By the Numbers: Orlando’s Industrial Fundamentals Remain Strong
Orlando’s industrial market emerged from the early panic of 2020 in solid shape, and both occupier and investment activity have continued in earnest ever since. While the preceding year has brought its share of pandemic-induced challenges to the Orlando market, the industrial sector itself has not been adversely affected, other than by labor shortages and the escalating prices of construction materials for new development.
Sector fundamentals remain strong, with healthy leasing and positive net absorption of space, robust tenant activity and continued speculative development that is focused primarily along the 429 Corridor and in the Orlando Central Park and Airport/Southeast submarkets.
Economic fundamentals are also sound. The unemployment rate in Orlando as of June 2021 was 6 percent, down an impressive 1,300 basis points from the height of pandemic unemployment in May 2020. Oxford Economics projects that Orlando is expected to see job growth of 2.1 percent in 2021, 9.1 percent in 2022 and should recover all of its lost jobs by third-quarter 2022, a majority of which are in the leisure and hospitality sector.
Central Florida is the state’s fastest-growing region, and the U.S. Census Bureau expects its growth to outpace South Florida by a factor of two to one for the next several years. Moving forward, creating logistics, distribution and shipping efficiencies, in addition to reshoring efforts, will be critical in preventing the kind of disruption that took place in 2020.
The overall vacancy rate at the end of June was 5.3 percent, with the 60-basis-point quarter-over-quarter drop indicating the lowest rate recorded since 2018 and the fourth-lowest in the previous 20 years. Asking base rents have increased by 9.8 percent since the start of the pandemic to a current average of $7.42 per square foot on a triple-net basis. Rents have continued a steady upward trajectory since 2012, with the average asking base increasing by 35 percent over that period.
Leasing activity has been strong through mid-year 2021, following on the heels of 10 straight years of strong leasing that collectively averaged over 9 million square feet annually. The total square feet leased as of the mid-year point was close to half of all volume recorded in 2020, and activity is expected to grow through the end of the year.
Demand for large bulk distribution projects remains strong, particularly along the 429 Corridor and in the Airport/Southeast submarket. While tenant demand is high for larger blocks of Class A industrial distribution space, there is also significant demand for smaller warehouse spaces between 3,000 to 5,000 square feet, which is resulting in higher asking rents for availabilities in the range.
This healthy space demand, along with tightening leasing fundamentals, is placing upward pressure on asking rents. Some institutional owners are now proposing 4 percent escalations, while others now prefer 5-year terms for mid-sized deals as opposed to the 10-year terms that were common pre-pandemic.
Net absorption through mid-year remains healthy and has already eclipsed the total number recorded in 2019. Totaling 1.7 million square feet as of second-quarter 2021, net absorption for this year is on pace to match last year’s performance, which was aided by the steady lease up of recently delivered distribution space.
Spec development continues
As of the end of the second quarter, there were 19 industrial buildings under construction across Orlando accounting for 2.8 million square feet. With an average floor plate size of 147,901 square feet, many of these new developments will be well-suited for e-commerce and distribution.
Additionally, there are another 17 buildings currently proposed with plans to deliver by the end of 2022.
Investors scour the market
Industrial investment activity has been heated in Orlando, with total transaction volume of $822.3 million for the period from January 2020 through June 2021. The largest sale in the first six months of the year was EQT Exeter’s acquisition of 10550 Southport Drive in the Airport/Southeast submarket for $17.4 million, or $143 per square foot.
Pricing for Orlando industrial assets has continued to elevate since 2016, particularly since the pandemic, as an influx of investors seek exposure to properties that can accommodate the rise of e-commerce distribution. There is also still a delta between the number of prime investment opportunities and the number of investors chasing deals.
Continued growth in the logistics, transportation and construction sectors will drive much of the industrial leasing activity in Orlando in the latter half of this year, which is expected to accelerate from its current pace. The construction sector is also expected to contribute significantly to GDP growth in Orlando moving forward through 2025.
In order to remain profitable, the increasing cost of land, labor and construction materials will result in an acceleration in rents for newly delivered industrial projects, making it more difficult for older, existing product to achieve the same rate of rent growth they have attained over the last several years.
— By Lisa Bailey, SIOR, Principal, and Lisa McNatt, Director of Insight, Avison Young. The article was originally published in the August 2021 issue of Southeast Real Estate Business.