Things are really hot in the South these days. While the Southeastern portion of the United States is known for its hot, steamy summers, this phraseology also is indicative of the region's commercial real estate markets of the last several years. "The Southeast's economy continues to outpace the nation in terms of job growth, net migration and residential development," says James E. Ledbetter Jr., executive director for Atlanta's Insignia/ESG, Inc.
That heat, building up over the last decade and peaking during the late-1980s and mid-1990s, is cooling off slightly now as we approach the start of a new decade. "But few expected the economic engine of the Southeast to continue to sizzle as it has for the past few years," says Ledbetter. "But even with a bit of a slowdown, the Southeast as a whole still remains one of the most vibrant real estate markets in the nation."
Atlanta In the heart of the Southeast, the Peach State is perhaps leading the region in new commercial development. According to Mark Vernon, regional vice president of Pinnacle Realty Management Co., Atlanta, the city continues to experience significant gains in all sectors of the local economy. "Business expansion, population growth and job formation is supercharging the real estate market," he says.
The city's office market is indicative of the capitol city's "supercharged" economy. Though leasing activity has slowed when compared to the record levels of 1988, there still is enough demand for new office space to justify another 2.2 million sq. ft. of new projects breaking ground during the first half of this year. While out-of-town observers warn of overbuilding, the majority of this new product appears to be warranted as tenants clamor for expansion space and room to grow.
But as Atlanta's economy continues to thrive, trouble can be detected on the horizon. "The city's dramatic growth has resulted in significantly increased traffic congestion, air pollution and other problems endemic to growing faster than infrastructure can be improved," says Ledbetter. However, he says, new initiatives such as the new Georgia Regional Transportation Authority and increased focus on "in-town" living versus the suburban lifestyle may help to alleviate these growth problems. BellSouth's recent announcement that it is relocating the majority of its Atlanta workforce to buildings adjacent to MARTA stations (the city's rapid transit system), and the number of developers announcing plans for infill and/or rehab projects, indicates a willingness by the business community to allow future growth to proceed in a more controlled manner, says Ledbetter.
Downtown Atlanta is undergoing a massive revitalization, which saw its beginnings when the city announced it was hosting the 1996 Olympic Games. This even has transformed the CBD, especially around Centennial Park. Today, this once blighted area is seeing an astounding amount of new hotel, loft residential, retail and office development, as well as enormous undertakings such as the construction of the new Philips Arena, the expansion of the Georgia World Congress Center and a renovation of CNN Center. "Demand for Class-A space remains high," Ledbetter says, and developers are responding with the 650,000 sq. ft. Suntrust Plaza Gardens project now under construction and 50% preleased. Announcements for two additional towers also have been made. The health of downtown's Class-B office market continues to improve as older buildings are converted into residential lofts, too, Ledbetter says.
"In Atlanta's office market, controlling growth is a topic for debate," Vernon says. "Although Atlanta is experiencing some of its best occupancies, new growth policies fuel discussion," he says. The central business district, midtown and the perimeter central area are anticipating new projects adding approximately 5 million sq. ft. to the existing market, and the market is expected to absorb a total of 4.5 million sq. ft. in 1999. "Our clients like the market conditions in Atlanta and are seeking to expand their investments here," Vernon says, an indication that the city's magnetic charge is going strong.
Just north in Midtown, the Class-A vacancy rate has fallen to under 5%, which has driven the development of Peachtree Pointe and plans have been announced for two additional 500,000 sq. ft. towers. Conversion projects include the Biltmore and Midtown Heights, which will add 284,000 sq. ft. to the market. Midtown's strengths continue to lie in its easy access to the rest of the city, is inventory of housing options and abundant amenities including shopping dining and entertainment, which transform the area into a true "24-hour" market, Ledbetter says.
Buckhead has long been recognized as Atlanta's premier office market, and last year wave of new development added a number of Class-A projects to the submarket's inventory. Demand for space from existing tenants has resulted in these new buildings slowly but surely filling up this additional new product, according to Ledbetter. Future development in this market, he says, is expected to occur around he Lindbergh MARTA station, where a major mixed-use project has been announced.
The Northwest area, Atlanta's first "edge city" development, ahs historically been one of the city's most stable and desirable suburban markets, Ledbetter says. An overall vacancy rate of less than 10%, combined with recent significant traffic improvements around the Interstate 75 and Interstate 285 interchange, have sparked activity on the area, he says. The Class-A Galleria 400 building was recently delivered and plans have been announced for new Northwest projects including Overton Park, City View and Paces Summit II. Further up I-75, the area around Town Center Mall has seen a large amount of business park and build-to-suit development.
