CITY HIGHLIGHT, JULY 2005

GROWTH AND DEVELOPMENT BOOMS THROUGHOUT ORLANDO

The city of Orlando and its surrounding submarkets all have seen positive trends in every market sector continuing through first quarter 2005. With the city’s population booming, development is taking place across the board, and space is being absorbed quickly. As it appears now, the market will continue to flourish and perpetuate rapid growth throughout the real estate industry.

Industrial

With a still-declining vacancy rate and solid net absorption, Orlando’s industrial market remained very robust at the end of the first quarter 2005. The market boasts an industrial inventory of 74 million square feet, and overall vacancies have fallen a notable 3.4 percentage points over the past year, including a 1.7 percentage point drop since the end of the fourth quarter 2004. The drop in vacancy has been fueled largely by the strong and sustained leasing of bulk distribution and warehouse space throughout the market.

Leasing activity has been strong, reporting solid gains in many submarkets. In addition, rental rates are beginning to show some upward momentum. This leasing activity effectively has resulted in strong net absorption figures (642,852 square feet in the first quarter alone) and a steadily climbing direct weighted average rental rate — as bulk distribution availabilities decline, rental rates gain upward momentum. The market recorded impressive net absorption during the first quarter 2005 with the bulk of the positive activity occurring in the South Orlando and Longwood/Lake Mary/Sanford submarkets (which accounted for 76 percent of all net absorption so far this year).

For the past couple of years, one of the greatest challenges facing the local industrial market involved the steady depletion of available land inventory. In fact, land prices literally have doubled over the past 5 years, and there is still constant demand for land. The situation worsened during the first quarter when two large industrial REITs augmented their local holdings. Liberty Property Trust announced it has plans to develop 3 million square feet of industrial space at Airport International Park of Orlando over the next 7 years; AIPO houses the largest inventory of industrially zoned land close to the urban core. Therefore, this joint venture has aggravated further what already was a steadily shrinking supply of industrial land, as the project is planned solely for build-to-suit opportunities. Duke Realty Corporation also announced its recent acquisition of 42 acres in Crossroads Business Park where it is finalizing plans to develop 800,000 square feet of distribution space in six buildings. Additionally, residential homebuilders have been busy snapping up industrial land, with the intention of rezoning it for housing developments. Clearly, time is running out for developers and owner/users who are unwilling to build their facilities along the periphery of the Orlando market. The best opportunities for owner/users are now found in nearby Lake and Polk counties, where there is ample, reasonably priced land.

— Lisa Rossetti, director of research, Advantis Real Estate Services Company/GVA

Office

Strong job growth, low unemployment, improving vacancy rates and a downtown building boom are creating a resurgence in the Orlando office market. About 40 wide-ranging construction projects valued at more than $1.3 billion reportedly are planned for or underway in the central business district. Among the projects are high-profile mixed-use developments featuring Class A office towers.

The Orlando Class A office market vacancy rate is roughly 12 percent overall, with vacancy rates of 9.5 percent and 7.6 percent in the downtown and growing southwest/tourist office submarkets, respectively. Net office absorption was 1.1 million square feet for 2004. Rents are in the $23 to $24 per square foot range with concessions on the decline. The unemployment rate for the greater Orlando area has dropped below 4 percent, with strong job creation reported in the professional and business services sectors.

Among the larger downtown projects is the $140 million Premiere Trade Plaza, which features two office towers, 13 and 17 stories, and a sold-out, 27-story residential tower that includes retail space. Located next to City Hall, the 260,000-square-foot CNL Center II will be anchored by the CNL Bank.

The hospitality and service industries and residential developers are creating demand in the suburban office markets. Over the past 18 months, a number of residential developers have moved up from Class B to Class A properties as they seek to raise their profiles.

In the southwest/tourist submarket, Duke Realty Corporation is developing its 625,000-square-foot Millenia Lakes office park and is expected to complete Millenia II, a 107,000-square-foot office building, in July 2006. Flagler Development Company is completing a 137,000-square-foot office building in its SouthPark Center. 

Looking forward, increasing land prices — driven in part by the housing boom — are making mixed-used development more attractive as retail and residential help to balance economics. Customers are willing to pay more for the convenience of having home, work and shopping nearby.

— Doug Irmscher, senior vice president, Florida operations, Duke Realty Corporation

Office Condos

Orlando continues to reign as one of the state’s two strongest markets for office condo development, supported in part by the 46,000 new jobs created in the region during the past year. The growth of Orlando’s office sector in 2004 was hampered only by its lack of available inventory, a limitation that will be short-lived, as more than 1.7 million square feet of space is under construction or in the planning stages.

Record low interest rates are credited to driving the trend toward office condos. The trend is greatest among upscale small business owners, such as professional service firms and medical offices.

Making office condos even more attractive to this small business sector is the emergence of new small balance commercial mortgage programs that require no income or asset documentation for borrowers with quality credit and collateral.

Monthly mortgage payments that are comparable to those for rent — plus the added benefit of the ability to earn equity — are driving business owners to buy rather than lease, typically purchasing between 1,000 to 5,000 square feet.

Downtown Orlando is clearly the region’s hottest office condo submarket. Redevelopment of the downtown core is consistent with the nationwide trend of middle- and upper-middle income people who want the convenience of working and living downtown.

Cameron Kuhn is considered widely the most prolific developer of office condominiums in the downtown Orlando submarket. He currently has three mixed-use projects in development that will produce a combined 950,000 square feet of new office condominium space in downtown Orlando. Premiere Trade Plaza broke ground in October 2004, plans for Benchmark were announced in December 2004, and the Cornerstone renovation project was announced in January 2005. Much of this space already has been leased and sold, according to Kuhn. Other major players in downtown Orlando’s mixed-use urban development boon include Steven Kodsi, Phil Rampy and Craig Ustler.

