By Steven McCraney
As we enter the second half of the year, there is good reason to be optimistic that the economic recovery is gaining momentum. Rents are stabilizing, property values are strengthening and investment and construction are on the rise. These and other positive signs have boosted Central Florida's industrial real estate market.
Several factors are at work. First, the Orlando area is attractive to foreign capital. In February, Siemens Energy Inc. announced it would invest $7 million in a 40,000-square-foot wind turbine training center near Orlando International Airport. The region is also a popular destination for international home hunters, according to online real estate marketing tools provider Point2.
Second, there is an abundance of capital in the market searching for yield, despite the volatility of the commercial mortgage-backed securities market evidenced by the widening spreads during the past two months. We consistently read that billions of dollars are available from life insurance companies, private equity, REITs, pension funds and other traditional sources to fund properties in primary and secondary markets across all property types.
It’s true that the market still holds few opportunities because there has been little construction and sales of opportunistic properties have been infrequent in recent years. At the same time, though, improved market fundamentals and the prospect of solid returns again puts the spotlight on commercial real estate in a global economy that holds uncertainty.
The first quarter saw borrowers focusing on CMBS due to the lower all-in rates, but the influx of cash benefits developers that have had difficulty finding financing since the economic crisis began in 2007. Based on this pent-up demand, borrowers now are seeing the banks — which are benefiting from the from the short term opportunities with wide spreads — and even insurance lenders return to the market with five- to seven-year term sheets.
While the banks are still cautious about making loans, we are seeing several positive trends. Although rates have climbed nearly 100 basis points during the last 60 days, loan-to-cost ratios continue to normalize to 75 percent, and legacy bank customers are finding the necessary capital required to rejuvenate their platforms. With banks emerging from the challenges of the past five years, our lending relationships have never been more important as past borrower behavior is scrutinized and project sponsor quality is pivotal.
Third, the regional economy is improving. The metro Orlando non-seasonal unemployment rate has dropped 1.8 percent year-to-year, finishing the second quarter of 2013 at 6.6 percent versus 8.4 percent at the close of the second quarter of 2012. Moreover, the Orlando metropolitan statistical area (Orange, Seminole, Osceola and Lake counties) added 44,915 jobs during the 12-month period ending May 31.
The economy should continue to grow as residential developers are again scouring for opportunities, which bodes well for industrial and office flex leasing in coming months. According to the Orlando Regional Realtor Association, sales of existing single-family homes jumped 13.4 percent year-to-year from May 2012, and home prices rose 20 percent during the same period.
As builders break ground, subcontractors and suppliers are seeking space. The main challenge to this trend will be interest rates, as increasing residential mortgage rates could result in longer-term renters, which will lead to lower vacancy and translate to higher rents for multifamily properties.
High Absorption is Healthy
The effects of an improved economy, evident in the numbers, should lead to lower vacancy and higher triple net rates for industrial, office and retail assets. The Orlando industrial market, while slower to recover than South Florida, has boosted its occupancy rate to 88 percent over the past 12 months.
What’s more, the vast majority of Class A and Class B+ product has been virtually absorbed, and today, vacant space can be found only in outlier Class C and Class D properties.
According to Matt Sullivan and Wilson McDowell, Colliers International reports net absorption of 782,988 square feet in the first quarter of this year, reversing a downward trend in the previous three quarters.
It is no surprise that the majority of the absorption took place in southwest Orange County and in Seminole County, as theme parks and related services continue to prop up and sustain product types.
As demand for Class A industrial space increases, development will continue to gain momentum. Working with Clarion Partners, we at McCraney Property Company have just formally opened a 150,000-square-foot build-to-suit in Orlando Central Park for Dade Paper Co., and we will immediately commence construction on two additional structures totaling 242,390 square feet facing John Young Parkway adjacent President’s Drive together.
Also, East Group has just completed a 70,000-square-foot warehouse on Commerce Drive, and additional market transactions include World Electric Supply moving into 50,580 square feet at the 33rd Street Industrial Park, ADL occupying 33,820 square feet at Kingspointe Industrial and Blackstone Group purchasing 712,145 square feet of space in the Southeast Orange submarket for $22.75 million.
More positive signs: Lease rates have stabilized as the number of existing tenants has increased over the past year, free rent for new tenants has all but disappeared, and development is starting to pick up speed with an increase in active users.
Such spec development is a very calculated proposition. Build-to-suits and Class A stabilized assets have hit the sweet spot for lenders. We are seeing other industrial developers undertake spec construction on a case-by-case basis where market momentum is riding absorption.
Looking to the Future
Central Florida will continue to ride a wave of new investment, new jobs and new development through the end of this year and into 2014. Orlando set tourism record in 2011 with over 55 million visitors and continues to thrive with 57 million visitors ending 2012.
If the Florida and national economies continue to grow, so will the industrial market in Orlando. We will see more development, and given desirability of the region, that should continue well into this decade.
From my perspective, the 20-year growth story is centered on the I-4 Corridor. The industrial market totals 275 million square feet, which is 39 percent of Florida’s total industrial space, and the region saw net absorption of 4.3 million square feet in 2012.
Those numbers are rivaled only by those of the South Florida market, which has 347 million square feet for 48 percent of the state total but last year saw absorption of only 3.7 million square feet.
With Central Florida outpacing South Florida and enjoying lower land prices accretive to lower competitive statewide distribution lease rates, and further complimented by a variety of land parcels available for growth over the next 20 years, the table is set for continued expansion in Central Florida.
Steven McCraney is president and CEO of West Palm- and Orlando-based McCraney Property Co., which specializes in office, industrial and flex space.