Industrial Tenant Expansions at Caution Level

For example, spec construction dates are being pushed back, build-to-suit and owner-built properties are stepping up to the plate and big-box vacancies are growing.

"Tenant movement and expansion is slowing but there are still a handful of large, 100,000-sf plus projects keeping the market positive," Shelton says.

Example: New distribution hubs are going up for DaimlerChrysler (500,000 sf) at Airport International Park here and Publix Direct (120,000 sf) at Lake Mary Business Center.

"These two companies alone will add over 650,000 sf of new product to the Orlando market," Shelton says.

Build-to-suits are also driving the industrial sector. "This segment of the market is faring well and will produce nearly two million sf by year end," the broker believes.

No new spec ventures broke ground in the first quarter but 1.26 million sf of new product is under construction in the 10.3 million-sf Southeast/Airport submarket which has rolled up the second highest vacancy mark at 19.6%. (For related news, click on:DeLater Breaks Ground on $17-Mil Spec Park)

"This high vacancy can be attributed to the availability of several big-box distribution centers including the former Toys 'R Us (530,000 sf) and Service Merchandise (460,000 sf) buildings," Shelton tells GlobeSt.com.

The highest vacancies are in the 1.1 million-sf East Polk County submarket at 23.4% with no new construction scheduled. Only 150,000 sf was leased at an asking rent of $3.50 per sf.

Property owners are shaving rents to fill existing product but there are no reports of widespread concessions among the 12 submarkets. The first quarter ended at an overall 9.1% vacancy, down 0.6% from fourth quarter 2000.

"The decrease was mainly due to there being no new building openings," Shelton says. "Rental rates marketwide are on a downward trend," he acknowledges. "We have been experiencing volatile market conditions over the past several quarters, which have caused rates to fluctuate."

The broker says a surplus of new product and the departure of several large tenants have contributed to the unstable rates. For example, average asking warehouse/distribution rates of $4.37 per sf are down 11 cents compared to the last quarter, but down only seven cents compared to a year ago.

Average asking R&D/Flex rents of $7.69 per sf "have taken a hit, dropping 31 cents for the quarter and 95 cents from a year ago." Shelton feels "this trend is expected to continue for several more quarters until the backlog of available product is filled."

First-quarter net absorption totaled 297,324 sf and is projected to hit only 1.9 million sf by year end versus two million sf in 2000. By the end of 2002, however, the absorption number will rise to about 2.1 million sf, Shelton projects.

"This slower pace of occupancy should depress rents in the short term but the long-term effect of this slowdown should provide for upward pressure in stabilizing rents," the broker tells GlobeSt.com.

He says developers "are instituting various strategies to mitigate the impact of this downward trend through combinations of shorter terms and lower base rents."

Their strategy is that by "securing existing demand in the short term, competitive pressures will squeeze smaller development organizations, whose cost of capital is higher than that of larger organizations, and will lead to lower rents being offered by smaller organizations in order to service debt."

Of the 2.17 million sf under construction, 1.76 million sf is warehouse/distribution product and 413,868 sf is R&D/flex.

The strongest of the 12 submarkets is the 5.92 million-sf 33rd Street/LB McLeod hub with the lowest vacancy of 3.5% and average asking rents of $6.16 per sf for wholesale/distribution and $8.59 per sf for R&D/flex.

Lake County's growing six million-sf inventory at 4.2 vacancy is the second strongest industrial development area, 30 miles west of Downtown Orlando. Wholesale/distribution product is going for an average $4.51 per sf.