CITY HIGHLIGHT, JULY 2010

ORLANDO CITY HIGHLIGHTS
Miguel de Arcos, Richard Matricaria & Shelton Granade

Orlando Office Market

The Orlando office market is currently taking its lumps just like other metros around the state. Many new buildings were delivered to the market between 2005 and 2007 due to demand generated by the inflating economic bubble. The unloading of space back on to the market has skyrocketed vacancy rates in many of Orlando’s submarkets from 6 percent to a marketwide average of 21 percent.

No major office developments have delivered year to date in 2010. There is about 156,000 square feet under construction according to REIS. By comparison, 1.63 million square feet was delivered in 2009, mostly from 2006 and 2007 start dates. The abrupt economic correction in 2008 has caused new deliveries to grind to a halt, a problem that still exists in 2010. The market showed a negative absorption of 1.2 million square feet over the last 12 months.

The Orlando office market is starting to show signs of life but is still on the operating table. Demand is slowly creeping back, and many industry professionals are projecting a return to normalcy in late 2011 —  causing some developers to go ahead and prepare. Build-to-suits top their wish lists and speculative building is no more. Well positioned developers are poised to take advantage of lower land prices and decreased construction costs. An estimated 700,000 square feet is scheduled for delivery in 2011 — a 450 percent increase.

The success of existing space and future office development directly relates to the creation of jobs. If there are no jobs, there is no need for office space. In turn, if there are no jobs, housing becomes unaffordable and population growth declines. A recent article in the Orlando Sentinel reported that Florida saw its first population decline in 30 years last year.

While an economic rebound is the surest way towards job creation, there are a few Orlando submarkets that are providing are creating jobs and have ideal working conditions conducive to growth in employment.

Orlando Markets To Watch

Downtown: The Orlando central business district (CBD) has always been strong and with the additions of the new Orlando Magic arena, the Performing Arts Center, multiple commuter rail stations, the revitalization of Church Street and the proposed Creative Village redevelopment of the old arena, the CBD should bounce back quickly.

Lake Nona: Not since Silicon Valley has such a condensed area seen so much potential. In one of the only undeveloped, formerly rural, areas in Orlando, a medical city is emerging. With an estimated $1 billion economic impact, the Lake Nona area will be bringing in hundreds of high-income jobs along with hundreds of doctorate-level employees. The Sanford Burnham Institute for BioMedical Research and UCF Medical School are already open, and work has begun on the Nemour’s Children’s Hospital and the $500 million VA Hospital. The University of Florida Research labs, MD Anderson Cancer Research Institute and millions of square feet of additional biomedical and high-tech feeder companies are also slated for the area.

Lake Mary: Well positioned northwest of metro Orlando, this affluent Seminole County submarket is considered the market’s financial high-tech corridor. The submarket has excellent interstate/highway access and is considered the jumping off point to both Volusia and Lake Counties. While sublease space seems to be the biggest thorn in the side of corporate office landlords in Lake Mary, the market remains at the top of Money magazine’s annual “Best Places to Live” list. Cost of living is lower in Seminole County, and the schools are A-rated; therefore, the C-class (CEO, COO, CFO) will continue to make their residences here and likely relocate to the market. The business climate continues to improve with the expansion of several large employers in the area and the addition of a several hotels.

— Miguel de Arcos is a managing director of Sperry Van Ness Florida.

Orlando Retail Market

Some positive trends began to appear in the Orlando retail property market in the first quarter, providing a possible starting point for a recovery to commence in 2011. Employers added 700 jobs, and total employment will increase this year. Also, less than 20,000 square feet of retail space was completed in the quarter, and deliveries in 2010 will fall to the lowest level since 1991. Housing starts, typically a leading indicator of retail property construction, also remain depressed and are expected to total 6,400 units in 2010, well below the average of 23,000 annually from 2000 to 2009. The current downturn in development will enable retail vacancy and rents to recover more vigorously as the economy strengthens. In addition to the decline in construction, retail sales have started to grow again, driving more traffic to shopping centers and malls. Despite these positive trends, space demand remains slack, with negative net absorption recorded for five consecutive quarters, while concessions continue to surge. Conditions will stay weak through the rest of 2010 as the economy stabilizes.

Fundamentals have started to show some signs of stabilizing. Construction has fallen off considerably, as only a 19,500-square foot strip center in Oviedo was completed in the first quarter this year. During the past 12 months, 475,000 square feet of space has come online, a 0.5 percent addition to stock and a drop from 2.5 million square feet in the preceding one-year stretch. The 160,000-square foot Loch Leven Landing in Mount Dora is the largest project under way that is scheduled to deliver this year; the development is slated to come online in the second quarter. Approximately 8.3 million square feet is planned in the metro area, although few projects will proceed until the local economy strengthens. Of the planned space, 1.7 million square feet is in Lake County, where population growth has stalled due to the prolonged housing slump. Developers will complete 400,000 square feet of retail space in 2010, down from 900,000 square feet last year.

