SOUTHEAST SNAPSHOT, DECEMBER 2010

Orlando Office Market

For the first time since the second quarter 2008, we are pleased to report positive net absorption in the Orlando office market. The overall market showed 118,536 square feet of positive absorption, which is not large in magnitude, but very meaningful for its direction. This is the first concrete reading that suggests we may have truly found the bottom in our local market. In addition, average lease rates dropped to $20.81 per square foot down slightly from $20.89 in the second quarter.

Of course, just because the third quarter showed positive net absorption it does not mean the next few quarters will be positive as well, but it is certainly a step in the right direction.

The Orlando metropolitan area unemployment rate sits at 11.8 percent, while the state unemployment rate sits 11.9 percent as of September of 2010, according to the Bureau of Labor Statistics.

In reality, Orlando is doing a good job of making gains in the number of employed persons, but not fast enough to fill the growing demand for jobs. We expect that Orlando will continue to grow jobs at a quickening pace if the broad national economy continues to improve. Technology, healthcare and education industries are already adding jobs and beginning to absorb space in the market.

Focusing in on the primary submarkets, we find that most are seeing modest improvements including the downtown/central business district (CBD), Lake Mary/Heathrow, University Research and Southwest Orlando submarkets. Maitland Center was the exception with a 29,597-square-foot negative net absorption, but when factoring that this may be an outlier — only 55,744 square feet has been lost year-to-date in Maitland — and not necessarily indicative of a trend, we conclude that Orlando has likely bottomed out across the board.

Significant leasing transactions for the third quarter of 2010 included Sears leasing 58,000 square feet at Lake Emma Corporate Park in the Lake Mary submarket; Lensar Inc. leasing 34,758 square feet in the Discovery Tech Center and Metters Industries Inc. leasing 31,160 square feet at 12501 Research Parkway, both located in the University Research submarket. Significant leasing transactions occurred in the downtown Orlando CBD as well.

 Many market participants are stating their belief that the office market officially bottomed during the third quarter of 2010 as positive net absorption has been seen nationwide. The asset market remains super hot with competition for the few A+ deals on the market as fierce as during the boom.

Broad macroeconomic factors, notably office-using employment, tend to confirm the likelihood of a bottom being found in the office market. So what does this bottom actually mean? In short, expect moderate gains in occupancy with the best buildings taking the lead. There will still be significant losses in certain markets, sub-markets and even specific buildings, as high rent leases reach expiration allowing tenants to move, contract or at least negotiate better pricing. While there is little consensus of when or how fast employment growth will occur, it appears that mid-2011 is the earliest. When this does occur, more meaningful expansion in the office sector is possible, thus rental rates are likely to be falling or flat from now until late 2011.

Always remember that a bottom is not a recovery, but just a necessary step towards a recovery and a sign that one may be near.

With the Great Recession officially declared over in the summer of 2009, it is logical to start preparing for the recovery that will likely take hold during the next few years. There have been many recent innovations in technology, regulation and general business practice that will likely change the nature and preferences of office-using firms when they seek new space. More employees can work remotely (i.e. without an office) due to the advances in computer networks and mobile technology.

Accounting rules are changing the manner in which leases are reflected on financial statements. Additionally, there is a definite desire for more efficient green buildings. Landlords that embrace these changes and accommodate tenants needs will effectively outperform those that wish to believe the world has not changed. This is not only daunting for landlords but can be quite stressful for the tenants as well.

— Greg Morrison is a principal with Morrison Commercial Real Estate in Orlando, Florida.

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