Atlanta's most active submarket by far continues to be the North Fulton area, located around North Point Mall along Georgia Highway 400, Ledbetter says. Since the beginning of 1998, this area has added more than 2.3 million sq. ft. of new space, and another 2.2 million sq. ft. currently is under construction. "North Fulton's incredible average of almost a half million sq. ft. of absorption for each of the past six quarters shows that there is still a strong demand for low-rise suburban Class-A projects featuring large, efficient floorplates," Ledbetter says. However, leasing velocity appears to be slowing due to less pent-up demand from Central Perimeter tenants and fewer large tenants seeking space in North Fulton. "The market's future appears secure, though, as it is centered around a vibrant retail core and is surrounded by abundant housing options, a growth pattern that resulted in the now-established Cumberland, Central Perimeter and Gwinnett Place markets," he says.
As of mid-year 1999, the overall metro Atlanta Class-A and -B vacancy rate had increased marginally from 11.3% at year-end 1998 to 11.4%, according to Kelly L. Gaughan, director of research for Carter & Associates, Atlanta. As of mid-year 1999, there was slightly more than 12.1 million sq. ft. of vacant office space within the metro Atlanta market, she says.
During the first six months of 1999, metro Atlanta recorded more than 2.3 million sq. ft. of net gain in office occupancy, Gaughan says. Occupancy in the Class-A sector increased by 1.8 million sq. ft. while the Class-B sector absorbed an additional 472,000 sq. ft. during the first six months of 1999.
Meanwhile, Gaughan says, the metro Atlanta Class-A sector's vacancy rate dropped from 11.1% at year-end 1998 to a mid-year rate of 10%. Conversely, the vacancy rate rose slightly within Atlanta's Class-B sector (from 11.6% at year-end to 13% at mid-year 1999).
Through mid-year 1999, the vibrant North Fulton submarket led the metro area with nearly 1 million sq. ft. of net absorption in all classes of office property. According to Gaughan, Northeast Atlanta, Buckhead and Downtown also are among the highest ranking submarkets with net absorption of 505,000 sq. ft., 447,000 sq. ft. and 374,000 sq. ft., respectively.
>From 1994 through 1998, Atlanta Class-A quoted rental rates increased by >an average of 2.7% per annum, while during the same period Class-A >effective rates increased by an average of 5.7%, Gaughan says. "During >1998 alone, average Atlanta Class-A quoted rents rose by 3.1%," she says. >Meanwhile, Class-B average quoted rents rose by 4.9% from 1994-1998. >"Looking forward to 2000 and 2001, market-wide average Class-A quoted >rental rates are likely to peak in the $23.20 to $23.50 range as Class-B >project range from $17.20 to $17.30," Gaughan says.
While the office market is garnering much attention for its strength, the city's industrial market is experiencing some lower absorption numbers and a slight slowdown in development due to overbuilding. "This has resulted in keen competition for new tenants," Vernon says.
The metro Atlanta industrial market consisted of 343.7 million sq. ft. of inventory in more than 5,000 projects as of mid-year 1999. Of that inventory, 28.7 million sq. ft. is vacant and available for sale or lease, according to L. Scott Helms, vice president of marketing for the eastern region of Industrial Developments International, Suwanee, Ga.
The overall Atlanta industrial vacancy rate, Helms says, currently is 8.3% and has remained remarkably stable during the past six and a half years, hovering between 5% and 8%. "We do, however, expect the metro Atlanta industrial market vacancy rate to increase marginally through year-end 1999," Helms says. "I believe that this positive absorption trend will continue through the remainder of 1999, as total absorption for the year is forecast in the 10 to 10.4 million sq. ft. range."
The business service, distribution and bulk warehouse sectors recorded similar vacancy rates for mid-year 1999, according to Jamison Research Inc., Atlanta. With the business service sector reporting 8%, business distribution at 8.3% and bulk warehouse reporting 8.5% for the third consecutive quarter, the sectors are showing similarly consistent absorption.
As of mid-year 1999, the metro Atlanta industrial market had reported more than 7.8 million sq. ft. of new deliveries, of which 60.6% were leased. "New development throughout the market continues to be dominated by the bulk warehouse sector, which accounts for 58% of the space delivered," says Henry Jamison of Jamison Research. Build-to-suit activity remained strong during the first half of 1999, as these facilities accounted for 33% of the reported 7.87 million sq. ft. of deliveries.
To date, Jamison says, the most active industrial areas with respect to newly delivered product have been the Northeast Atlanta, South Atlanta, Fulton Industrial and North Central submarkets. Overall, there is more than 8.8 million sq. ft. of new industrial space under construction throughout Atlanta, according to Jamison. "The majority of this new construction is characterized by high ceilings (24 feet clear and greater) and large building size, sometimes as big as 400,000 to 600,000 sq. ft.," Jamison says.
