New Office Developments Take Shape in Orlando’s Core Submarkets
At mid-year 2018, Orlando’s economic engine is performing like a well-oiled machine, fueled by brisk business expansion, healthy in-migration, accelerating job growth and steady population gains. In fact, Orlando ranked No. 3 in the nation for population growth during the period between 2010 and 2017.
Office market fundamentals remain solid with steady demand for high-quality, Class A space largely outstripping available supply, particularly in high-demand areas. Job creation continues to fuel economic growth in Orlando with a rise in non-farm employment of 46,840 over the trailing 12 months ending in May. There has been a sustained decline in the unemployment rate as well, which stood at 3 percent in May.
Spec, Mixed-Use Projects
Development activity has been restrained over the last several years. However, a handful of key office projects have recently broken ground in high-demand areas. The most exciting development activity is occurring in the urban core, where a number of projects are moving forward. Speculative Class A office construction is once again rising with the $100 million Church Street Plaza going vertical after a slight construction delay.
SunTrust Banks Inc. recently announced plans to relocate its Orlando headquarters from the SunTrust Center building into 90,000 square feet at Church Street Plaza, which is scheduled for completion in late 2019. SunTrust will be vacating 125,000 square feet of its current space, creating an opportunity for a new anchor tenant to occupy a rare large block of Class A space in Orlando’s most sought-after trophy office tower.
Just to the west of Interstate 4, the $1 billion, transit-oriented Creative Village development continues to move forward, a new 200-acre project called The Packing District is being planned and the Orlando Magic’s future $200 million planned sports and entertainment district is awaiting construction.
Southeast of the urban core, the rapidly growing Lake Nona Town Center area near Orlando International Airport continues to expand. A second phase is planned for the $780 million, 3.8 million-square-foot mixed-use project, which will include a 155,000-square-foot office building that has already signed UK-based Signature Flight Support as an anchor tenant and is expected to deliver in the fourth quarter. TPA Realty Services, Sentinel Real Estate Corp. and Emerson International also have significant speculative office developments planned or underway in the market.
Market-wide, there is a total of $9 billion in infrastructure improvements planned or underway throughout the area, including the state’s massive I-4 Ultimate Improvement Project, new terminal development at Orlando International Airport, the second phase of SunRail and the planned connection with All Aboard Florida’s Brightline train that will ultimately connect Orlando with West Palm Beach and Miami.
Florida Gov. Rick Scott has also begun the administrative process for a privately funded high-speed rail service that eventually will link Orlando to Tampa. Brightline submitted a proposal earlier in the spring with plans for the route to extend from Orlando International Airport to downtown Tampa.
Quick Look at the Stats
During the trailing 12-month period ending in June, asking rents are up $0.71 per square foot, or 3.1 percent, across all properties, with Class A rents up 4.2 percent.
The greatest overall rental rate gains can be found in the Winter Park/Lee Road (up 21.3 percent), Southwest Orlando (up 6.7 percent) and Lake Mary/Heathrow (up 6.1 percent) submarkets. The direct vacancy rate has fallen 100 basis points over the same period and sublet vacancy is beginning to slowly ebb away.
Robust Investment Activity
Office investment activity has been fairly brisk over the last year with $794 million in total transaction volume for the trailing 12-month period ending June 2018. The largest sales so far in 2018 include Terracap Management Corp.’s acquisition of Resource Square I and III in the University/Research submarket for $39.2 million, or $158 per square foot, and Piedmont REIT’s acquisition of the HD Supply building in downtown Orlando. The 182,641-square-foot building sold for $28 million, or $153 per square foot. Also in the urban core, Sullivan Properties purchased the Church Street Exchange for $12 million, or $138 per square foot. The building functions primarily as a tech hub.
Within the high-demand Maitland submarket, Susquehanna Holdings acquired Keller Center for $27.9 million and Realty Capital Commercial Real Estate Advisors further expanded its Orlando holdings with the acquisition of a three-property portfolio in Maitland and Winter Park. Maitland’s 500 Winderley Place and 2400 Maitland sold alongside Interlachen Corporate Center for $27.3 million.
Orlando’s office market is well positioned as most tenants are utilizing their spaces efficiently, reducing the likelihood that large scale downsizing will be necessary in the event of a slowdown, and the overall vacancy rate continues to post incremental declines.
With continued discipline on the part of developers, and barring any unforeseen economic shocks, Orlando’s office market is expected to remain one of the strongest in Florida.
— By Greg Morrison, Principal and Managing Director, and Lisa McNatt, Director of Research, Avison Young. This article originally appeared in the August 2018 issue of Southeast Real Estate Business.