Known worldwide for its tourism industry, metro Orlando, Florida, has entered the new millennium with a rapidly developing reputation as a center of high technology and promising business opportunity. The region's diverse and prosperous economic growth coupled with a superb quality of life has propelled Central Florida into the second fastest growing major metropolitan area in the country.

Recently, Orlando has felt the effects of the recessed national economic climate, which has particularly affected the tourism and commercial real estate sectors. Currently, a recovery appears to be underway and many economists anticipate growth to return to the market by year-end. Although Orlando's diverse economy will continue to be tourism driven, the high technology industry will have the most significant growth over the next decade.

During the past decade a renewed interest has focused on Central Florida's urban core. Downtown Orlando is being redeveloped into a 24-hour city and is attracting new office, retail and multi-housing developments. More than 1 million square feet of new Class A office space in three towers has been added to the central business district recently. In addition, over 1,200 multi-housing units have opened recently or are nearing completion. Higher density, inner-city development and redevelopment will play a significant role in shaping the urban landscape.

Suburban commercial development continues to flourish with a new emphasis. The "new urbanism" concept of town center development is an ever-growing trend seen throughout Central Florida. Celebration, Avalon Park, Baldwin Park and Colonial Town Park are just a few of the large-scale developments using this town center concept. Campus-style and mid-rise suburban office developments will also continue to prosper. Overall, the suburban landscape is being redefined as gentrification of the inner-city rebounds.

Office

The Orlando office market, characterized by rapid economic growth and related development during the past 3 years, now faces challenges in light of the stagnant economy. Available sublease space has mushroomed and is accompanied by a lack of tenant demand throughout the market. Additionally, there is the beginning of an imbalance of supply and demand in office space, especially in Lake Mary and southwest Orlando where speculative building is greatest. Lastly, job growth was flat through the first half of 2002, which does not bode well for absorption of new office space.

The Central Florida office market suffered from a sluggish economy before September 11. Fortunately, many developers took note and many speculative projects in the construction pipeline were postponed indefinitely, leaving only those projects underway to be completed. Currently, there is more than 1 million square feet of new office product under construction in metro Orlando. Lake Mary leads the region in new speculative projects with 273,000 square feet under construction. Birmingham, Alabama-based Colonial Properties Trust is developing two buildings: Colonial Center 200, a 155,000-square-foot speculative building, and Colonial Center 600, a 200,000-square-foot build-to-suit for Fiserv, a Wisconsin-based software firm.

Landlord concessions coupled with attractive sublease rates have placed downward pressure on asking rental rates. Downtown remains an attractive urban location, although it now faces new competition from the emerging Millenia development in southwest Orlando. Many developers have positioned themselves in this emerging submarket through land purchases. These companies include The St. Joe Company, Duke Realty Corporation and Jones Lang LaSalle, which recently completed Millenia Lakes I, a 192,000-square-foot speculative building. The East Orlando/University submarket, which maintains remarkable strength, stands to benefit most during this downturn primarily because of the high concentration of government and defense-related contractors in the area. Maitland and Winter Park will remain geographically desirable and an attractive alternative to locating downtown while remaining "in-town."

Barring any unforeseen extension of the economic slump, the Orlando office market should witness signs of a recovery beginning in the second half of the year. The construction pipeline should regain momentum in 2003 as vacancies and subleases dwindle to more sustainable levels.

Industrial

Positive but incremental growth will set the stage through 2002. The Orlando industrial market weathered the economic storm well and is a step ahead of the pack nationally. Although construction activity will remain below the robust levels of the past 3 years, increased activity is anticipated through the remainder of the year. Developers may remain hesitant to begin any large speculative projects until a firm commitment of tenant confidence is witnessed in the market. At the close of the first quarter, nine projects totaling more than 734,000 square feet of space were under construction. Among these projects, six are build-to-suit and/or owner-occupied projects and total 457,000 square feet or 62 percent of the total. In the remaining three speculative projects, 216,000 square feet is available for lease. The development is spread evenly throughout the market. The construction pipeline emptied at the end of 2001, which reduced the threat of an imbalance in supply and demand this year.

