First Quarter 2017 / Office Market Report. Orlando

Transcription

1 First Quarter 2017 / Office Market Report Orlando Market Facts 36.9 MSF Total office inventory in the Orlando office market 270,997 SF Direct net absorption for 1Q % Overall Vacancy $25.57 PSF Average rental rate for class A space in Orlando on a fullservice basis Steady Leasing Activity and Economic Growth Continue During the First Quarter of 2017 Orlando's economic vitality continues as demonstrated by the sustained decline in the unemployment rate, which remained steady at 4.3% as of February 2017 a nominal 10-bps decrease from the previous year. Economic fundamentals remain solid, job growth continues to soar with over 55,000 new jobs added in the trailing 12-month period, healthy leasing activity is occurring, and we are beginning to see more active and diversified speculative development in the pipeline. For the second time in less than a year, the Federal Reserve raised the benchmark interest rate by a quarter point, a move that indicates its confidence that the national economy continues to improve. Officials project two more potential hikes over the course of 2017, although any move would be predicated on how the economy is performing. In the meantime, the U.S. stock market has been surging due to reforms expected to come out of Washington, D.C., although relatively flat spending has not resulted in a corresponding spike in economic growth to date. At the close of the first quarter, office fundamentals in Orlando remained strong with healthy net absorption of 270,997 sf and steady gains within asking rents for a majority of submarkets. The overall vacancy rate has increased only slightly by 0.4 percentage points since the end of 2016 to a current 11.3%, and vacancies are tightest in the Winter Park/Lee Road and Southeast Orlando submarkets. Rental rates have inched up over the last three months by $0.17 psf on average, with class A rates up $0.26 psf over the same period. Landlords continue to raise rental rates, even as they recapture spaces that temporarily lower their occupancy

2 Orlando Office Market Report First Quarter 2017 Construction is expected to break ground in May on the first phase of the $1 billion Creative Village mixeduse development, which will kick off with new downtown campuses for the Univeristy of Central Florida and Valencia Community College. Average Asking Rent Rate ($/SF/FS) $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $ Q-2017 Direct Vacancy Rate 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Class A Class B Total Q-2017 Direct Sublet YTD Net Absorption (SF) 250, , , ,000 50,000 0 (50,000) CBD Non-CBD Total Class A Class B rates, demonstrating a clear sign of confidence in the overall market. Nearly all of the positive net absorption during the first quarter took place outside of the urban core, and 64% of it was in the Lake Mary/Heathrow submarket where the largely pre-leased 500 TownPark was completed, and where key leases were signed with CardWorks Servicing (31,678 sf) and The Newport Group (30,628 sf). Leasing activity was brisk during the first quarter with several key deals closing in excess of 10,000 sf, the most notable of which was ServiceNow's lease of 60,000 sf at the speculative Science One building, currently under construction in Central Florida Research Park. Construction Cranes Dotting Downtown's Skyline The much-anticipated Creative Village will soon be underway in the downtown core. Construction is expected to break ground in the third quarter of 2017 on the first phase of the $1 billion mixed-use development, which will be comprised of a 256-unit multifamily project and 10,600 sf of ground-level commercial space, and campuses for both the University of Central Florida ("UCF") and Valencia Community College ("Valencia") will break ground this May. The 148,000-sf Dr. Phillips Academic Commons will anchor the project's $431 million in related private real estate investment activity and will house five of the seven programs for both UCF and Valencia, along with a courtroom that will be used by Florida A&M University. The Orlando Magic's new $200 million entertainment complex is also planned in the downtown core on an eight-acre site alongside Interstate 4. At completion, the project will include a 250-room hotel, 64,000 sf of retail space, 100,000 sf of office space, 250 residential units and a parking garage. Dallas-based Mill Creek Residential Trust and Naples-based Summa Development Group are also underway with two prominent residential towers that together will comprise 583 apartment units and more than 21,000 sf of retail space. Speculative Office Development Continues Outside the Urban Core While a still-conservative lending environment continues to limit new speculative office development, market fundamentals are sound and new speculative construction is underway in the University/ Research and Southwest submarkets. Equity Partners is developing Science One, a 60,000-sf single-story building in Central Florida Research Park. The building is slated for completion early in the third quarter of In the Southwest submarket, Megastron Development LLC is well underway on Kirkman Point II, a 134,000-sf class A office building at International Drive and Kirkman Road. The building is slated for completion by year-end 2017 and several companies have reportedly expressed interest in leasing the building in its entirety. The 500 TownPark building in Lake Mary was completed in early January with CNA as its primary tenant, and Webb International delivered 680 Century Point, a 44,800-sf, single-story class B speculative office building located in Rinehart Ridge. Lastly, The Edison at Primera is expected to break