"We predict that this trend will continue throughout the following years as the Atlanta area increases its dominance as a modern regional transportation hub for the southeastern United States," Jamison says.
Retail buzz in Atlanta these days would not be complete without mention of the Mall of Georgia. The 1.7 million sq. ft. mega-center opened last month in Gwinnett County at Interstate 85 North. A project of Simon Property Group and Ben Carter Associates, Atlanta, the center is anchored by Nordstrom, Lord & Taylor, Dillard's, JCPenney, Pottery Barn and an IMAX Theater. The construction of the mega-mall instigated development of new centers surrounding the mall, as well. Mall of Georgia Crossing also opened recently with anchors Nordstrom Rack, Staples, Target, Uptons and Best Buy.
Among other new retail projects in the Atlanta area is The Avenue at East Cobb, an open-air center by Cousins Properties Inc., Atlanta. According to Joel T. Murphy, president of Cousins' retail division, Cousins is bringing its popular "Main Street" center to the Southeast for the first time with The Avenue East Cobb. Completed last month], the 225,000 sq. ft. center includes 50 shops and restaurants typically found in regional mall environments, including Gap, Ann Taylor, Smith & Hawken, Borders Books and Music, The Athlete's Foot and others.
Lenox Courtyard, 100% leased prior to its opening this summer, is located at Peachtree and Wieuca roads in Atlanta. The Sembler Co. project contains 423,430 sq. ft. and is anchored by Galyan's Trading Co., Publix, Staples and Target.
Richmond While interest in the Richmond area is not as robust as in larger markets like Atlanta, both outside investors and local buyers are taking a serious look. The initial rush for Class-A suburban buildings by the REITs has subsided, but five major REITs still hold investments in Richmond and have ownership of a large portion of commercial buildings, both in the suburbs and in the CBD. "Thus far, 1999 has seen little sales activity of suburban commercial real estate," says Michael Divaris, president of Divaris Real Estate, Virginia Beach.
On the other hand, four speculative suburban office buildings currently are either under construction or close to groundbreaking. In addition, several other sites are targeted for construction, probably delaying a start until an anchor tenant is secured. In the build-to-suit department, the ongoing expansion of Capital One Financial continues as a 171,000 sq. ft. building is under way adding more inventory to their portfolio of about 1 million sq. ft. of office space.
Indicative of a renewed focus toward Richmond's CBD, a 175,000 sq. ft. Class-C building recently was purchased by a national company with the intention of revitalizing the property. "With the downtown convention center expanding three-fold and the continued development of the Riverfront Canal project, it is anticipated Richmond will receive more attention on a national scope," Divaris says. Already, national developers have invested in residential projects in the downtown sector introducing approximately 600 new residential units to the area, a catalyst for new construction and revitalization.
The first half of 1999 proved to be very active for the office sector. "Not only did the market experience new construction and announcements of new projects and expansions, but also the back filling of leaseable space was significant during this period," says Jeffrey Cooke, senior vice president, commercial sales-leasing for Morton G. Thalhimer Inc., Richmond. Net absorption in the office market was more than 193,000 sq. ft. during the first six months of 1999, quickly approaching the 1998 total absorption figure of 229,000 sq. ft.
Delivery of new office product during the first half of 1999 took place in the Interport Business Center and Oaklake Business Center, according to Cooke. With limited new construction and healthy absorption figures, vacancy rates inched down from 9.58% at year-end 1998 to 8.25% for mid-year 1999. Trendwise, the first quarter of this year experienced the bulk of activity with 144,000 sq. ft. being absorbed. Meanwhile, rental rates have remained stable here, with few, if any, landlord concessions.
Activity in the industrial sector picked up during the second quarter of 1999, adds Evan M. Magrill, CCIM in commercial sales-leasing for Morton G. Thalhimer. Net absorption grew substantially from 88,385 sq. ft. in the first quarter to 292,346 sq. ft. in the second quarter, Magrill says. Significant transactions included in this absorption figure are two leases in the Fairgrounds Distribution Center which helped to backfill space vacated during the first quarter.
Two of Richmond's newest state-of-the-art warehouse distribution buildings also experienced leasing success at the new Highwoods Distribution Center on Laburnum Ave. South of the river, additional leases were made to vendors supplying Hewlett-Packard's Richmond operations. "This shows real evidence of the spin-offs that everyone in the market anticipates with Richmond's growing high-tech business," Magrill says.
Expansions are in the works, too. Just as Phase 1 of the Hewlett-Packard facility at the White Oak Technology Park nears completion of approximately 800,000 sq. ft., the firm has announced a dramatic expansion of the project which will nearly double its size. "Hewlett-Packard's commitment to the Richmond market has been one of the most significant industrial developments in the past two years," Magrill says. Holding down the overall net absorption was the recent vacancy of approximately 75,000 sq. ft. in the Falling Creek Warehouse development.
