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 — those segments were large components the local economy. Although the area currently ranks eighth nationally for foreclosures and the median home price has stabilized at the 2002 level of $130,000, residential sales volume increased 51 percent year over 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. Burnham Institute, University of Central Florida Medical School, Nemours Hospital and Florida Hospital are all growing. Additionally, government-funded projects in infrastructure and community venues in Orlando should build momentum in the recovery.
As it is occurring nationally, we are witnessing a stratification of retailers locally as well – 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. Some are seeing increases in sales of 25 percent. 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. Boom times and inexpensive credit propped up many borderline defunct retailers for years, but, to paraphrase Warren Buffet, “When the tide goes out, that’s when you find out who’s been swimming naked.”
With this winter’s wave of retail bankruptcies behind us, there are still many ripples on the way. The local retail market has taken a major hit: Circuit City, Linens ’n Things, Kmart, Albertsons, AC Moore, Sound Advice, Floors Today, Leather Gallery, Steve & Barry’s, Home Depot Expo, Washington Mutual, Bank Atlantic, Steak & Ale, Bennigans and Don Pablos were among the retailers with significant closures in the market. Many businesses have not or cannot adapt 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. Numerous vacancies or anchor closures in a center can trigger cotenancy clauses, leading to further vacancies or decreased rental payments. With such an increase in supply, widespread rental rate deterioration is imminent. With transaction volume and deal velocity at depressed levels, establishing market rental rates is challenging: CBRE gauges it at $18.67 NNN. Given the above, rents will continue to fall in order for vacancy to be absorbed given the current soft demand. 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.
Unsurprisingly, infill markets are holding up the strongest with 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 at 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. New development is at a standstill, but this is healthy; there is clearly an over supply of retail product in a handful of submarkets regionally. Furniture and other home-oriented stores have taken a severe hit locally whereas necessity retail remains strong.
Expansion in soft goods categories has been nearly non-existent in Central Florida with some notable exceptions. Both the opening of H&M in The Florida Mall and Nordstrom Rack at Millenia Crossing is highly anticipated. Florida Mall remains at 100 percent occupancy, partly due to resilient tourist traffic, despite many vacancies in box and shop spaces in surrounding developments. Millenia Mall continues to fare very well as one of the jewels of Taubman Centers’ portfolio. 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.
On the west side of the market, Weingarten’s Clermont Landing project brought JC Penney, Epic Theater, Ross, TJ Maxx and Michaels to the submarket. Across the street, BJ’s Wholesale is nearing completion. Farther south along U.S. 27, Tuscany Village has broken ground, but the project is stalled due to the financial problems of the former developer. The Plaza Collina project on S.R. 50 is stalled, as is a neighboring power center development toward the west. Nearby, the Sembler Company’s Winter Garden Mall at Fowler Grove has changed shopping patterns on the west side of town, shifting the retail focus from the declining West Oaks Mall area and Colonial Drive.
In the Doctor Phillips submarket, Dellagio, developed by Unicorp, recently opened its signature restaurants Bravo and Cantina Laredo, soon to be joined by Flemings and Urban Flats. The Rialto project by Wilder Company recently opened Ocean Prime, J. Alexanders, Bar Louie and Bento Cafe. The Point Orlando redevelopment next to the Orange County Convention Center has opened Cuba Libre to join Capital Grille, Maggiano’s, BB King and Red Rock Canyon Grille. Orlando Ale House recently opened just north of Point Orlando with excellent sales performance thus far. The old Mercado center has been leveled, but vertical construction on this mixed use redevelopment dubbed The Square has been delayed. This pocket of Orlando emanating from Interstate 4 and Sand Lake Road offers the best dining options; many restaurants are still averaging annual sales of $4 million to $9 million.
Within the Orlando CBD, the Plaza Cinema Café 12 at Orange Avenue and Church Street had its grand opening in May. With attendance and revenue above projections, the effects of this highly anticipated entertainment destination is noticeably stimulating businesses in the area. The Publix at Paramount on Central Avenue opened months ago and is performing well, while 55 West on Church Street recently began leasing its apartments and retail after a 2-year delay. The projected October 2010 opening of the Orlando Events Center on Church Street will not only provide a new home to the Orlando Magic, but it will also mark the largest public works project in Orlando in several years.
South of downtown Orlando, the SoDo mixed-use development opened in November amid the height of the financial crisis. It is anchored by Super Target, 24 Hour Fitness and TJ Maxx; Jason’s Deli and several shop tenants are opening over the next few months. This project has spurred a handful of new developments and the redevelopment of older properties in this corridor. The exciting Mills Park mixed-use project is temporarily on hold on the north end