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(Carl Cronan is editor of Real Estate Florida.)

ORLANDO-Significant job losses have led to continued deterioration within the Central Florida office market, leading to a sixth straight quarter of negative space absorption, according to Cushman & Wakefield. Overall vacancy increased slightly during the first quarter to 17.5%, while asking rents fell to their lowest level in two years at $22.41 per square foot.

Nearly 57,000 jobs were lost over the past year in the Orlando metropolitan area, mostly in professional and business services, pushing unemployment to nearly 10%. A research report by Marcus & Millichap predicts that 25,000 positions will be lost this year, with office-using employment contracting by 4% or 11,200 jobs.

“We have not seen effective rental rates this low in over a decade,” says Matthew McKeever, senior director of office brokerage services with Cushman & Wakefield of Florida in Orlando. “Now is a great time for tenants to lock in long-term lease deals at very low rates with numerous concessions, which will provide extensive cost-savings over the lease term.”

Overall absorption totaled minus 334,000 square feet through the first three months of 2009, with the Maitland submarket accounting for the largest chunk at 136,300 square feet, based on research by Cushman & Wakefield of Florida. But there were some pockets of good news, such as the University/Research Park submarket recording at least 32,000 square feet of positive net absorpotion, aided by a 124,500-square-foot lease by Kaplan University at 12650 Ingenuity Drive.

Leasing activity increased 51% from the final three months of 2008, to 672,000 square feet, as landlords continued offering concessions in the form of free or reduced rent for part of lease terms, Cushman & Wakefield reports. Less than 10% of the 823,000 square feet now under construction is being built on a speculative basis, with Southwest Orlando, Altamonte Springs and Maitland being the biggest locations for new buildings.

Office construction is being limited by both a lack of tenant demand plus difficulty obtaining financing. The largest office project expected this year is the new 470,000-square-foot headquarters of Darden Restaurants Inc.

“Supply-side pressure will be minimal, as the largest project scheduled for completion in 2009 is fully leased and other under-way buildings were about 80% preleased as the year began,” Marcus & Millichap states. However, the firm added that office leasing will remain slow this year as job cuts continue among a broader mix of tenants.

From an investment standpoint, declining rents and increasing concessions will combine to realign pricing expectations between buyers and sellers throughout this year, Marcus & Millichap notes. Cap rates for prime class A properties will average from the mid-8% range, while first-year returns on lesser-grade properties will start above 9%, the firm states.

Well-positioned assets in established areas of Orange County will attract investors who want a quick rebound when the economy recovers, Marcus & Millichap predicts. However, Cushman & Wakefield notes that the first quarter was the second-slowest in five years for sales activity and no increase is expected until current credit markets thaw.

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