— Doug Long, CEO, Orlando, Fla.-based Pinnacle Financial Corporation

Retail

The retail scene in Central Florida continues to stay hot. Residential development is maintaining a record-breaking pace with 360 degrees of growth in every corner of the market, as well as in the core. Census projections show that the population in Central Florida increases by 144 people every day. More importantly, the metro area ranks as the 12th best growing market in terms of employment growth according to economy.com. Surprising to some, incomes are on the rise at a 6.2 percent annual rate, the second highest rate in Florida. Tourism for Central Florida continues to shatter records as well, with hotel taxes, airport traffic and theme park attendance all well-surpassing pre-September 11 levels. Increased activity in all sectors is fueling new retail development, encouraging repositioning and redevelopment, and driving down vacancy across the market.

Prices for street-front retail continue to escalate, as more concepts are competing for high visibility locations in front of new developments. Drug stores started the trend years ago, banks have followed and now they compete with restaurants and other traditional outparcel users. In Central Florida, ground leases are typical for outparcels in new developments – large and small. Rates range from as low as $70,000 per year to upwards of $140,000 per year depending on location and anchors. Rental rates in the street-front strips that front most new developments, as well as those that are being added to existing developments, range from $25 to $40 per square foot, triple-net leased.

Within the CBD, an influx of restaurants and retail is expected to meet the demands of several thousand new urban residents and workers in the dozens of residential and office projects recently completed or currently underway. According to Orlando’s Downtown Development Board, another 4,962 residential units are planned for the Downtown area, bringing the number of new residents downtown to 17,488 people. More than $3.13 billion in short-term economic impact is just one benefit of this boom of development activity. New mixed-use development also is occurring in the fringe areas just north of downtown with Pelloni Development’s Uptown project and south of downtown with North American Properties’ SoDo project.

Many master-planned communities have been a real success story for developers, retailers, municipalities and residents. The fact that Central Florida has a large number of these developments could be one of many factors for housing prices appreciating by 28 percent for the year ending 2004, reported by the Orlando Regional Realtors Association. In fact, Poincianna, on the southern edge of Central Florida, and The Villages, on the northwestern edge, were the fastest and second fastest growing master-planned communities in the entire nation, respectively. New retail development in the form of town centers has become a vital component to these developments, boasting an emphasis on design. The trick is blending New Urbanist concepts with realistic expectations in regards to tenant mix and positioning, as there are many lofty ideas that do not make sense in the eyes of retailers.

Several competing projects on the region’s west side continue to lure in big box retailers that are circling the area. The Sembler Company recently downsized their proposed Town Center at Fowler Groves at State Route 535 and The Western Beltway as a result of community involvement. Phoenicia Development’s Plaza Collina development at the Florida Turnpike & State Route 50 reportedly is gaining momentum with the commitments of a number of big box tenants. A new node of retail development also is in the early stages of development at the West Road exit of the State Route 429 Western Beltway. With Westyn Bay and other residential developments underway, a new Publix-anchored center, drug stores and rumored big box retailer are proposed for the intersection.

One of the most interesting developments currently taking shape is the Lake Nona area on Orlando’s southeast side. With thousands of residential units in the development pipeline and a new developer funded interchange with the State Route 417 Greenway nearly complete, Lake Nona is gearing up for a massive commercial development. Once underway, this area is poised to join the ranks of MetroWest, Waterford Lakes and Heathrow as a major master planned community. However, because it is nearly adjacent to Orlando International Airport, with its accessibility to the State Route 528 BeeLine, the SR 417 Greenway, and with the addition of an FDOT-approved interchange with the Florida Turnpike at SR 417, this area could become a true “edge city” for Central Florida. In addition to office and industrial components, a world-class town center currently is in planning stages, and negotiations are underway with big box tenants.

The East Central Florida coast, including Flagler, Volusia and Brevard County, also is seeing a wave of growth and new retail development. Flagler County was ranked the fastest growing county in the nation on a percentage basis for 2004, and new high-end development currently is in the pipeline. To the south, the Melbourne and Palm Bay area was ranked the seventh fastest appreciating residential market nationwide according to the National Association of Realtors, and retailers are taking notice. The success of the Viera retail project is prompting retailers to look further south into the high growth Palm Bay market. Poised at the center of this wave of growth is Benchmark Properties’ West Melbourne Center at Interstate 95 and Palm Bay Road. Palm Bay is leading Brevard county in new residential permits this year, with many high-end developments in the pipeline.

Several new retailers are descending on Central Florida. Of the big boxes, Kohls is getting the most attention. Also aggressively pursuing locations are Dick’s Sporting Goods, TJX’s Homegoods concept, Whole Foods, Belk and Target. Banks that continue competing against one another include Fifth Third Bank, Trustco, Bank of America and, just entering the market, Bank Atlantic. Some of the other new or active concepts are Panda Express, Starbucks, Chipotle, Amscot, Village Inn, Pancheros, Dunkin Donuts and Tropicana Smoothie. Active developers in the market include North American Properties, The Wilder Company, Unicorp, The Benchmark Group, Monroe’s Prestige Group, Boyd Development and Intram.

With unprecedented job creation, population growth and tourism levels, Central Florida is situated well to capitalize on the nation’s increasing economic expansion, showing no signs of cooling off in the foreseeable future.

— Bobby Palta, sales assistant, CB Richard Ellis|Retail Services - Florida

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