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Small Tenants Causing Big Demand for Industrial Product in Orlando

The industrial market in Orlando has undoubtedly experienced robust leasing activity over the first half of 2015, especially among the smaller users ranging from 3,000 to 10,000 square feet. With an average industrial vacancy rate of 9.3 percent throughout Southeast / Southwest Orlando according to second quarter 2015 market reports, quality space for smaller tenants is becoming more and more scarce and available dock-high small space is virtually nonexistent.

Industrial is Rebounding
Two specific factors can be directly linked to the current industrial shifts in Central Florida: construction spending and theme park growth.

The construction industry is booming, in particular within the single-family and multifamily sectors, allowing construction companies of all sizes market share due to high demand for services. Industrial parks are welcoming back smaller construction business owners that may have downsized and operated out of their homes during the downturn but are now looking for larger warehouses and mixed-use spaces for business.

Lisa Bailey, Avison Young

Lisa Bailey, Avison Young

Secondly, theme park expansions, spurred by the record year of tourism in Orlando in 2014, have caused many businesses that were on the back lots of the parks to be pushed back out into the marketplace. Higher tourism rates represent a boost in consumer confidence and spending — locally, regionally and beyond, which is adding to market-wide real estate momentum.

Lack of Industrial Supply
The lack of available industrial space is causing seismic shifts in the dynamic between landlords and tenants, ultimately giving landlords an upper hand. Rental rates continue to rise, with older product priced at $5.95 per square foot and newer product pushing upwards of $7.50 per square foot triple net, in part due to landlord’s willingness to offer concessions of free rent in lieu of lowering rates.

With rental rates on the rise, many industrial space users are leaning toward the cost effective appeal of owner-user options. However, those that were privy to the improving market signs months out quickly snapped up the available properties, leaving very limited supply on the market. Any properties that do come on the market are acquired within weeks.

All of these factors pose an obvious need in the market for smaller single-user industrial product, as well as industrial parks that cater to small- to mid-sized tenants. As rental rates are further pushed up over the next six months to a year, the financial logic would then appeal to local or regional developers to build this type of product. However, an additional hurdle is realized as the availability of land is dwindling, thus pushing construction prices up.

Currently, though, as mid-sized businesses double and triple in size and national retail giants seek hubs in Central Florida to create faster, more efficient and cost-effective deliveries, much larger developments are coming on line. Several new projects in Orlando include:
• McCraney Property Co.’s Phase II at Bent Oak Industrial Park, which will accommodate approximately to 1.03 million square feet of space for big-box users by the end of 2016.
• EastGroup Properties broke ground on Horizon III, which will contain 109,000 square feet, and Horizon IV, which is 81 percent pre-leased and will contain 123,000 square feet, in Orlando in the second quarter of 2015.
• Prologis delivered Building 600 at Beltway Commerce Center, a 125,085-square-foot spec industrial building located at Lee Vista Boulevard and State Road 417.

Hot Spots of Activity
Southeast/Southwest Orlando’s industrial sector as a whole is experiencing rapid positive absorption. More than new businesses penetrating the market, there is a lot of movement as companies with an established presence significantly expand. Historically, the areas within the Southeast/Southwest submarkets which perform the best include the Airport area and Orlando Central Park. Due to the product in these areas nearing full occupancy, tenants able to fill large blocks of space quickly secured square footage within the Bent Oak, Prologis, EastGroup Properties and Lee & Associates industrial parks.

While industrial supply throughout the entire Orlando market is narrowing, submarkets such as Sanford, Lake Mary and Seminole within Northeastern Orlando have less available inventory as vacancy rates reside at 2.4 percent as of second quarter 2015. Beyond lack of product in Orlando, there is a lack of land, which can potentially spark redevelopment in the market as an alternative to new construction catering to smaller users.

In addition to construction spending and tourism, several macroeconomic factors also contribute to the upsurge experienced throughout Orlando: business spending, government spending, job growth and population growth. The bustling activity contributes to, and is a result of, the continued progress of the fundamentals in the area. An improving infrastructure due to projects like I-4 and SunRail moving ahead enhance the logistics of industrial users, further catapulting growth and demand. The necessity of such improvements have become more apparent as the Central Florida business landscape moves beyond tourism and hospitality, representing a more integrated range of industries which all demand efficient services from industrial companies.

— By Lisa Bailey, Principal, Avison Young. This article originally appeared in the August 2015 issue of Southeast Real Estate Business.

Content Partners
‣ Arbor Realty Trust
‣ Bohler
‣ Lee & Associates
‣ Lument
‣ NAI Global
‣ Northmarq
‣ Pavlov Media
‣ Walker & Dunlop

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