The commercial real estate engine in Florida isn’t running on all cylinders — but it’s still running. It is arguably even beginning to pick up steam, although still uncertain macroeconomic conditions and a shaky local employment market continue to take a toll on many of the state’s metropolitan areas. The fact that the state is not largely dependent upon a strong manufacturing base, coupled with the fact that many metropolitan areas have fairly well diversified local economies, has prevented unemployment from escalating beyond any controllable measure.

Orlando, Florida, has done a fairly good job of weathering the economic storm despite several recent announcements of corporate layoffs and continued downsizing, which are the inevitable result of last year’s national economic contraction. Commercial real estate activity is beginning to pick up once again, with several recent investment transactions indicative of a perception by investors that Orlando remains a strong market.

The Office Market

Nationwide office space fundamentals continue to struggle against abnormally weak demand for office space, coupled with significant sublease availabilities. Anticipated demand for office space has not increased significantly and likely will not until 2004, as labor market fundamentals continue to experience losses. U.S. employers cut 108,000 jobs from their payrolls in March, extending the longest streak of labor market pain since 1944.

University Corporate Center II, developed by Opus South Corporation, is located in Orlando’s Quadrangle Corporate Park. The recently delivered building, which is leased by Advantis, is indicative of current office development trends.

The Lake Mary submarket (north Orlando) remains fairly replete with newly delivered and still vacant space available; however, it did experience positive net absorption during the first quarter. The University submarket (east Orlando) just witnessed the delivery of University Corporate Park II, a 103,995-square-foot building, and will soon have to absorb the delivery of Crescent Resources’ Three Resource Square, a 153,269-square-foot building, which is still largely available. All in all, office development has slowed and development trends have changed somewhat. Mid-rise office buildings with high-end lobbies and extensive common areas are slowly being replaced by low-rise office buildings with efficient layouts, lower core factors and higher parking ratios. Rental rates market-wide have continued to decline, although their rate of decline continues to taper off.

The majority of recent U.S. employment market losses occurred within the services industry, which comprises much of south Orlando’s local economic base. The good news is that so far Orlando has yet to experience massive service employment layoffs and tourism seems to be doing a fairly good job of weathering the economic storm. Renewed leasing activity and improving net absorption figures offer promise that 2003 will be better than 2002.

Orlando’s office market totals 28.01 million square feet and has a current vacancy rate of 18.6 percent, a 0.7 percent increase since year-end 2002. Many areas did experience healthy leasing activity and the vacancy rate increase was partially due to the delivery of a speculative office building in the University submarket. Downtown Orlando has performed well so far this year with a 1.4 percent decline in vacancy and positive net absorption of 36,286 square feet. Several other areas also performed well during the first quarter, although Maitland Center and Lake Mary continue to struggle. Vacancies in both of these areas should begin to improve once tenant contractions in the telecom, software and tech markets begin to cease.

Several leases were transacted during the first quarter, although none were significant. Continued pressure on the national economy is encouraging many tenants to pursue renewing their existing space at very favorable terms rather than moving their operations. Increased tenant improvement dollars, rental abatement and other concessions are not uncommon right now, but the willingness of landlords to aggressively market available space has helped to prevent an even greater rise in the current vacancy rate. Net absorption, the greatest barometer of a market’s health, is nearing equilibrium, although it likely may not be back in positive territory until the third quarter of this year.

The Industrial Market

While the national economy continues to struggle with rising unemployment, slowing economic growth, a widening trade deficit and disappointing retail sales, it now appears as though the engine of the local industrial market may well be starting to rev up once again. The overall industrial vacancy rate in Orlando has decreased 1.1 percent since year-end to a current rate of 9.2 percent, and the market experienced strong net absorption during the first quarter. Long considered the bread and butter of any commercial market, the industrial sector tends to rebound at a faster rate than other sectors, and this quarter was no exception. This does not mean that the ride is over, of course, but that the market is now approaching a return to normal.

