CITY HIGHLIGHT, JULY 2008

ORLANDO CITY HIGHLIGHTS
Mark Stratman, Kane Morris-Webster & Shelton D. Granade

Orlando Office Market

The largest developments in the upcoming year for Orlando, Florida, will be in the public sector. Orlando’s 800,000-square-foot Events Center is the main focus of the media and downtown Orlando; however, the importance of another project, the new University of Central Florida College of Medicine, should not be overlooked. In less than 12 months, the 198,000-square-foot Burnett School of Biomedical Sciences will open. It is the first of several buildings in the surrounding area that will create a medical city, including its name identifying UCF College of Medicine (a 168,000 square foot facility), as well as new Veteran’s Hospital, Nemours Children Hospital, University of Florida Research Building and the Burnham Institute. Undoubtedly, this will create an opportunity to develop other types of medical office buildings in the Lake Nona area of Orlando. Linking these areas of development is the corridor commonly referred to as Innovation Way, an Orange County regional project designed to provide connectivity between the Central Florida Research Park and the Orlando International Airport. The UCF College of Medicine and its medical city mecca will be able to harness the transportation and growth development plans already planned.

As for the Events Center, which is scheduled to open its doors in September 2010, it will be more of a renaissance project for the Central Business District (CBD) of Orlando, changing the dynamics of downtown Orlando. The entertainment facility will be more centrally located than the current Orlando Arena and will provide easier access for the core businesses and citizens who utilize Interstate 4 and the East-West Expressway (408 Interchange) to access the facility. This planned facility is poised to be the best of its kind in Florida, making Orlando’s Event Center a preferred stop for traveling attractions. Shortly thereafter, the development of the Dr. Phillips Performing Arts Center, a mixed-use urban arts center for cultural, artistic and educational excellence, will provide the citizens of Orlando with a venue appealing to the community.

Highwood Properties’ Capital Plaza III in Orlando.

These two artistic powerhouses (the Events Center & the Performing Arts Center) are not alone in their major development plans within downtown Orlando. Highwood Properties and CNL have the ability to deliver the next two office towers, Capital Plaza III (180,000 square feet) and CNL Center III (205,000 square feet), respectively. However, with a slowdown in both leasing activity and job growth in the financial sector (largely due to the slumping residential real estate market), construction plans on these two projects could be delayed.

Landlords continue to push rental rates higher despite increasing vacancy and very little leasing activity in the CBD market of Orlando. The average rental rate in the CBD for Class A office space increased over 3 percent per square foot from 2007 to the first quarter of 2008, topping out at an average of $28.29 per square foot. Moving forward, rental rates are expected to stabilize as tenants begin to push back on increasing asking rents. The delivery of new office space would also cause a slight decline in quoted rates.

One of Orlando’s strongest industries, the hospitality and tourism sector, continues to accelerate in growth with the creation of new jobs within the service industries and new construction in timeshare. Flagler’s SouthPark Center has had the most success within the Tourist Corridor adding 2 million square feet of office space during the last 5 years. Offering competitive rental rates has been the key to their success. With both single-story and mid-rise buildings, Flagler has options for a wide variety of tenants.

For tenants looking for more, Duke Realty offers a competitive alternative with its Millenia Lakes development project. With a prime location adjacent to the high-end Millenia Mall and visibility from I-4, Millenia Lakes offers more amenities to its tenants. Rental rates in the Tourist Corridor have plateaued with a slight decrease down to $23.50 in the first quarter of 2008.

In the other two major submarkets, Lake Mary and Maitland Center, trends have been similar. Developers like Colonial Property Trust, Crescent Resources and Liberty Property Trust all have sites and are ready for the next space demand cycle; however, the demand is currently not there. Businesses will remain cautious throughout 2008, and leasing activity will be driven primarily by the renewals of existing tenants.

— Mark Stratman is senior vice president & managing principal with The Staubach Company’s Orlando office.

Orlando Retail Market

The question these days is how many of your deals are falling apart? It seems that the good times have taken a U-turn, but really there are many deals out there still to be made.

Central Florida is a unique market. This region has many positive qualities to discuss. The first attribute is our job growth, which has remained stable and continues to grow. Medical City in the Lake Nona area has put us on the map for biomedical industries, with Burnham Institute making Central Florida its new home, the birth of UCF’s medical school, the construction of a new VA hospital and Nemour’s finding a location as well. The Lake Nona area will be one to watch as it becomes one of Central Florida’s largest employment centers. Additionally, the UCF campus, now the sixth largest university in the U.S., and the Research Park continue to be major economic generators.

Tourism also plays a considerable role in our local economy. With over 40 million visitors each year, we have a healthy retail market, especially in the I-Drive/Sand Lake corridor. A great balance of Disney, Universal and the Convention Center makes the Premium Outlets one of Chelsea’s highest performing malls. Prime 1 Outlets just went through major remodeling. Tourists typically spend five times what they normally would in a week while they are on vacation, helping our retail sales stay strong. Central Florida benefits from the high dominance of timeshare units because it ensures that we will continue to have tourists in these uncertain times. The timeshare owners have pre-paid for their vacation, so most owners of units vacation regardless of the state of the economy. Also, the value of the dollar declining against the euro makes this a great destination for international travelers.

