Few buildings are being sold and fewer trophy properties are coming on the market. Capitalization rates are in the 9.5% to 11% range and moving higher, a plus for buyers.

With vacancies rising and rents softening, owners still aren't dropping prices. Investors, meanwhile, are gauging the Orlando market for further weakness in the months ahead, say commercial real estate professionals interviewed by GlobeSt.com.

"Office deals are not tough to find, just tough to close," says Ronald J. Rogg, head of investment properties/Florida, CB Richard Ellis Inc. "Debt capital is available, albeit some lenders have redlined Orlando, and others are underwriting less aggressively." Rogg says raising equity dollars "has become a bit more challenging."

He says "sellers are still not dropping prices to meet buyers' expectations" and feels leverage "clearly is on the side of the buyers." Rogg's division is currently tracking over 3.8 million sf of office properties available for purchase in metro Orlando with an aggregate value of $430 million.

"Obviously, buyers have plenty of properties to choose from but are concerned about new construction, sublease space and that rental rate growth, making pricing not very aggressive," he tells GlobeSt.com.

Year-to-date sales volume tracked by CB Richard Ellis researchers through June of this year is $77 million versus $73 million for the same 2000 period. "Although volume is slightly better, pricing is off on a per-sf-basis by approximately 25% from one year ago," Rogg says. "This is in part due to an inferior class of property being sold and a portfolio sale that tended to drag down the average per-square foot price."

David J. Patten, president, Interlachen Commercial Mortgage, Winter Park and a NAIOP national director, says, "Although we are still able to finance well-leased/located class A and B office properties, they are no longer on the top of the lender's radar screen like they used to be."

Patten says, "In other words, the underwriting is getting a little tighter. The strongest preference now is for industrial, then retail and apartments, with office last." Property prices are down from 2000 and even 1999, he says.

Michael S. Sorich, a longtime area commercial appraiser and a principal with Integra Realty Resources Orlando, feels "the (Orlando) market is in transition and investors are getting gun shy for the foreseeable future." He says, "Expect cap rates to be on the rise."

Sorich views the local office market as "overbuilt in the suburbs or getting that way in many areas." He anticipates "the impact of the high-tech industry will hit Orlando this year and next, relative to office occupancy issues."

Sorich says that scenario "will tend to drive cap rates higher." Right now, however, "investors are shying away from Orlando for the near term to see how we fare over the next few months."

The appraiser says, "My guess is cap rates for class A office buildings are in the upper 9% range, possibly north of 10%, depending on the nature of the tenancies, such as credit worthiness, quality, submarket conditions and occupancy/releasing posture over the near term." Class B properties definitely would be "north of 10%," Sorich says.

For the central business district, "this is a stronger market (with) no new inventory coming on line, although some new space is still available." Cap rates in the CBD are in the lower to mid-9% range, he estimates.

Jeffrey Bloom, an investment broker with Arvida Realty Services' commercial division, Winter Park, FL is finding prices up this year from the previous two years, even with a softening rental rate picture. "Prices on office properties are still very good, mostly above $100 per sf on cap rates of around 9.5%," Bloom tells GlobeSt.com. "I don't think asking prices are being reduced in direct proportion to rental rates at this time."

He says, "With so many properties changing hands in investment real estate recently, there are not very many owners wanting to sell." Bloom says "there are a lot of new owners who need time to season and who have some wherewithal to ride out down times."

Like his colleagues, the Arvida office specialist says "there is plenty of capital" available in the market but "loan-to-value ratios and other lender requirements are definitely more stringent than in the previous three years." Bloom adds, "Deals are tougher to fund" today.

George D. Livingston, founder/chairman of Realvest Partners Inc., Maitland, FL says one reason the investment market in Orlando has lagged is that "owners are not under pressure to sell as they were in the late '90s." He says, "the feeling now is just not of panic."

Livingston says "new construction is saleable today because the building or buildings are fully leased, the rents are known and stabilized, and the leases have a long time to run." With such a scenario, the owner "can hold or sell," the broker/developer says.

But older buildings "generally are still cash flowing, so the sellers can wait for their price or wait for a better future opportunity." Livingston says "leverage is not as high either, so refinancing is possible, if necessary."

The developer says the existing office investment environment here is puzzling because "buildings are sold on cash-flow streams. If vacancies are up and rents down, by definition, sales are made at lower prices, or not made at all." But he has seen few sales this year and no "meaningful change in asking cap rates by sellers."

Greg Morrison, managing broker, Carter & Associates-Oncor, agrees. "Prices are flat due to the low amount of activity," Morrison says. "For the most part, sellers are holding tight right now."

Morrison also agrees with his colleagues that "there is a lot of capital, but buyers and sellers are on different pages." That scenario makes for "minimal (investment) activity."

He says, "Everybody is watching the economy and softening markets, so there is caution among buyers and developers." Morrison adds, "The consensus in Orlando is that this is a short-term slowdown. Growth will continue, but at a moderate pace."

Instant Insights /

GlobeSt.com SPECIAL: Office Sellers Holding Firm as Buyers Wait It Out

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