Central Office Market Shows Weakness

(Carl Cronan is editor of Real EstateFlorida.)

ORLANDO, FL-The local office sector is being affected by declining job growth, conservative leasing strategies and the opening of new office space, according to a new research report by Marcus & Millichap. More than 800,000 sf is expected to debut throughout the market by the end of this year, pushing local office vacancy to 11.4%.

On the bright side, the second-quarter report states that the sales market for Orlando’s class A office assets should remain stable as competition among prospective buyers keeps current pricing level. Office properties have maintained a median price of just under $200 per sf over the past year, even though transaction velocity is down 27% through the first half of 2008.

“Despite cooling economic conditions, institutional and fund investors will continue to target premier properties in the CBD, with assets trading near current cap rates,” says Bryn Merrey, regional manager of Marcus & Millichap’s Orlando office. He notes that cap rates have averaged between 6% and 7% for top-tier properties, while tighter lending may drive up cap rates beyond the current mid-7% range for lower-tier buildings.

Recent investment activity throughout the Orlando market includes last week’s sale-leaseback of a 106,440-sf office building at 2290 Premier Row to HDG Mansur Investment Services by Symcor Inc. CB Richard Ellis brokers in Orlando, New York and Toronto handled the transaction, for which the value was not disclosed.

Job growth in the Orlando market, while still positive through this year’s first half, measures only a third of that in each of the last three years, according to another market report by Cushman & Wakefield. Overall vacancy measured 15% at midyear, up four full percentage points from mid-2007, with the Altamonte Springs, University/Research Park and Millenia/Metrowest submarkets each topping 20%, C&W figures show.

Overall asking rents within Orlando’s office sector are expected to finish the year at $22 per sf, with effective rents at $18.60 per sf, Marcus & Millichap states. Nearly 335,000 sf of additional space is expected to open this year in South Orlando, where the midyear vacancy rate is 12.6% and rent averages just above $18 per sf.

Downtown Orlando’s office vacancy rate is holding steady at 8.7% with rents of $23 per sf, according to Marcus & Millichap. The firm notes that Rida Development Corp. has placed its proposed 900,000-sf office project on hold there, citing economic uncertainty.