen Rossand 1001 Tower by London + Regional Properties.

Two other office projects, One West Palm by Jeff Greene and 300 Banyan, already are under construction.

But real estate brokers said those new spaces are likely to be just as expensive as Related's office space.

Related's big bet on West Palm Beach office space

When the coronavirus pandemic began in March 2020, a number of financial firms in the Northeast started fleeing cold, crowded urban cities for warm climes. Many landed in South Florida, including in West Palm Beach.

Related Cos., which built The Square, originally CityPlace, had started construction on the 360 Rosemary office tower at the mixed-use complex just before the pandemic.

The building quickly filled with finance-related companies.

Then Related moved to make a bigger bet on the city's office market by buying three existing Class A office buildings downtown: Phillips Point, Esperante Corporate Center and CityPlace Tower.

As the pandemic business restrictions were rolled back and infection rates eased, companies still kept expanding or relocating to West Palm Beach.

One business that expanded to West Palm in a big way is NewDay USA,  a mortgage refinance company that specializes in loans to military veterans. 

The Fulton, Md.-based company just took the top two floors of the 360 Rosemary office building. Last month, it placed its name atop the office tower.

The company also is negotiating with Related to move its Maryland headquarters and staff to West Palm Beach. Sources said NewDay could take half of a planned 500,000-square-foot tower at 515 Fern, a new office tower Related plans to build in The Square.

Demand for "trophy" office space pushing prices higher

There's no question that rising demand for office space already has pushed up rental rates, according to the Cushman & Wakefield brokerage.

During the third quarter, rents rose throughout the county by 5.8% to $42.84 per square foot, including expenses, compared to the same period last year. 

Meanwhile, office vacancy rates in Palm Beach County fell to under 12%, their lowest point since 2007, said Eric Messer, Cushman & Wakefield's senior research manager. In downtown West Palm Beach, the vacancy rate is under 14%.

"And we're continuing to see interest from tenants outside the market," including from New York and Chicago, said Anthony Librizzi, managing director for Cushman & Wakefield.

A number of these firms want to be in "trophy" office space in downtown West Palm Beach, Librizzi said.

This includes Related's newest office tower, One Flagler, being built along Flagler Drive at Lakeview Avenue downtown. There, pre-lease rates reportedly are at least $100 per square foot base rent, with penthouse space costing a whopping $140 per square foot.

So far, plenty of firms are biting: The 270,000-square-foot One Flagler tower is expected to be 75% pre-leased by the end of the year, Related said.

Even as the city fills with big-money finance firms, it still is home to local law and accounting firms that make up about 40% to 50% of the overall downtown office market, Librizzi said.

Now some of these tenants are having a hard time absorbing higher rents, especially in those Class A "trophy" buildings, where the average rent tops $70 per square foot.

As a result, Librizzi said he recently helped three office tenants leave downtown buildings for space outside the city's core.

Will suburban office markets gain as current tenants look elsewhere?

"I'm actually banking on the fact that firms will move out of downtown," said Neil Merin, chairman of NAI/Merin Hunter Codman and an owner of office buildings in Boca Raton.

Companies will seek out less expensive space in suburban locations that are not as crowded, which could encourage developers to build new office towers in cities such as Palm Beach Gardens, Boca Raton, Delray Beach and western communities.

"If developers think they could get $30 a (square) foot, they're not interested," Merin said. "If they could get $40 to $60, it's like, 'Wow. That's great.'"

Higher office rental rates may frustrate office tenants but they also are a boon for other office owners in town.

"When Related bought the market, they immediately raised their rates on their portfolio, which then allowed everyone else to raise their rates," said Michael McCloskey, an owner of the Jupiter Medical Mount Sinai New York office building along North Flagler Drive.

As a result, the building is fully occupied now. "And if we had a vacancy, it would be priced 10-to-15% below Philips Point," McCloskey said of the rival office complex.

Hybrid work schedules raise question: How much space do you really need?

The Gunster law firm is one of the businesses that has benefited from the influx of wealthy executives and their companies to West Palm Beach.

The venerable West Palm Beach-based firm, in business for nearly 100 years, is a full service law firm with the state's largest wealth management practice. 

But while Gunster's lawyers are busier than ever, not all of them work every day in the office. This is especially the case in the firm's Miami and West Palm Beach offices, where commuting can be a headache, said H. William Perry, the firm's managing partner. 

The coronavirus pandemic has created what Perry thinks could be a permanent state of hybrid work, with people continuing to sometimes work at home. The trend could mean leasing smaller offices, or finding ways to use space more efficiently.

And while the firm has at least eight years remaining on its lease at the Phillips Point office complex, Perry already is thinking about the future and the cost of office space.

Perry is concerned the firm could be priced out of its luxury digs along the Intracoastal. Gunster's two-plus floors feature feature million-dollar views of the water and Palm Beach.

The firm wants and needs to remain in West Palm Beach, Perry said, especially because its lawyers now regularly use the Brightline passenger rail to Fort Lauderdale and Miami

But Perry said he's not yet sure what the firm's downtown office footprint will look like or even how large it will be.

"We're trying to be a thoughtful law office of the future," Perry said. "If you pay for this expensive real estate, how do you use it in the most effective fashion?" 

Alexandra Clough is a business writer at the Palm Beach Post, part of the USA TODAY Florida Network. You can reach her at aclough@pbpost.com. Twitter: @acloughpbpHelp support our journalism. Subscribe today.