SOUTHEAST SNAPSHOT, JANUARY 2007

Orlando Office Market

In Orlando, office development is restricted mostly to the developers who have significant land banks — Crescent Resources, Flagler Development Company, Duke Realty Corporation, Lincoln Property Company, and Colonial Properties Trust. Because they purchased the land at a lower price than today’s market dictates, they can make development work even with increased construction costs. In addition, insurance premiums have risen significantly, which add to the operating cost of the building. New developers have a difficult time entering the market because rental rates have not increased at a fast enough pace to keep up with the spike in land, construction, and operating costs.

Some significant projects that will have an impact on both commercial and residential real estate are The Burnham Institute for Medical Research, Innovation Way, the commuter rail, and the three public works projects downtown — the new arena, the renovation of the Citrus Bowl, and the performing arts center. Housing will be developed around Burnham and along Innovation Way, which in turn will create demand for retail and office development. Commercial and residential projects will cluster around the 16 planned commuter rail stations. In addition, accessibility to the major submarkets will help keep the job market strong, which is the main driver of office space demand. The projects downtown will make the central business district (CBD), Orlando’s biggest office market in terms of total square footage, more of a destination and a 24-hour community. This will create more demand for mixed-use projects, boosting the office, retail, and residential sectors.

The biggest deal of the year was the sale-leaseback of the Darden Corporation buildings on Lake Ellenor Drive in the Orlando Central Park. The 10-building complex includes nine office buildings totaling 397,555 square feet and one 25,000-square-foot warehouse/distribution building. Patriot Equities purchased the buildings for $50 million and then Darden leased back the entire 422,555 square feet for 3 years while their corporate headquarters is built near John Young and Central Florida parkways.

Other significant leases included Starwood Vacation Ownership leasing 75,267 square feet at Gran Park at SouthPark East 1200 in the Southwest/Tourist/Celebration submarket; The Bank of New York taking 67,737 square feet at Colonial Center 300 in Lake Mary; and Staples’ 58,000-square-foot lease at Liberty Summit in Maitland.

As for asking prices, Class A overall rental rates range from a low of $17.50 per square foot full service in the Longwood submarket to a high of $25.48 per square foot in the CBD. The Orlando MSA overall average Class A asking rate is $22.23 per square foot, the highest on record. Projects currently under construction in the CBD are asking $28 to $30 per square foot, while buildings under construction in the suburban markets are asking anywhere from $23 per square foot in Lake Mary and the Southwest/Tourist Celebration submarket to $40 per square foot in Windermere.

As of the end of the third quarter 2006, the Orlando MSA overall vacancy rate stood at 9.6 percent, the lowest level since 1998 and the direct vacancy rate was 7.9 percent, the lowest level ever recorded. Class A vacancy rates were even lower — 6.8 percent overall and 5.7 percent direct.

The Orlando office market has been nothing short of outstanding for the past several years — leasing activity is high; rental rates continue to rise, though they need to increase more significantly to justify increased development costs; and vacancy rates are at some of the lowest levels ever recorded. In addition, the low cost of capital combined with the demand for investment in Orlando office buildings has resulted in the most significant sales activity ever experienced in Central Florida.

In 2005, sales volume totaled more than 5.7 million square feet, more than double the previous record set in 2002. In 2006, sales activity reached more than 3.7 million square feet, which is the second highest yearly total ever posted. Several portfolio sales occurred last year including the Darden Corporation portfolio, Maitland Green I and II, Oakridge Office Park, Gateway Business Park, and Executive Point Towers. In addition, one of the largest and most recognizable Class A buildings in downtown was sold, the Bank of America Tower. The building was sold to America’s Capital Partners for $96.25 million or $228.51 per square foot.

Sales activity should remain strong at the beginning of this year, but will taper off due to increased capital costs as well as lack of product for sale. In addition, absorption will weaken slightly; office vacancy rates will decline, but not at the significant levels experienced in 2005 and 2006; and rental rates will continue to rise due to increased insurance, land, and construction costs.

— Stephanie Lockard is a research director with Cushman & Wakefield’s Orlando, Florida, office.

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