CITY HIGHLIGHT, JULY 2009

ORLANDO CITY HIGHLIGHTS
Greg Morrison, Shelton Granade & Bobby Palta

Orlando Office Market

The Orlando office market is comprised of more than 40 million square feet of office space. Like other metropolitan markets throughout the country, it has certainly been impacted by the sagging economy during the past 12 months. Corporate downsizing, bankruptcies and decreased demand have softened the market considerably. 

Vacancy rates are on the rise and were at 18.3 percent market wide at the end of the first quarter. Landlords have responded to the competitive market by reducing lease rates and increasing concessions, which has resulted in significantly lower effective rates.

But the news is not all bad. During the first part of 2009, there was a noticeable increase in leasing activity. This may be attributed to pent-up demand created by delayed decision making in the latter part of 2008 and bargain hunters sensing that the market is close to the bottom. Even with this increase in activity, trends for higher vacancy and lower effective rates are anticipated for the remainder of 2009. 

Orlando’s economy is much more diverse than people realize, which has enabled some sectors to thrive even in this recession. While the overall demand for office space is down, the bio-medical sector is flourishing. Construction of southeast Orlando’s “medical city” is underway. It will be home to life-science organizations, such as the University of Central Florida College of Medicine, the Burnham Institute for Medical Research and Nemours Children’s Hospital. This is sure to drive the demand for new office space in this emerging market.

Likewise, the simulation, training and defense industries continue to grow. The Central Florida Research Park, located next to University of Central Florida in east Orlando, is considered the nation’s epicenter for modeling, simulation and training technology. In addition, Siemens Power Generation group and Northrop Grumman have a major presence in this market and have both recently expanded.

A factor that is sure to drive downtown Orlando’s recovery is the development of its new community venues. Both the planned Dr. P. Phillips Orlando Performing Arts Center, comprised of more than 300,000 square feet, and the 800,000-square-foot Orlando Events Center, which is scheduled to deliver in the fall of 2010, will help solidify Orlando’s standing as a major metropolitan area.

As one might expect, developers have responded to the slow leasing and tight credit markets by shelving plans for the construction of new office buildings.  That said, only a few significant office buildings are currently under construction. Darden Restaurant is building a state-of-the-art, 450,000-square-foot headquarters in south Orlando. Liberty Property Trust is also working on a 220,000-square-foot Summit Park III building in Maitland, half of which will be occupied by the financial-services technology firm Metavante Corporation when the building opens this November.

Although the current economy poses challenges for Orlando’s office market, the city is poised to come back strong when the market recovers, as many economists predict that high-population growth markets and economies fueled by the tourism, technology and medical industries will be among the first to recover.

— Greg Morrison is the founder of Orlando-based Morrison Commercial Real Estate.

Orlando Multifamily Market

The Orlando multifamily market is showing signs of life in what continues to be one of the most challenging real estate cycles in recent history. Despite the tough market, fundamentals have exhibited modest improvement in the past 60 days, and many investors have pegged Central Florida as a strong candidate to help lead the way back up. Recovery will take time, but favorable supply/demand balances and meaningful job formation during the next 5 years have Orlando poised for strong growth. 

Orlando led the state of Florida in transaction volume in 2008 with more than $645 million in local apartment sales. Despite anemic activity in the 1st quarter of 2009, buyer interest has increased significantly, and the local market has seen nearly $95 million in apartment closings in April, May and June. Cap rates continued to rise due to the challenged national economy and the struggling credit markets, but many buyers have pegged Orlando as a market with a long-term upside. REITs and lenders have been the most active sellers in 2009, and private equity buyers have been the predominant bidders. Institutional buyers have begun to make offers as well and seem poised to return to the acquisition market later this year.   

Average rents are projected to decrease more than 1 percent this year, from approximately $809 to $798. Gross occupancy in the Orlando metro area is currently at about 90 percent and is projected to increase slightly in the second half of the year. With minimal new supply in the pipeline, however, MPF Torto Wheaton Research projects that Orlando rents will increase from $798 to $934 during the next 5 years. Rents will start back up in 2010 and will rise more than 4 percent each year from 2012 to 2014. Occupancy is also projected to tighten significantly moving forward, reaching nearly 94 percent in 2011 and surpassing 95 percent from 2012 to 2014. Several submarkets are forecast to outperform the market in 2009 and 2010, including Altamonte Springs/Longwood, East Orange County, North/East Seminole County and Southwest Orange County. 