3 Orlando Office Market Report First Quarter 2017 ground early in the second quarter of 2017 near Lake Mary Blvd and Interstate 4. Atlanta-based TPC Realty Services, LLC will be developing the two-phase project, starting with a two-story, 108,500- sf class A building that can be expanded to over 200,000 sf. Developing Real Estate Trends One of the nation's most significant new development trends is that of transit-oriented development (TOD), where mixeduse, residential, and commercial development arises adjacent to a multi-modal transportation project providing access from multiple points to the urban center. The Orlando area is experiencing strong developer interest in sites close to planned stations for SunRail in South Orlando and Osceola County, as the important millennial demographic desires access to entertainment, leisure and cultural destinations easily reached by alternative transit options. Startup companies providing flexible lease options and dynamic, configurable spaces will also impact commercial real estate, although their impact is expected to be modest as it is generally the shorter term tenant that is attracted to such options. Landlords willing and able to provide greater flexibility during the lease negotiation process with traditional tenants should be able to overcome their appeal. Looking Ahead Investment activity during 2017 is expected to continue at a healthy pace as the growing economy supports business fundamentals including rising rents, occupancies and cash flows. REITs actually rallied by over two percent following the latest move by the Federal Reserve, indicating that investors should not fear additional increases yet to come later in In fact, REITs have generated positive returns in 12 of the last 16 periods when significant interest rate hikes took place. After all, rate hikes indicate a healthy, growing economy and that is a core fundamental for REIT performance. With regard to overall investment activity, capital will continue to flow into the real estate market, albeit at a somewhat slower pace, and investors are now factoring the rising cost of that capital into their negotiations. The restrained pace of new construction, coupled with stillrising commercial land prices, will support a stable vacancy rate with continued incremental gains in rents over the course of 2017, particularly within sought after class A space in primary submarkets. Avison Young continues to anticipate that the new space under construction will only partly mitigate the pent-up demand for large blocks of quality space as tenant interest remains steady and strong economic fundamentals support continued business expansion. Commercial construction activity will also likely pick up speed during 2017 as the new administration has promised additional incentives through an infrastructure reform program that will provide tax credits for private-sector firms investing in projects related to the transportation, public safety, health care, education, utilities and cybersecurity sectors.