Seminole County business parks will benefit long-term from the recent designation of foreign trade zone status. In the short term, the area will continue to mature and gain smaller local and regional tenants that prefer to be close to their clients. The well-established Northwest Orlando and 33rd Street submarkets, although limited geographically, still remain players in the market. Southwest and southeast Orlando, traditionally dominant submarkets, will provide opportunities as a surplus of sublease and first- and second-generation space is available. Growth in Osceola County's industrial market has been slow in maturing, although recent governmental actions have fostered a resurgence of interest that is sure to wake the sleeping giant. Lake and Polk counties offer viable opportunities for tenants considering Central Florida and they have recently been successful in capturing some major national corporations. Proximity, pricing and infrastructure aid these outlying counties in their bid to enter the industrial arena. The Orlando industrial market still has wind in its sails given the sustained growth over the past few years. The optimism shown by developers and tenants alike will prevail through the foreseeable future.

Retail

The Orlando retail market is generally healthy despite the recessed economy. Tourism, on which Orlando relies heavily, is on the rebound. The steady tourist flow of 40 million visitors annually and a strong business environment offsets the disproportionately high percentage of retail space (49 million square feet) given a population of 1.75 million residents. The pace of new construction remains brisk as numerous big-box home improvement, wholesale and discount retailers expand across the region. BJ's Wholesale Club and The Home Depot's Expo are new entries into the market.

Vacancy increased slightly throughout 2001 as retailers relocated from older facilities. Back-filling the surplus of vacated space is just one of the many challenges ahead.

A second quarter economic recovery would benefit the current development pipeline of 3.4 million square feet, which is filled with new high-dollar projects. Topping the list is the debut of Mall at Millenia, Orlando's entry into upscale retail. Bloomingdale's, Macy's and Neiman Marcus will anchor the 1.2 million-square-foot mall, which is being developed by Detroit-area developers The Forbes Company and Taubman Centers, Inc. In addition, Nordstrom and Lord & Taylor will debut at an expanded Florida Mall. Just a stone's throw away from these high fashion projects, Belz Enterprises of Memphis, Tennessee, is developing Festival Bay, a 1.1 million-square-foot lifestyle, retail and entertainment center.

While job and employment growth rates slow, opportunities for retailers still exist in rapidly developing areas of Lake County, north Seminole County and southeast Orlando. Downtown Orlando and Winter Park are emerging as niche urban retail markets structured to handle local needs, which bodes well for the growth of a 24-hour city.

Long term, the picture remains optimistic. Although the development pipeline will empty out by the end of the year, many outparcel and big-box retailers will actively develop and scout sites for future development. For instance, the Lake Mary/Sanford retail market is set for a boom as Wal-Mart, Sam's Club and Lowe's Home Improvement Warehouse have all taken large land positions along the Rinehart Road corridor near the Seminole Town Center Mall. Retailers will remain bullish on the Orlando market through the foreseeable future as Central Florida diversifies its economy and becomes the state's most desired location, not only to visit but also to shop.

Multi Housing

The Orlando multi-housing market has experienced strong absorption, declining construction starts and stable occupancy through 2001. Expect continued strengthening in those submarkets serving traditional employment concentrations including downtown Orlando, East Orlando/University and Maitland Center. However, submarkets impacted by the post September 11 fall-off in tourism, including Southwest Orlando, Kissimmee, and Southeast/Airport areas, have experienced vacancy increases, rent concessions and downward pressure on rents.

Currently, approximately 6,500 new apartments are under construction. This is below historical annual demand and well below the 8,600 unit average absorption of the past 3 years. Factors leading to the decrease in construction starts include Orange County's de facto moratorium on residential rezonings, now in its second year, and increased discipline from those lenders and investors who finance new apartment construction. Through 2002, opportunities for developers exist in individual submarkets where the demand generators are something other than tourism and the service industry that supports it.

Development in the entire southern area of Orlando should be curtailed. The exception will be the emerging Millenia submarket around the Mall at Millenia, scheduled to open in October. To the extent that sites are available, opportunities still exist along the Interstate 4 corridor from Millenia to Altamonte Springs and in East Orlando. Downtown Orlando has emerged as a high-end, niche urban market based on changing living patterns. The Lake Mary market continues to experience new construction at levels well ahead of demonstrated demand.

Bryan Burns serves as market research analyst with Grubb & Ellis Company - Orlando.


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