The third positive aspect of our region is the amount of government construction projects occurring in Central Florida. There is more than $5 billion in road improvements and public facilities, such as a new arena, performing arts center and rehabilitation of the Citrus Bowl, in addition to Interstate 4 improvements and UCF expansions.

With all that said, things are still moving slower than in the past 4 years. Vacancy will likely rise in many retail centers. Rental rates are in the high teens and low $20’s for small shop space in the 1,000- to 10,000-square-foot range, which is a 15 to 20 percent reduction in rental rate from 2006. Supply will exceed demand for some time in Central Florida; but again, our growth is continuing, just at a slower rate. Therefore, our community will likely rebound faster than the rest of the nation.

Deals are being scrutinized more closely because of retailers pulling back and new stringent requirements of the capital markets. The economy is moving back to the basics. The deals have to make sense before developers go hard. Retailers are starting to look only at actual population versus growth. The rent numbers are a product of projected sales. The retailers have formulas what works for them, and now they are making sure they stick with those formulas, not on what landlord’s are asking. The trend for retailers today is infill development, like the SoDo project (developed by North American Properties and Kimco Realty) located south of downtown Orlando on Orange Avenue. This will be the first Target in Central Florida in a mixed-use project. Retailers will pay to be in the right location. They are also re-evaluating current locations, studying the trends that make certain stores successful, rehabilitating older locations that are established or closing stores that are underperforming.

For the past 5 years, many developers have been flocking to Florida to develop any piece of land they could get their hands on; but now, many are packing up and moving back to their own home towns. Many of the local developers are still continuing to expand their portfolios, like Collard Properties, who has more than five new grocery store-anchored developments in the pipeline. Weingarten has two new projects coming on line now in the Dr. Phillips area: Phillips Landing with the second Whole Foods location in Central Florida and Phillips Crossing. Unicorp has two new mixed-use projects under development as well, Dellagio and The Square (former Mercado). Along with the Rialto, developed by The Wilder Company, this area will be one of the most dynamic entertainment and dining locations in Central Florida.

There are still many retailers expanding in the market. h.h.gregg is opening six new locations this year in Central Florida. Aldi, a discount grocery store, has also entered our market. They are making a big move with more than nine new locations around Central Florida, with very aggressive expansion plans.

I am very bullish on Central Florida’s retail market despite some hard times still ahead. It continues to charge forward with growth.

— Kane Morris-Webster, CCIM, is a retail and land specialist with Colliers Arnold in Orlando.

Orlando Multifamily Market

The metro Orlando multifamily market is projected to be among the best performers in the country during the next 3 years, according to the Spring 2008 Linneman Letter. The report predicts that local vacancy rates will dip below 5 percent by year-end 2009 and below 3 percent in 2010 and 2011. Much of that improvement will come from the stabilization of the condo shadow market toward the end of this year. The supply and demand balance also looks favorable moving forward, as apartment developers are challenged to find well-located, infill sites. Those fundamental factors, coupled with Orlando’s continued job and population gains, bode well for this high-growth area.

Metro Orlando’s rental market entered 2008 approaching stabilization as the effects of the condo conversion shadow market began to wane. Gross occupancy for the metro area finished above 92.4 percent with rents averaging $848 per month at the end of the first quarter, according to M/PF. Rents remained largely unchanged over the trailing 12 months as many units intended for conversion to condominiums had to aggressively lease back up as rentals. Those condo to apartment reversions are largely absorbed now from a rental standpoint, which should help boost fundamentals in the second half of 2008. In 2009 and 2010, Orlando is expected to see annual rent growth return to the 3 to 5 percent level.

Despite strong demand, new construction of market-rate units is relatively modest, with only about 2,700 apartments scheduled for completion in 2008. With a total rental pool of approximately 140,000 units in Orlando, these new deliveries will represent less than 2 percent of rentable units- far less than the annual deliveries of 9,000 and 10,000 units seen in 1999 and 2000. New construction is projected to be limited over the next few years due to the scarcity of multifamilzoned sites and the increase of impact fees. Local impact fees are $10,000+ per unit in some counties, which has helped push total replacement cost for wood-frame, garden style communities to over $140,000 per unit. Those barriers to entry, while challenging to developers, should help increase demand for the existing stock of Central Florida apartments.

Demand for rental product and sales activity in Orlando is also projected to increase due to the area’s sustained job and population growth. Despite the national economic slowdown, Orlando continues to produce jobs and leads the state of Florida in job formation. Forbes magazine ranked Orlando as the fourth “best city in the nation for creating jobs,” and Torto Wheaton projects that Orlando’s total employment growth will be the best in the country over the next 2 years. High-wage, white-collar jobs are expected to grow 15 percent by 2010, with strong gains projected in health care, biotech, and animation. Two independent economic research companies estimated that the new UCF medical school could generate $1.4 billion a year for the city of Orlando. The city of Orlando and Orange County have also passed a billion-dollar development plan to build a new arena and a new performing arts center. Those projects are beginning this year and are expected to create more than 10,000 new jobs over the next 3 years. These strong economic drivers should help lead to a healthy apartment market in 2009 and beyond.

— Shelton D. Granade is first vice president in CB Richard Ellis’ Orlando office.

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