CITY HIGHLIGHT, JULY 2004

ORLANDO’S REAL ESTATE MARKET SHOWS STRENGTH

Commercial real estate occupancy rates are generally stronger in the Orlando, Florida, area than elsewhere across the state. For example, in the first quarter of this year, metro Orlando’s office vacancy rate hovered around 14.89 percent, versus as high as 19 percent in Palm Beach County. This suggests Central Florida’s commercial real estate market is emerging from the national downturn on more solid economic footing than other regions. While several submarkets are still experiencing negative pressure, we are beginning to see positive absorption trends that, if continued, will lead to an increase in rental rates.

Submarkets showing continued strength through the early months of the year include the airport area, downtown Orlando, Lake Mary and southwest Orlando. Despite an overall negative absorption rate in the Maitland submarket during the first quarter, several office buildings there recently sold at very attractive prices. We continue to see significant interest in Orlando from major institutional investors, which bodes well for a long-term recovery for Orlando and the entire state.

All in all, Orlando’s commercial market is growing and remains strong, and I expect this trend to continue through the next 6 months.

— Paul Ellis, principal & North Florida area director, Trammell Crow Company

Industrial

Orlando’s industrial inventory is just over 91 million square feet. With vacancy rates at a 2-year low (currently 6.7 percent market-wide) and positive net absorption over the previous three quarters, concessions are far less aggressive on the leasing side and there has finally been a trend toward rent growth, albeit with very modest gains, primarily for bulk warehouse product that is in relatively short supply.

The sales market has been very active, with many more potential buyers in the market than available product. Owner/users are the most active buyers in the market, eager to take advantage of low interest rates. A challenge to the landlords in Central Florida is to retain tenants that are tempted to purchase their buildings rather than rent. A recent example is Leisure Bay Industries, an Orlando-based company leasing more than 260,000 square feet of space in northwest Orlando with significant term left on its lease. In May, the company entered into a lease with an option to buy a 570,000-square-foot facility in the northern Orlando suburb of Lake Mary. Fortunately for existing owners of investment real estate in Central Florida, new supply has been limited — less than 500,000 square feet of new industrial product was delivered in the first 5 months of 2004 — and the overall economics of Central Florida still make this an attractive market in which to be a landlord.

Orlando is rapidly running out of industrial land. Portions of land originally targeted for industrial use have now been converted to residential use to meet the burgeoning demand for homes within the area. Five years ago, prime industrial land in Orange County was fetching about $75,000 per acre while today, the same land would go for $130,000 to $140,000 per acre.

Increasing land costs and lack of available land will create barriers of entry into the immediate Orlando market. Continued population growth teamed with a continuation of the strong market fundamentals exhibited by the Orlando industrial market in the first half of 2004 bode for a strong market recovery for this product type.

— David Murphy, vice president, CB Richard Ellis – Industrial Properties

Multifamily

The Orlando apartment market is showing signs of life and could see rent increases of 4 to 5 percent by this time next year. Both occupancy and effective rents rose in the first quarter of 2004, according to M/PF Research. Gross occupancy in Orlando increased 2 points from year-end 2003 figures to 94.1 percent. East Orange County saw the biggest gains in occupancy and led all metro submarkets with an overall occupancy of 95.5 percent. Northwest Orange County/Lake County, Winter Park/Maitland, southwest Orange County and south Orlando also registered occupancies above 94 percent.

Strong renter demand helped average monthly rents to increase slightly during the first quarter as well. The area has shown modest rent growth in back-to-back quarters, as opposed to decreases shown in six of the previous seven quarters. M/PF reports 4,733 newly constructed units were completed in the first quarter, but demand exceeded overall supply by 3,947 units.

While occupancy and rents continue to improve, concessions still remain prevalent. Overall, specials are decreasing, and most experts expect concessions to decline further throughout the year.

Much of the positive outlook is due to the local economy’s strong performance. Both Orlando and the state of Florida were creating jobs faster than the 49 other states combined, according to a March 2004 Orlando Sentinel article. The Florida Agency for Workforce Innovation recently reported that Orlando once again led the state in job creation in April, with an increase of 19,900 jobs from a year earlier. The growth bodes well for the apartment market.

The improvement in the market helped spur robust sales activity in the first quarter of 2004. According to CB Richard Ellis statistics, the area registered $325.7 million in multihousing sales in the first quarter. That figure is nearly seven times larger than the sales total at the same time last year. Five of the 18 properties sold in 2004 to date have traded for more than $100,000 per unit. Before this year, only four local multifamily communities had sold at that level. At least one of the high-dollar sales this year is being converted to condominiums, a trend which is gaining momentum in Orlando.

— Shelton Granade, director of operations, and Robert Miller, senior vice president, CB Richard Ellis’ Central Florida multihousing group

Office

The Orlando office market is primed for solid growth. The local economy is predicted to be one of the top 10 fastest-growing markets in the country over the next few years. Employment is diversifying from tourist-based to a more well-rounded economy with an emphasis on business services and financial activities, which will help grow and fortify the office market. Job creation is expected to reduce vacancy and create tenant stabilization over the ensuing 12 months. While real estate investors are attracted to Orlando’s low cost of living and strong potential for growth, demand is limited by available for-sale product.