Fundamental demand for manufactured goods remains weak and vacancies nationwide continue to slowly escalate as the United States faces greater global competition. The Orlando market serves as a regional distribution center for many companies, and its health is therefore tied to the national economy. Fortunately, the relative lack of a strong local manufacturing base has prevented the local unemployment rate from edging even higher as that industry has been hard hit by the U.S. economic slowdown. Leasing activity did pick up during the first quarter. Several significant leases were signed, and there are several tenants still at the negotiating table.

At the end of 2002, seven out of 10 industrial submarkets had recorded negative net absorption for the year. That number is now down to one, and negative absorption in that submarket is largely the result of a vacant, newly delivered building. The south Orlando industrial market has rebounded well, although uncertainty regarding the health of companies such as Recoton and Siemens may further aggravate the vacancy rate should those companies continue to downsize. The development pipeline remains fairly small and the former glut of sublease space has diminished — two factors that will assist the market’s recovery.

Current Industrial Development Trends

The most notable industrial development trend that has taken place during the past year is the relative lack of development activity in the Orlando market. National economic turmoil that has trickled down to affect the local market has given developers pause, and an uncertain stock market has created a sense of hesitancy among investors and tenants alike. Fortunately, those concerns are beginning to ease and construction cranes are beginning to reappear.

Opus South Corporation is developing a 203,125-square-foot distribution facility at Crownpointe Commerce Park in Orlando.

Speculative industrial product being developed in Orlando today tends to be shallow depth, rear-load or cross-dock, with clear heights at or above 30 feet. New projects are also being developed to allow space for trailer drops, which provide on-site trailer parking. Active developers include Opus South Corporation, McDonald Development, Liberty Property Trust and EastGroup Properties. The most significant new development is a 203,125-square-foot cross-dock distribution facility by Opus. The facility is located in Crownpointe Commerce Park in the southwest submarket of Orlando and is slated for delivery during the fourth quarter. Also under construction is Sunport IV, a 150-foot deep, 63,325-square-foot warehouse/distribution building being developed by EastGroup. Other key industrial developers in the Orlando market include ProLogis and Duke Realty Corporation, although they do not currently have any significant speculative developments underway. While the southwest area is currently the hotspot for industrial development in Orlando, a close eye should be kept on both Polk and Lake counties — two peripheral areas that offer great opportunities for the development of large distribution facilities and both of which have experienced steady growth in recent years.

In Conclusion

While the recent military campaign in the Middle East created concern on Wall Street and affected consumer confidence, the campaign’s successful conclusion is expected to greatly assist the national economy and therefore the local industrial market by default. Future development activity in Poinciana, International Corporate Park and Crownpointe Commerce Park, if delivered at a disciplined pace, could also serve as a catalyst for companies that consider relocating to Central Florida. In any event, it seems as though the tide has begun to turn. Orlando’s industrial market metrics are improving, despite a decline in national labor market fundamentals, and the area should experience continued excellent long-term economic prospects.

Greg Morrison is executive director, and Tom McFadden and Bo Bradford are senior directors of Advantis Real Estate Services Company in Orlando.

