SOUTHEAST SNAPSHOT, JANUARY 2009

Orlando Office Market

It’s common sense that office markets are tied to employment. In Orlando, the three major theme park operators — Walt Disney World, Universal Studios and Busch Entertainment  Corporation — and the manufacturing juggernaut Lockheed Martin are the largest area employers. Due to the current economy, it’s hard to predict if these once-stable companies will have to cut back on employees as the market takes its toll on revenues and expansion plans.

“Everyone’s just trying to see how the whole employment market fares in the next 6 to 8 months to see how that’s going to impact the office market,” says John Guitar, vice president of Central Florida in Flagler Development Group’s Orlando office. “The one good thing for Orlando is that we don’t have a large exposure to financial service companies. In Jacksonville and Tampa, they have a bit more exposure to those kind of guys. They’re seeing big pullbacks where we haven’t seen that yet in Orlando.”

J. Paul Reynolds, vice president of brokerage services at CB Richard Ellis’ Orlando office, says that companies are hesitant because of market uncertainty. Once happy to renew leases 5 or 10 years at a time, these firms are eager to either soak up short-term renewals or not renew at all. “Companies are cutting back on expenses across the board, including payroll, real estate and other major line items,” he says. “Also, recent increases in real estate taxes and other operational costs have landlord’s net rental rates declining when signing new leases.”

According to Reynolds, the last substantial office property sales occurred back in the second quarter of 2008. Since then, there’s been a smattering of smaller deals that suffer from increased cap rates and diminished prices per square foot. Houghton Mifflin Harcourt Publishing Co. took 250,000 square feet in two buildings at Flagler Development’s SouthPark Center. Busch Entertainment Corp., Strayer University and Wyndham Vacation Resorts are also housed in the 2.9 million-square-foot development. Houghton Mifflin’s lease term is significant in the current market, and the deal, which closed in July, is a bright spot in the office arena.

“There are several large transactions greater than 50,000 square feet that will have a positive impact on the market; however, it’s the multitude of medium to smaller leases where companies are giving back dark space that will have the largest impact negatively,” Reynolds says. The leases that are occurring, he says, are sometimes misleading because a few companies that are signing large leases have just moved out of an even larger space.

Further areas of activity include South Orlando and the Lake Mary submarket. These areas feature available land that is already entitled and an escape from the compact environment found closer to the city center. Guitar says the southern market is doing well because of its proximity to Orlando theme parks.

“I think it really is the one place where some deals have been happening this year,” he says. “Vacancy rates are doing better than the overall vacancy rates in the other markets.”

Orlando might be fairing better than some of its Florida neighbors, but commercial developers and brokers are still in for a rough time in 2009. Guitar predicts no new development starts and building vacancies that will take some time to get absorbed. Rents will either start declining or stay flat.

“Even if the market starts turning sometime in 2009, I don’t think that’s going to have a positive impact on the commercial office side for another 12 or 18 months after things start turning around.”

MAITLAND HEATS UP ORLANDO OFFICE MARKET Liberty Property Trust’s Summit Park III in Maitland, Florida. In the Orlando submarket of Maitland, a significant amount of office space is set to deliver in 2009. Liberty Property Trust will deliver its 220,000-square-foot Maitland Summit Park III in November. The property is located in Maitland Summit Park on Summit Park Drive and consists of two other office buildings leased by Charles Schwab, EA Sports and ZOM. These two buildings, which span 256,000 square feet, were acquired by Liberty in 2005. Summit Park III is being constructed to Gold LEED specifications and will include waterless urinals and low-flow shower heads. This substantial space in the Maitland market has one tenant, Metavante Corp., who has signed on for 107,000 square feet.  Across Interstate 4 to the east, The Morgan Group is set to complete the first phase of its Village at Lake Lily  development during the first quarter. Located at 921 S. Orlando Ave., the mixed-use property will feature 40,000 square feet of office and retail space. Completion of the entire project, including 450 residences, is slated for 2010.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.