The vacancy rate for all retail properties increased 20 basis points in the first quarter to 11.1 percent. Negative net absorption of nearly 1.8 million square feet has been recorded in the past year, pushing up vacancy by 210 basis points. In the neighborhood/community center segment, vacancy surged 80 basis points in the first quarter to 12.5 percent, the highest level recorded since 1992. Weak demand has driven up neighborhood center vacancy 550 basis points during the past 12 months to 17.2 percent in the Southeast submarket, an area that includes International Drive and Orlando International Airport.

Negative net absorption has totaled 257,000 square feet since the first quarter of 2009.

The vacancy rate will rise 110 basis points by year’s end to 12 percent, following a 250 basis point surge in 2009.

Rents in the Orlando MSA, however, continue to erode. After declining for the fifth consecutive quarter during the first 3 months of this year, asking rents are now at their lowest level since late 2005. Rents fell 1.2 percent to $17.14 per square foot during the year’s initial period and are also down 6.4 percent from a year ago. Effective rents dipped 1.7 percent in the first quarter to $14.56 per square foot, the lowest rate in nearly 7 years. Year over year, effective rents have declined 9.2 percent. Effective rents have declined in eight of the nine quarters of the recession, pushing up concessions 460 basis points to 15.1 percent of asking rents. Properties north of Colonial Drive have fared better since the downturn started at the end of 2007, however, as concessions in this area have risen just 310 basis points to 13 percent of asking rents. Asking rents will decrease 3.1 percent in 2010 to $16.81 per square foot, while effective rents will retreat 4.5 percent to $14.15 per square foot. Last year, asking rents slipped 7 percent, and effective rents fell 9.4 percent.

Single-tenant properties continue to draw attention, with investors nurturing an especially keen interest in assets only net-leased to top-rated national credit tenants. In recent deals, nationally branded convenience stores and fast-food chains have traded at prices of $300 per square foot or more, well above the current median price for all single-tenant properties. Continuing risk aversion will sustain interest in these types of assets in the months ahead. As for multi-tenant properties, activity remains slow, except for a few opportunistic purchases by institutions in recent months. Generally, unanchored strip centers continue to be adversely affected by a soft local economy, but these properties can sell if rents are at market level and if located in high-traffic areas. Cap rates on well-located assets such as these may start at 10 percent, but the market for lesser quality properties in secondary locations has not yet recovered.

Shelton D. Granade is the senior vice president of the Central Florida Multi-Housing Group with CB Richard Ellis in Orlando.

Orlando Multifamily Market

The Orlando multifamily market has exhibited noticeable improvement this year, and is gaining momentum toward a very strong recovery. After 3 years of rent and occupancy losses due largely to the global recession, apartment fundamentals in Central Florida have registered gains again in 2010. With more than 207,000 new jobs expected locally through 2015 and a very favorable supply/demand balance during the next few years, investors see strong upside in the Orlando apartment market moving forward.

Sales volume in Orlando has increased significantly through mid-year, and is up from the historic lows of 2009. Through June, the local market has seen approximately $188 million in multifamily sales — already approaching last year’s total of $219 million but still largely off the 2005 high of $3.2 billion. Cap rates have compressed considerably during the last several months, and most buyers are securing Freddie Mac debt on new acquisitions. Lenders have been the most active sellers in 2010 thus far, and institutional buyers have returned to the acquisition market. New private equity groups — both national and foreign — have also been drawn to Orlando during the last 12 months.   

Average rents are projected to increase about 1 percent in the second half of 2010 from approximately $805 to $811. Occupancy in the Orlando area increased more than 200 bps from the beginning of the year, and is currently 92.2 percent. With minimal new supply in the pipeline, MPF Research projects that Orlando rents will increase from $805 to $965 during the next 5 years. Occupancy is also projected to tighten further, reaching nearly 95 percent in 2012. Several submarkets are forecast to outperform the market in 2010 and 2011, including Altamonte Springs/Longwood, East Orange County, and North/East Seminole County.

Multifamily investors expect Orlando to be buoyed further by the lack of new supply being built. Only 786 rental units will be delivered this year — a historic low of less than 1 percent of the total rental pool. With such modest new supply in the pipeline for 2010 and 2011, occupancy and rents are poised for improvement during the next 3 years. 

Although Florida’s unemployment rate exceeded the national average for the last 18 months, Orlando is expected to have the second strongest job growth in the country during the next 5 years according to MPF Research. Total employment in Orlando is projected to grow by 207,000 jobs with the biggest gains expected to come in professional and business services and education and health care. Many of those jobs are being added at the Nemours Hospital, the VA hospital, and UCF’s Medical School — three brand new facilities. The local unemployment rate dropped month-to-month in March, April, and May, and MPF predicts that Central Florida will enjoy modest job gains throughout the rest of 2010. Growth will be strongest in 2011, 2012, and 2013, which will see a net gain of more than 50,000 jobs each year. These strong increases coupled with minimal new supply should help lead to a robust apartment market later in 2010 and beyond.

— Shelton D. Granade is the senior vice president of the Central Florida Multi-Housing Group with CB Richard Ellis in Orlando.

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