With the condo conversion shadow market largely stabilized, the modest pipeline of new multifamily construction is an important bright spot for owners and investors. With minimal new supply in the pipeline for 2009 and 2010, occupancy and rents will likely see noticeable improvement during the next 3 years. Despite strong demand, there are only about 2,700 apartments scheduled for completion in 2009. With a total rental pool of approximately 142,000 units in Orlando, these new deliveries represent less than 2 percent of rentable units. 

Total employment in Orlando is projected to grow by 97,000 jobs during the 2009 to 2014 period; the biggest gains are expected to come in professional and business services, education and health care. The local unemployment rate held steady at around 9.7 percent from March to April, and MPF Torto Wheaton Research predicts that Central Florida will begin adding jobs again in 2010. That growth will be strongest in 2011, 2012 and 2013, with an expected net gain of more than 40,000 jobs each year. These strong economic drivers coupled with minimal new supply should help lead to a healthy apartment market later this year and beyond.

— Shelton D. Granade is first vice president of CB Richard Ellis’ Central Florida Multi-Housing Group.

Orlando Retail Market

As with the rest of the nation, Central Florida is adapting to drastic changes to our financial system. The local retail market has been adversely affected by the severe downturn in construction and housing-related industries. Although the area currently ranks eighth nationally for foreclosures, residential sales volume increased 51 percent in the first quarter compared to the first quarter of last year. Unemployment for the region peaked in March at 10.1 percent, but is now down to 9.7 percent. Fortunately, Central Florida continues to make progress in diversifying its workforce with significant growth in the defense, high-tech and medical fields. Additionally, government-funded projects in infrastructure and community venues in Orlando should build momentum in the recovery.

We are witnessing a stratification of retailers locally — a separation between the Good, the Bad and the Ugly. The Good retailers are focusing on marketing, remerchandising, remodeling, expanding, recruiting and taking advantage of deflated costs and weakened competition. The Bad are working up to Good by repositioning or closing non-performing locations, downsizing existing locations, remerchandising, discounting and marketing. The Ugly are filing bankruptcies, closing locations, laying off staff and slashing prices and costs.

With this winter’s wave of retail bankruptcies behind us, there are still many ripples on the way. Many national retailers have closed stores in the area, and some businesses have not yet adapted their model to the “new normal.” The current market vacancy rate of 7.2 percent is expected to rise in the near term by 1 to 2 percentage points. With such an increase in supply, widespread rental rate deterioration is imminent. Property values are expected to decline in step with rents, but with lenders demanding increased equity participation and higher interest rates, property values face much steeper decline.

Infill markets are benefiting from higher density and solid sales demand from consumers. A Grade A location is still a Grade A location, and they are still commanding the highest rents, which are currently in the high $20s NNN but are occasionally more than $30 NNN, depending on incentives. Dense, upper-middle income areas are no longer immune to store closings, but these are where many opportunistic retail concepts will first gravitate. In less desirable corridors and where economics will allow, alternative users are filling vacancies with libraries, children’s concepts such as Monkey Joes, fitness centers and dollar stores. These deals are getting done in the $4 to $9 NNN range with substantial landlord buildout and incentives, so much so that effective rent can get as low as $2 NNN.

Both the opening of H&M in The Florida Mall and Nordstrom Rack at Millenia Crossing is highly anticipated. It would be hard to tell there was a recession by visiting the outlet malls; they enjoy solid traffic and sales performance. Chelsea’s Premium Outlets in Lake Buena Vista has one of the best sales-per-square-foot numbers of any development in the country and should soon be starting an expansion. Prime Outlets’ purchase and redevelopment of the former Belz Outlet was very well received.

Active tenants remain limited to those with cash reserves or strong banking relationships. Many of these concepts are taking advantage of the tenants’ market by pushing landlord incentives to the max. Nearly all landlords are reducing asking rents, offering longer buildout periods and free rent after opening.

The improving macro conditions of our market should help power the local economy through a recovery during the next year. As vacancy and rent stabilization takes hold and as retail tenants and landlords readjust their models, the Central Florida market will emerge once again as one of the leading regions in the country during the more prosperous times that lie ahead.

— Bobby Palta is a senior associate in CB Richard Ellis’ Orlando office.


©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.




Search Property Listings


Requirements for
News Sections



City Highlights and Snapshots


Editorial Calendar



Today's Real Estate News