Economic health at the start of 2020 set a foundation for Orlando’s office market that remains in a good position despite headwinds caused by the global COVID-19 pandemic.
Nationally, the United States saw its longest-running period of economic growth before non-essential business was paused. Even with the slowdown in tourism, Orlando continues to see an uptick in local economy-boosting sectors, including defense and technology. Additionally, an increasing number of companies and individuals in the Northeast have eyes on Florida to escape denser urban markets and high state and local taxes, which bodes well for the Central Florida region.
Fundamentals stay firm
The pandemic significantly curbed a lot of new office leasing activity in Orlando in 2020. However, rents have not experienced a measurable decline to date. As of the second quarter, the total average rental rate was $24.92 full-service. Landlords are generally being patient and are not lowering rents or offering above-market concessions when negotiating new deals. Asking rents will likely stay flat for the coming months until the broader economy kickstarts again or the anticipated new sublease space hits the market and compels landlords to be more competitive.
Greg Morrison
Avison Young
Total net office absorption for the Orlando area posted a negative 518,778 square feet at the end of second-quarter 2020, mostly due to large contiguous blocks in a handful of buildings that the market expected to come on line. The majority of the space was in the University/Research Park and Southwest submarkets. Still, the University/Research Park submarket continues to see steady activity, primarily attributable to the defense and technology industries that are not adversely affected by COVID-19. The tourist corridor in Southwest Orlando may have been impacted the most by the pandemic and awaits a positive shift.
In the overall Orlando office market, some lease deals previously on hold are resurfacing as the economy reopens. The majority of the transactions that are happening are with private-sector companies that have a clearer vision of their post-COVID-19 world and larger corporations whose businesses have either not been affected by or are thriving in the current environment.
Lisa McNatt, Avison Young
Submarkets see big wins
The Airport/Lake Nona submarket takes credit for some of the most significant recent new office leases. SIMCOM Aviation Training announced this month that it would build a new 90,000-square-foot global headquarters and training facility in Lake Nona Town Center. Additionally, in the second quarter, the Lake Nona Corporate Campus released 38,029 square feet to an unnamed tenant, and Lake Nona Town Center II inked a 27,277 square-foot lease with ClosetMaid.
The Lake Mary/Heathrow submarket displayed notable movement in the fintech and soft tech industries, as 400 Heathrow signed 37,346 square feet to public sector software and consulting company GCR Inc. in the second quarter. Meanwhile, the digital media world is ramping up in downtown Orlando, which recently gained the EA Sports headquarters at the Creative Village Center. The deal represented a move and expansion of EA Sports from its previous location in nearby Maitland.
Bid-ask standoff
While very few assets are on the market for sale, billions of dollars in private capital eagerly await opportunities for deeply discounted deals on distressed assets. For example, Oaktree Capital Management is raising a $15 billion fund for distressed assets. There is also a large amount of patient capital looking for strategic long-term value opportunities.
As sellers hold out for high bids and buyers stand off for lower asking prices that factor in real-time market uncertainty, investors will continue to push the future distress narrative once government subsidies taper off. However, property owners are showing strength through healthy rent collections and mostly solid property fundamentals. It’s only a matter of time until the dust settles, and investors return at close to pre-pandemic pricing.
With regard to development, 268,500 square feet of office space is under construction in the Orlando market. Virtually all projects that broke ground continue to move forward, most notably the EA Sports headquarters building in the Creative Village Center. Most speculative development is on hold and on the sidelines.
Outlook
Orlando maintains its position as one of the fastest-growing metro areas in the country. In fact, local population and economic growth due to strides in the defense, technology, simulation and aerospace industries helped put Orlando/Orange County (along with two other Central Florida counties) in the running for the future U.S. Space Force headquarters.
— By Greg Morrison, principal and managing director; and Lisa McNatt, director of research at Avison Young. This article originally appeared in the August 2020 issue of Southeast Real Estate Business.