Orlando likely resides in the minds of children and children at heart as “The Happiest Place on Earth,” and those involved in its industrial market today couldn’t agree more.
Over the past five years, the Central Florida industrial market has been transformed from its prior position as a spoke in the wheel of distribution to the hub. To service consumers located in the country’s third most populous state, companies are locating large distribution centers in Central Florida (hub) with smaller distribution centers in Tampa, South Florida and Jacksonville (spokes). From a distribution standpoint, Central Florida has become the statewide distribution center for Florida.
Warehouse is the New Retail
The world of e-commerce began with the birth of the internet in the early 90s, made a big milestone with the first secure online transaction in 1994, and today Amazon is no longer first thought of as a rainforest in South America. In fact, Amazon is so prolific that recent reports from Consumer Intelligence Research Partners estimate that Amazon Prime now reaches nearly half of U.S. households. That translates to 54 million people, just in the United States, who have paid $99 for an annual membership that enables each consumer access to free two-day shipping. Amazon Prime and other retailers are in competition for consumer purchasing, offering free and expedited shipping to gain a competitive edge.
The uptick in e-commerce has accelerated demand for statewide distribution in Florida. “We are tracking demand for roughly 5.5 million square feet of industrial product in Central Florida today compared to 3 million square feet in 2007 (the last peak),” said David Murphy, senior vice president with CBRE. “What is even more striking than the uptick in demand is that the number of users looking for space is comparable to what it was in 2007, but their size requirements are much larger.”
Space & Place
Larger users naturally need larger space. But e-commerce users, of all sizes, require a minimum of 3-to-1 land-to-building ratio rather than the typical 2-to-1 due to employee intensive operations and distribution needs. Available sites that can accommodate larger truck courts, additional trailer storage and greater employee parking requirements in Orlando are dwindling.
“The fundamentals of the market — 5.5 million square feet of demand, 1.3 million square feet under construction in Orlando’s core and 3.5 million square feet of announced projects — from a supply and demand standpoint are in very good shape,” said Matt Sullivan, managing director and principal with Cite Partners. “Orlando’s healthy industrial market bodes well for rent growth and price appreciation.”
Orlando has seven buildings totaling 1.15 million square feet under construction as of first-quarter 2016 according to market reports, and momentum has already pushed outward spurring further develop west along the I-4 corridor. Polk County, Central Florida’s largest county bookended by Hillsborough and Orange Counties, has 4.13 million square feet of industrial space under construction as of first-quarter 2016, the most in the state. Several of the large developments under construction or proposed in ancillary markets include (announced projects may or may not get developed and the timing of groundbreaking depends on continued absorption remaining strong):
CenterState Logistics Park, a nearly 1.2 million-square-foot, Class A distribution space under construction at State Road 33 in Lakeland.
County Line Logistics Center at Fancy Farms, a 1.3 million-square-foot, Class A industrial spec property proposed on 70 acres in Plant City
Four Corners Business Park, a more than 795,753-square-foot, Class A distribution center near I-4 and U.S. Highway 27 in Davenport.
Lakeland Logistics Center, a logistics park with 245,000 square feet of Class A industrial space completed and 245,000 addition square feet proposed near I-4 in Lakeland.
Park27, a 600,000-square-foot industrial park under construction at I-4 and Route 27 just west of Disney in Davenport.
Cost of Design
With the higher proportional cost of land, designing to e-commerce needs results in higher building costs due to 36-foot clear heights as a standard rather than 24- or 30-foot clear heights, among other elements. What can translate to an increase in price per square foot is often offset by the functional utility of the building.
Furthermore, market reports up to second-quarter 2016 have vacancy rates continuing to trend downward, averaging out in Orlando at 7.5 percent, down 2 percentage points year-over-year, and direct asking rate up 3 percent since first-quarter 2016 and up 10 percent year-over-year.
Investment in the Future
Sales of industrial properties increased in each of Florida’s major markets from 2014 to 2015 according to market reports, with the most growth occurring in Broward County and Orlando. “Industrial is the product of choice at the moment of the investment community,” continued Sullivan. “It is where the money is flowing.”
And just like tenants, investors interested in Orlando’s industrial market are going to pay a premium for a building that has excellent functional ability.
“Orlando is not a market that sees frequent trading of industrial assets as it is heavily institutionalized, and institutional owners tend to hold assets longer-term. Because of this, several projects that we are currently marketing are generating tremendous interest from the investor community,” added Murphy.
Investment dollars being rotated into the area’s industrial markets are creating cap rate compression on the Class A product. While the Class B and C products are not in as high of demand as Class A, the well-located Class B product is trading well as investment dollars outnumber available assets.
Although the Central Florida industrial market may be the “bell of the ball” today, keep in mind that many developers were nothing more than warehouse owners just 60 months ago. However, key fundamentals to sustainable growth of Central Florida’s industrial sector rely on the fact that the market is centrally located, has access to great transportation and linkages and is fortunate to have an excellent labor pool.
— By Steven McCraney, President and CEO, McCraney Property Co. This article originally appeared in the August issue of Southeast Real Estate Business.