As COVID-19 took hold in early 2020, the Orlando retail market only saw a modest dip in fundamentals where metro-wide rental rates fell by 5 percent and occupancy dropped 100 basis points during the second and third quarters. Beginning in the fourth quarter of 2020, rental and occupancy rates began an extraordinarily strong comeback, climbing 12 percent and 140 basis points, respectively, from the COVID-19 lows.
According to data from CoStar Group, the metro’s average rental rate of $15.84 per square foot in the second quarter is more than 7 percent higher than the pre-pandemic peak. And occupancy rates are 40 basis point higher than the pre-COVID-19 peak, currently standing at 96.4 percent.
Brad Peterson, JLL Capital Markets
With escalating land prices and shortages in raw materials and labor, we anticipate overall construction costs will continue to increase, stalling deliveries and further advancing rental and occupancy rates.
Last year, some retail owners (sellers) and investors (buyers) focused on asset management within their portfolios and reevaluated the perceived investment risk due to the pandemic, which caused a sharp dropoff in 2020 investment activity, despite an abundance of capital available to invest.
After a couple quarters of fundamentals bottoming out, owners and investors had confidence in their ability to measure investment risk, which resulted in transaction activity starting to rebound.
At the same time, investment capital was also re-evaluating risk-return dynamics across all asset classes. The yields on multifamily and industrial investments are extremely low and predicated on aggressive rent growth assumptions, so investors began to see retail investments as a higher yield alternative with much more modest growth assumptions.
So, with retail fundamentals in Orlando today stronger than they were pre-COVID-19, capital looking for investment and moving from other asset classes, we’re seeing aggressive pricing on strong retail investments — particularly on grocery-anchored centers. It’s the most aggressive pricing in my 20 years in retail investment sales.
Among the most noteworthy recent Orlando retail sales is Bluerock Commercial Real Estate and Intram Investment’s sale of ECCO on Orange, a 57,747-square-foot retail center anchored by Publix that was part of a mixed-use development in Orlando’s SoDo District. JLL Capital Markets brokered the sale of the property to Continental Realty Corp. for $30.5 million, or roughly $530 per square foot. The transaction closed at a record-low cap rate for a stabilized grocery-anchored center.
Why Orlando?
There are three main reasons why Orlando’s retail market is outpacing much of the country: Orlando’s population growth, which is expanding three times faster than other U.S. cities; its booming tourism industry; and Florida’s business-friendly environment and strong economy.
The Orlando MSA gained nearly 61,000 new residents in 2020, which, other than 2016, is the most residents Orlando has gained in any single year over the last decade. Orlando’s growth last year ranks it as the No. 3 fastest-growing market in the United States, outpacing Atlanta, Austin and Tampa. While the current population of metro Orlando is roughly 2.6 million with a median age of 37, it is expected to reach 5.2 million residents by 2030.
In addition, there are more than 70 million visitors annually who come to the theme park capital of the world, and they come to spend. These vacationers tend to have higher income levels than the average Orlando resident and boost the local economy without the need to comparison shop. Equivalent to having another 1 million full-time residents, this phantom population has a profound impact on retail, which spent some $50 billion in 2018 — an all-time high.
Orlando is also experiencing an economic boom exceeding state and national averages due to its vibrant tourism, real estate and life sciences industries. According to Roofstock, the Orlando MSA is the No. 5 U.S. large metro area with the most economic growth so far in 2021. Further, there is currently more than $15 billion of infrastructure investment in Orlando for such projects as the Ultimate 1-4, Orlando Beltway, Orlando International Airport and SunRail.
Looking forward
Orlando’s growing economy and population have resulted in one of the healthiest retail markets in Florida. Orlando’s strong population growth coupled with a tremendous adrenalin shot of tourism and strong economy creates a unique and highly attractive retail market. Record investor demand and pricing is expected to accelerate in the coming years.
— By Brad Peterson, Senior Managing Director, Orlando Office Co-Lead, JLL Capital Markets. This article was originally published in the August 2021 issue of Southeast Real Estate Business.