ORLANDO’S RETAIL MARKET Lynn Leonard High vacancies at some office projects, a noticeable decline in tourism and increased competition from village and town center projects have some retail investors concerned about the Orlando market. But record housing starts and the end of the war in Iraq keep others confident that retail sales and development will return to previous levels soon. The $250 million, 1.3 million-square-foot Mall at Millenia reportedly has faced some uncertainty. Located at the corner of Interstate 4 and Conroy Road, Millenia was developed by Taubman Centers and The Forbes Company as Orlando’s first luxury mall. Anchored by Bloomingdale’s, Rich’s-Macy’s and Neiman Marcus, the 145 retailers are said to be struggling, due to tourism woes and budget-conscious locals not frequenting the upscale retailers. However, retail activity around the mall is strong, as evidenced by a new Super Target, which opened recently to the northwest of the mall. Just north of the mall, Swerdlow Group developed a 700,000-square-foot power center anchored by Home Depot, Expo Design Center and BJ’s Wholesale Club. Price Legacy Corporation now owns the center and is developing Millenia Plaza II, a 154,000-square-foot center, across the street. Petco, Pier 1 Imports, Marshalls and Off Broadway Shoes will anchor the center. Four miles from the Mall at Millenia, Belz Enterprises’ Festival Bay shopping center opened in April at only 50 percent occupancy. Opening 3 years later than planned, the mall is expected to be at 70 percent occupancy by July. The center is facing stiff competition from the Mall at Millenia and Orlando Premium Outlets, as well as feeling the effects of slowed retail activity on North International Drive, once metro Orlando’s premier tourist corridor. An 18-screen AMC movie theater and covered parking garage are scheduled to open at Altamonte Mall in July. Renaissance Centre, next to Altamonte Mall, is getting $700,000 in exterior renovations. The 60,000-square-foot Jacobson’s store is still vacant there, and leasing is proving difficult on the two-story space. City officials have approved the proposed Altamonte Town Center, which will include a 300,000-square-foot retail component. The project, located at State Road 436 and Cranes Roost Boulevard, also will include 80,000 square feet of office space and 420 residential units. Also new is the 80,000-square-foot Gateway Crossing shopping center on State Road 434. Crescent Resources developed the $4.2 million center. West Oaks Mall in West Orange County is benefiting from a housing boom and skyrocketing disposable income. As growth moves west, older malls are redeveloping and re-tenanting to remain competitive. The Florida Mall has added Lord & Taylor and Nordstrom as part of its 1.6 million-square-foot expansion, and at the 478,014-square-foot Highland Lakes Plaza, Simon is backfilling the former Target space with American Signature home furnishings and Burlington Coat Factory. Publix will open a store at Citrus Tower Village Shopping Center, a 160,000-square-foot center on 30 acres in Clermont, west of Orlando. Presco Associates is developing Citrus Tower Village as well as College Station Retail Center, a 90,000-square-foot center at State Road 50 and Hancock Road, near the new Super Target in Clermont. Recent sales include Goldenrod Plaza Shopping Center, a 55,000-square-foot Kash n’ Karry-anchored center purchased by Goldenrod Associates from Perrine & Wheeler for $7.5 million; Waterbridge Downs, a 112,933-square-foot Big Lots-anchored center purchased by Continental Real Estate Companies from Watkins for $6.95 million in March; Shoppes at Lake Avenue, a 64,543-square-foot Winn-Dixie-anchored center, which sold for $12.3 million in February; and Oakhill Village, a 104,000-square-foot Kash n’ Karry-anchored center purchased by Oakhill Village Associates from ING for $9.2 million in January. Lynn Leonard is vice president - marketing with NewBridge Retail Advisors.

