FEATURE ARTICLE, DECEMBER 2005

Orlando, Florida

Steve Neveleff President NAI Realvest

Now, condominiums continue to be a hot product category in the office, industrial and residential markets. Residential absorption will close with another record year. Land sales, in all market segments, continue to sizzle. Based on growth projections for the area, there are no signs of it abating anytime in the near future. The demand for land is further exacerbated as the entitlement process becomes increasingly complex and the timeline for delivering new entitlements to market grows longer.

Looking forward to 2006, prospects for commercial real estate look even better. At the end of the third quarter, the area was one of the nation's leaders in job growth with a reported annualized growth rate of 4.93 percent and shows no signs of cooling. The diversity of area industry continues to broaden its base outside of tourism and the service industry with the expansion of such companies such as Electronic Arts – Tiburon in video gaming and VaxDesign, a biotech spin-off. Last, but not least, the net population migration to Central Florida continues to be strong.

Office

The overall Orlando office market continues to strengthen. Rental rates are improving at a modest rate. At the end of the third quarter, the vacancy rate was hovering around 9.5 percent, which is a benchmark not seen since fourth quarter 2000 and a 15 percent improvement over year end 2004. Sublease vacancies continue to be absorbed and are expected to be less than 1.5 of 1 percent of the market by year end. The market is showing quarter over quarter growth in net absorption and the year is expected to end with more than 2.5 million square feet of positive absorption.

Large leases have been distributed around the city. Some of the more notable leases have been 80,500 square feet by the law firm of Akerman, Senterfitt, & Edison P.A. at the CNL Center II and 60,000 square feet by TLC in the central business district; 55,000 feet by Island One Resorts in the southwest quadrant; and more than 52,000 square feet by Centex at Maitland Colonnades.

Sales activity for the first half of this year lagged last year in total transactions. However, while transactions were down about 20 percent, the dollar volume increased by approximately 7 percent. Cap rates continue to compress and have fallen nearly 4 percent when compared to the same period in 2004. This is primarily driven by an environment of diminishing inventory.

Industrial

Orlando's industrial market is doing extremely well with a vacancy rate in the mid-6 percent range, which is nearly a 20 percent improvement from fourth quarter 2004. This is an overall vacancy rate not seen since late in 2000. Rates continue to escalate in existing product and are rising rapidly for new construction as the price to build and the cost of land escalate at meteoric rates. Sublease inventory accounts for only 1 percent of the total market.

First half of this year's major sales activity substantially exceeds the same period last year with a 33 percent gain. The number of transactions is down by 18 percent to 47. However, the average price per square foot was up to $57. Cap rates continue to compress as supply dwindles.

Retail

Retail in Orlando is strong and thriving. The challenge in the next year for existing retail will be increased competition. During the last year, Orlando experienced considerable movement among retailers within the big box market. Last June, supermarket giant Winn-Dixie announced that it will be closing 326 of its 913 stores. These closings have allowed the opportunity for newer and more successful retailers, such as Kohl's Department Store, to enter Florida's market.

As a whole, Orlando's retail market has remained relatively stable. Asking market rental rates are in the $19 range, which is at least a $0.50 increase, with vacancies less than 5 percent, a decrease from even 6 months ago. New construction of retail properties is experiencing an upward swing, and Orlando should expect to see more than 1.5 million square feet of space delivered within the next 12 to 18 months.

Driving this massive development trend is the incredible residential growth that Central Florida continues to see year after year. Studies indicate that for the next decade 300,000 to 350,000 people will move to Florida annually. For Central Florida, that means 1,200 new people are added to this area each week. That growth can support 25 to 30 new grocery stores every year for potentially the next 10 years.

— Steve Nevelef is president of NAI Realvest.

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