4 Orlando Office Market Report First Quarter 2017 ORLANDO MSA TOTAL Class A 16,603,761 $ ,145, % 6.90% 1.62% 8.52% 136, ,363 Class B 20,319,572 $ ,471, % 12.17% 1.44% 13.61% 60,000 57,634 Market Total 36,923,333 $ ,617, % 9.80% 1.52% 11.32% 196, ,997 Downtown / CBD Class A 4,074,777 $ , % 9.94% 3.41% 13.35% 0 20,545 Class B 3,036,412 $ , % 12.95% 0.89% 13.85% 0 (25,164) Downtown / CBD Total 7,111,189 $ , % 11.23% 2.34% 13.56% 0 (4,619) Non-CBD / Suburban Class A 12,528,984 $ , % 5.91% 1.01% 6.92% 136, ,818 Class B 17,283,160 $ ,078, % 12.03% 0.20% 12.23% 60,000 82,798 Non-CBD / Suburban 29,812,144 $ ,819, % 9.46% 0.52% 9.98% 196, ,616 Lake Mary / Heathrow Class A 3,780,231 $ , % 8.16% 0.04% 8.20% 0 158,168 Class B 1,943,260 $ , % 14.23% 0.62% 14.85% 0 16,424 Lake Mary / Heathrow Total 5,723,491 $ , % 10.22% 0.23% 10.46% 0 174, Corridor Class A 339,475 $ , % 3.23% 0.00% 3.23% 0 0 Class B 1,000,992 $ , % 13.08% 0.92% 13.99% 0 13, Corridor Total 1,340,467 $ , % 10.58% 0.68% 11.27% 0 13,704 University / Research Class A 1,329,406 $ , % 5.62% 0.01% 5.63% 0 3,066 Class B 3,242,670 $ , % 8.56% 3.93% 12.49% 60,000 (4,238) University Research Total 4,572,076 $ , % 7.70% 2.79% 10.50% 60,000 (1,172) Winter Park / Lee Road Class A 298,795 $0.00 1, % 0.39% 0.67% 1.06% 0 0 Class B 1,237,803 $ , % 6.64% 0.71% 7.35% 0 4,558 Winter Park / Lee Road Total 1,536,598 $ , % 5.43% 0.70% 6.13% 0 4,558 Southwest Orlando Class A 3,824,484 $ , % 4.26% 3.21% 7.47% 136,000 6,618 Class B 3,003,011 $ , % 14.05% 2.89% 16.94% 0 10,414 Southwest Orlando Total 6,827,495 $ , % 8.56% 3.07% 11.64% 136,000 17,032 Southeast Orlando Class A 919,946 $ , % 9.95% 0.32% 10.27% 0 3,478 Class B 425,439 $ , % 2.21% 0.00% 2.21% 0 (2,430) Southeast Orlando Total 1,345,385 $ , % 7.50% 0.22% 7.72% 0 1,048 Maitland Class A 2,036,647 $ , % 4.46% 0.00% 4.46% 0 21,488 Class B 3,973,999 $ , % 11.97% 0.54% 12.51% 0 40,803 Maitland Total 6,010,646 $ , % 9.43% 0.35% 9.78% 0 62,291 Altamonte / Longwood Class A 0 $ % 0.00% 0.00% 0.00% 0.00% 0 0 Class B 2,455,986 $ , % 16.46% 0.00% 16.46% 0 3,563 Altamonte / Longwood Total 2,455,986 $ , % 16.46% 0.00% 16.46% 0 3,563 Reporting Methodology: This report includes all class 'A' and 'B' office buildings and parks 20,000 SF and greater in the Orlando MSA that are not owner occupied, office medical, or government owned. All rents are reported on a full-service gross basis. The information in this report has been collected by the Avison Young research team via sources that are deemed reliable but is not guaranteed.

5 Orlando Office Market Report First Quarter 2017 Investment activity during 2017 is expected to continue at a healthy pace as the growing economy supports business fundamentals including rising rents, occupancies and cash flows. Leading Indicators (Y-O-Y 1Q-2016 to 1Q-2017) Vacancy Rate 11.32% Net Absorption 270,997 SF Average Asking Rate (FS) $21.70 New Construction 196,000 SF Total Employment 1.21 MM Significant First Quarter 2017 Lease Transactions - Sorted by SF Tenant Property Type SF Submarket ServiceNow Science One New 60,000 University/Research Aecom Cornerstone Building Renewal 35,466 Downtown Orlando CardWorks Servicing Colonial Center 100 New 31,678 Lake Mary/Heathrow The Newport Group Primera IV New 30,628 Lake Mary/Heathrow Hilton Worldwide Windsor at MetroCenter New 29,356 Southwest Shutts & Bowen Lincoln Plaza New 22,819 Downtown Orlando Orlando Family Firm One Orlando Centre New 19,620 Downtown Orlando Environmental Health Testing Westwood Corporate Center I New 15,818 Southwest Centene Maitland Promenade II New 15,202 Maitland Cuhaci & Peterson Forrestal Building New 11, Corridor Significant First Quarter 2017 Sales Transactions - Sorted by Sale Price Property SF Sale Price Price/SF Buyer Submarket 550 International Pkwy 125,920 $19,100,000 $152 JP Morgan Chase Bank Lake Mary/Heathrow 600 Business Center Dr 128,152 $18,900,000 $148 JP Morgan Chase Bank Lake Mary/Heathrow 1 South Orange Ave 76,995 $15,500,000 $201 Launch That LLC Downtown Orlando 429 S Keller Rd 34,884 $6,300,000 $179 IPX1031 Maitland 217 N Westmonte Dr 48,000 $4,000,000 $83 Rahim Enterprises LLC Altamonte/Longwood 1485 International Pkwy 27,545 $3,500,000 $127 Christian Financial Resources Lake Mary/Heathrow Contact Information Greg Morrison Principal and Managing Director 135 W Central Blvd, Suite 700 Orlando, FL greg.morrison@ Lisa McNatt Director of Research 135 W Central Blvd, Suite 700 Orlando, FL lisa.mcnatt@ 2017 Avison Young - Florida, LLC. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.