Developers are expected to deliver only 600,000 square feet of office space in 2004, the smallest annual amount of new construction in nearly a decade. The largest property under construction is the 260,000-square-foot CNL Center II in downtown, which is scheduled for completion in 2005 and is 60 percent pre-leased.

Economic growth is helping to improve vacancy throughout the Orlando metro area, and asking rents have remained relatively stable over the past 5 years. Vacancy should decline from 17.7 to 15.1 percent this year with market stabilization expected in another 12 to 18 months. Downtown has the lowest vacancy at 14.1 percent. In 2004, owners are expected to increase rents by 2.2 percent, to $19.41 per square foot, nearly identical to asking rents in 2000. Effective rents continue to fall, however, and now stand at $15.96 per square foot.

The dominant theme in the Orlando market is the lack of available for-sale property compared to demand. The total number of transactions increased by 13 percent in 2003, to 110, an increase of 55 percent since 2001. Sellers are recognizing substantial appreciation on property due to an abundance of available capital and low interest rates. More than two-thirds of the buyers of property selling at $4 million or more are from outside the Orlando area as national investors realize the low costs and growth potential in the region. Demand should remain strong for Class C property with median prices per square foot increasing between 3 and 6 percent.

— Steven Ekovich, first vice president and regional manager, Marcus & Millichap

Retail

Orlando’s economy is growing at a rate not seen since 1999. Employment has increased by 3.4 percent in 2004, which accounted for 32,000 new jobs, primarily in construction and tourism. New construction of retail properties is booming, with 1.5 million square feet to be delivered in next 12 to 18 months, 590,000 square feet of which will be unanchored space. Vacancies are decreasing, asking rents are increasing, and the transaction pace of single- and multi-tenant retail investment properties has been brisk.

However, because Central Florida imports up to 40 percent of its concrete, the area is suffering due to a worldwide shortage of concrete. Central Florida, a major player in the nation’s booming construction industry, is also experiencing price increases in steel, lumber and drywall. These tight market conditions have caused construction delays in some Orlando commercial projects.

The 1 million-square-foot expansion of the 4 million-square-foot Orange County Convention Center will help attract convention traffic and should provide a boost for retail sales. In addition, Canadian resort developer Intrawest Corporation will develop almost 30 acres near the Convention Center’s north entrance. Plans call for a high-end condominium/hotel resort complex, with shops and restaurants. Atlanta developer Stan Thomas and his Orlando partner Marc Watson, who own 1,780 acres of the former Universal Orlando land, will develop a retail component of the project.

A 14-screen theater is being added to the second level at Orlando’s Fashion Square Mall. The 41,336-square-foot theater will be located between Dillard’s and JC Penney, adjacent to the food court. Colonial Properties Trust moved several tenants to make room for the theater, which will be operated by Big Spring, Texas-based Premiere Cinema Corporation. Over the last 2 years, the mall has undergone $6.5 million in renovations.

Renovations are almost complete on the 1.2 million-square-foot Altamonte Mall. The 30-year-old mall has received $40 million in improvements since 2002. Mall owner General Growth Properties is hoping to position Altamonte Mall to compete with several new open-air retail centers, which are gaining market share in Orlando.

Publix opened in April at Baldwin Park, the 1,000-acre, mixed-use, pedestrian-friendly redevelopment of the former Naval Training Center. Begun nearly 5 years ago, the project is expected to consist of 3,600 homes and 1 million square feet of retail and office space. A lineup of restaurants is planned for the rapidly developing village center.

Vista Park, another large-scale development, is planned for the southeast side of Orlando. If annexing is approved by city council, more than 1,500 acres may be developed as 4,000 homes and apartments, 55,000 square feet of office space and 166,000 square feet of retail. The land is positioned between State Road 417, the Central Florida Greene Way and State Road 528 (the Beeline Expressway). Reported to be the primary growth area of Orlando over the next 25 years, city officials predict the population will soon exceed 50,000. Also proposed is a new mall, which would be built south of the Beeline and east of Narcoosee Road.

The Loop, a 450,000-square-foot shopping center, is proposed for the intersection of John Young and Osceola parkways. Plans call for restaurants, retail space and a movie theater on 62 acres. Wilder Companies has announced plans to build a 440,000-square-foot open-air center in south Orange County, 5 miles from downtown Orlando. Wilder is also negotiating for land to build another open-air center in southwest Orange County near the MetroWest community.

Walgreens and CVS/pharmacy are building new stores on State Route 436. Walgreens will build on 1.61 acres at W. State Road off Wymore Road in Altamonte Springs. CVS/pharmacy is building at the former Chevy’s restaurant site on W. State Road.

Significant transactions include Inland Retail’s acquisition in February of Piedmont Plaza, a 148,100-square-foot community shopping center in Apopka, for $8.35 million. The center is anchored by Bealls department store and Paramount Health Club.

In late 2003, Weingarten Realty Investors bought Westland Terrace Shopping Center, a 67,974-square-foot center anchored by T.J. Maxx and Petco, for $8.75 million. The center, located at the northeast corner of Colonial Drive and Apopka Vineland Road, is shadow anchored by SuperTarget.

In October 2003, Agree Realty sold Winter Garden Plaza, a 233,512-square-foot community center anchored by Kmart and Kash n’ Karry. The property was sold for $8.5 million to a private investor.

— Lynn Leonard, vice president of marketing, NewBridge Retail Advisors

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