FEATURE ARTICLE, DECEMBER 2004

2005 Outlook

Orlando, Florida

Greg Morrison CCIM, SIOR Executive Director Advantis Real Estate Services Company/GVA

Heading into 2005, the Orlando office market will have to deal with absorbing several blocks of space that are scheduled to come on line during the first quarter in addition to finding a way to reverse the trend of rental rate depreciation.

Downtown Orlando remains a magnet for residential activity with many projects either underway or on the drawing board. The widely anticipated Plaza project, which is rumored to be 70 percent committed, is also expected to break ground during the first quarter. Speculative development activity will likely remain very controlled during 2005, returning with renewed vigor in 2006 once the recovery has finally ended.

Recovery

Nationally, several factors are inhibiting a full office recovery. High energy prices, uncertainty overseas, concerns about terrorism, a still-slow job market, hurricane-related disruptions and the upcoming election had an influence on demand for space in Orlando during the latter half of the third quarter. The fourth quarter is historically a very active one, however, and Advantis expects the market to end 2004 on solid ground with healthy absorption and with rental rates stabilizing. In the meantime, the office market’s vacancy rate has fallen 2.3 percentage points since the beginning of the year and healthy net absorption of 403,280 square feet has been recorded (with the majority of the positive activity occurring in the Lake Mary and Southwest areas.)

A very disciplined development environment persists, a primary reason why vacancy rates have continued to decline. The market has proven to be fairly resilient when it comes to weathering national economic storms, due in large part to its increasingly diversified local economic base. Investor interest in Orlando remains very strong and an increase in the number of investment offerings on the open market is expected during fourth quarter 2004.

Leasing Fundamentals

While the office-leasing environment remains challenging, there are indications that leasing fundamentals may be showing some improvement. The direct weighted average rental rate has dropped $0.05 per square feet over the past year with Class A and Class C space taking the biggest hits. Much of the laggard leasing activity has been a direct result of both the availability of sublease space (which is now dwindling) and an increase in activity among owner/users. Activity is beginning to pick up, however, as tenants regain some of their lost confidence and office investment offerings continue to diminish.

Aggressive leasing deals are being negotiated across the market, with upfront concessions being offered on many new lease deals. Rising construction costs have resulted in increasing tenant demand for “turn-key” build-outs in lieu of a tenant improvement allowance as many tenants are unwilling to risk having to absorb construction overages. Many landlords have been agreeable to such conditions on first generation space although with strict construction guidelines. So far this year the most active areas for office leasing have been the Lake Mary, Maitland Center and Downtown Orlando submarkets, with slow activity in the University and Winter Park/Lee Road submarkets.

Investment Activity

Private and institutional investors have been chasing commercial real estate at a breakneck pace throughout 2004 and investment offerings have been few and far between with scarcely any properties on the open market. That may soon change following the Fed’s recent interest rate hikes. Speculation is that owners that have been considering selling may now rush to market before the costs of borrowing money become prohibitive — the rationale being that with three recent interest rate hikes behind us there could be more on the way.

In any event, Alan Greenspan has publicly stated that he expects the economy to rebound after hitting a “soft patch” earlier this summer, although private economists seem confident that rising energy costs will take a toll on the national economy.

In the meantime demand for office space in Orlando continues to far outpace supply, which is putting downward pressure on nominal returns and is creating a heightened sense of competition among investors. For now the amount of capital targeting real estate in Central Florida remains plentiful.

Industrial Highlights

While the commercial real estate market continues its long march toward recovery one thing has become obvious — the industrial recovery has ended. With the Orlando market recording over 2.6 million square feet of net absorption by the end of the third quarter and the vacancy rate dropping by 0.9 of a percentage point since year-end 2003, it can no longer be said that the industrial sector is “recovering.” In fact, it is expanding at a healthy clip with new construction activity once again taking place and tenants growing their local operations in an effort to satisfy pent-up demand.

With many local companies once again in growth mode, the demand for warehouse space has risen dramatically. Orlando Central Park has recorded 28 percent of all net absorption so far this year and 92 percent of that number was comprised of bulk warehouse space. Strong bulk warehouse leasing activity has also been taking place in the Silver Star Corridor, Southwest and Longwood/Lake Mary/Sanford submarkets.

Sublease availabilities continue to account for 1.4 percent of the industrial market’s 10.3 percent vacancy rate and the majority of that space can be found, not surprisingly, in the South Orlando and Longwood/Lake Mary/Sanford areas.

Industrial investment interest continues to be very strong and is only tempered by a very limited inventory of investment offerings. Locating an industrial building in the range of 20,000 to 40,000 square feet for a user is proving to be a very difficult task as the past 2 years have seen a considerable up-tick in the number of private investors and companies seeking to acquire industrial product to diversify their real estate portfolios. Looking forward, the market will be impacted by a variety of macro and micro factors, specifically any additional interest rate hikes (which affect the cost of borrowing money), a growing import/export imbalance, continued turnaround in the manufacturing sector and conflict and tension in the Middle East.

—Greg Morrison, executive director, Advantis Real Estate Services Company/GVA


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