The Multifamily Market Jay Ballard, Cole Whitaker and Jerrianne Zook Presently, the metropolitan Orlando apartment market consists of 607 multifamily properties of more than 50 units in Orange, Seminole, Osceola and Lake/Northeast Polk counties. These properties total 152,624 units, according to Charles Wayne Residential Market Reports. The current development cycle is slowing down due to a perceived concessionary rental market in the Class A product type. Downtown Orlando has added approximately 1,355 multifamily rental units over the last 2 to 3 years, with approximately 800 more condo units in the development pipeline and another approximately 592 multifamily rental units on the drawing board. Additionally, Baldwin Park, which is the site of the former Orlando Naval Training Center, is being redeveloped into a large-scale residential/commercial planned unit development. Infill is still part of the mantra coming from the development community. As Central Florida grapples with increasing traffic congestion on its major road arteries, the multifamily developers will continue to look for “commodity” development sites to counter the next suburban apartment deal. The East Orange/University of Central Florida (UCF) submarket has seen the most multifamily development in the last several years, delivering approximately 3,750 units since 2000. Overall development in Central Florida has dropped off significantly over the last 2 to 3 years due to an Orange County initiative that ties residential development in Orange County to available school classroom capacity. There have been almost an equal number of affordable (low-income housing tax-credit/bond) multifamily units built each year as market-rate units. On the affordable side, CED, Lee Chira & Associates and The Wilson Company have led the market across the state in terms of total units built (including in Central Florida). On the market-rate side, EPOCH, Colonial Properties Trust, Wood Partners, Trammell Crow Company, PAC Land Development, ZOM, Lincoln Property Company, Tarragon and Echelon have been the most active in Central Florida. Current overall occupancy rates for the entire Orlando market, according to the March 2003 Charles Wayne Residential Market Report, is 90.3 percent. Class A rental rates in downtown Orlando range from $1.01 per square foot to $1.72 per square foot for garden-style apartments and $1.28 to $2.52 per square foot for high-rise. Suburban rents range from $0.88 to $1.28 per square foot. The two submarkets that merit consideration are East Orange/UCF and Millenia Mall. The East Orange/UCF submarket is uniquely positioned with two major office parks (The Quadrangle and The Central Florida Research Park) and UCF providing strong job growth, as well as significant retail (the Waterford Lakes Regional Mall), new big box development (Home Depot, Super Target, Lowe’s and BJ’s Wholesale Club) and residential development (Waterford Lakes, Avalon PUD, Stoneybrook PUD and Eastwood). The Millenia Mall submarket is home to the newest high-end retail in Central Florida at the Millenia Mall (Rich’s-Macy’s, Bloomingdales and Neiman Marcus). The Traditions at Millenia is entitled for 1,052 units and 452 units are currently under construction. Jay Ballard is director; Cole Whitaker is senior director; and Jerrianne Zook is senior financial analyst with The Apartment Group LLC, a Cushman & Wakefield company.

Mixed-Use Heating Up Tom Green Mixed-use development, already popular in many major markets across the country, is heating up in Orlando and Central Florida. Orlando’s spectacular growth in the past decade has spurred a parallel increase in its congestion and commuting times. Longtime residents and employees relocating from other markets are giving stronger consideration to these issues, challenging the development community to come up with meaningful solutions. Similarly, upscale retailers are beginning to push back from the traditional big box, strip-mall construction as well as regional malls. They are demanding more accessible designs reminiscent of Main Street America, inviting pedestrian walkways, street-side parallel parking and urban-style storefronts — all closer to the residential and office communities they want to serve. Colonial Properties Trust’s TownPark is the first major live/work/shop space to go on line and has already garnered a lot of attention, winning NAIOP’s Outstanding Business Park Development award for the past 2 years. With 456 apartment homes and more than 500,000 square feet of office space completed, TownPark’s festival retail component will open in November. Construction on the retail village began in December 2002. It will include five restaurants; a 12-screen, stadium-style-seating theater; and upscale shops with loft apartments and office space situated above. A Hampton Inn Suites and Hotel will be open mid-October. There are several Orlando-area developments underway: • Veranda Partners’ Veranda Park, a $120 million, Italian-themed urban village with 500 condominiums, a movie theater, shops and office space in southwest Orlando. • Avalon Associates’ Avalon Park Town Center in eastern Orlando recently unveiled 100,000 square feet of under-construction office and retail space. A medical facility will open in the summer, and the project will include 5,040 residences within the next 12 months. • The Baldwin Park community, which is being constructed on the site of an old Navy base, is on track to have the retail, restaurant and office sections built by early next year — the home sites are being constructed now. The community will encompass 1.7 square miles, one of the largest in-city redevelopment ventures in the nation. Tom Green is the Orlando market officer for Colonial Properties Trust.

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