Over the last five years, the level of industrial investment has been "incredible," says Gregory H. Wingfield, president of the Greater Richmond Partnership Inc. An impressive 157 new companies made a commitment to investing $5 billion in the Richmond area between July 1994 and June 1999, according to Wingfield. Big names coming in have fallen into several pointed categories, including bio-technologies, pharmaceutical, semiconductor industries, corporate headquarters, professional services, food processing specialty chemicals and customer service, he says.
During the first half of 1999, the net absorption for the Richmond retail market was positive with a gain in net occupancy of 65,593 sq. ft., according to C. Lee Warfield, vice president of the RetailGroup for Morton G. Thalhimer. The overall vacancy rate is down by 1.82%, he says, due to the addition of freestanding and owner-occupied properties, which primarily are 100% occupied. With 124,023 sq. ft. absorbed, the southwest quadrant outpaced all others, according to Warfield. The bulk of this positive absorption was USA Auctions taking 82,000 sq. ft. at the Meadowdale Shopping Center, he says.
"We project a brisk market for the remainder of 1999," Warfield says. Rental rates are expected to remain stable, and new centers will continue to raise the bar on small tenant rents. CBL & Associates plans to break ground on a shopping center at the intersection of routes 360 and 288, a 450,000 sq. ft. center anchored by Home Depot and Super Wal-Mart. "This area currently is one of the most active in the Richmond marketplace, with a 600,000 sq. ft. Trammell Crow/Faison center already under construction and the CBL project coming on line," Warfield says.
Miami While many of the nation's economies are slowing down, South Florida's real estate sector continues to flourish. Miami-Dade County, in particular, is a crossroad for international trade and business and continues to be sought after by even struggling countries such as Brazil and Argentina, who seem to be showing slow signs of recovery from economic crisis. In addition, European countries such as Spain are looking to South Florida as their gateway to Latin America through the use of the Port of Miami and Miami International Airport, bringing more capital to the county's already booming economy and positively affecting the commercial real estate markets here.
The Miami office market gained momentum during the first six months of 1999, according to Peter R. Harrison, senior managing director, Florida Area, client services for Cushman & Wakefield of Florida Inc., Miami. The overall vacancy rate, which rose slightly, remains one of the lowest in the tri-county area, while asking rental rates continue to climb. Favorable market conditions such as employment growth and a robust economy increased development activity and fueled investor interest in the area, Harrison says.
According to Jim Fried, senior vice president of Tri-Stone Cos., Boca Raton, there is strong demand from institutional and private sector buyers for all major property types. "The emerging markets, in particular, are catching investors' eyes," he says. The Biscayne Boulevard corridor north of downtown Miami, Lincoln Road in South Beach area and many areas of Boca Raton, are among those hot spots.
At 13.8%, the overall vacancy rate rose slightly from the 13.5% recorded six months ago, Harrison says. The increase occurred in the non-CBD submarkets where recent construction completions and an increase in sublease space availability have aided the 0.6 percentage point rise in vacancy to the current 13.4%, he says. The CBD, however, continues to strengthen with a decline in vacancy from 15.1% at year-end 1998 to 14.5% now. "The overall vacancy rate is the lowest it has been in more than a decade," says Harrison. "The CBD office market remains tight and options for tenants wanting to expand are very limited."
The availability of sublease space aided the vacancy rate, Harrison continues. Two factors have contributed to the rise in sublease space, he says. First, recent mergers and acquisitions have left various companies with excess space. Secondly, other companies have leased more space than needed for expansion purposes due to tight market conditions in some sectors of the county, Harrison says. As a result, there are 367,001 sq. ft. available for sublease, of which 31% is in the Airport/West Dade submarket. "The abundance of sublet space raises some concern for the Airport/West Dade sector," Harrison says. "This area has had recent construction completions with little to no preleasing and has another half a million sq. ft. under construction," he says.
Despite what might appear as a slowdown, leasing activity and demand for space remain healthy, Harrison says. At mid-year 1999, absorption totaled 376,416 sq. ft., an increase over the 221,605 sq. ft. absorbed by mid-1998. The overall vacancy rate for Miami's CBD and suburban office markets is at 13.8%.
Tenant expansions and relocations within the market continue to be the driving force behind leasing activity in the Miami area. "Tenants looking to expand are forced to look elsewhere in the market because their current locations cannot accommodate their expansion needs," Harrison says. "Continued demand for quality space and tenant expansion needs will remain the driving factors of investor and developer activity in the coming months.
"Economic uncertainties in the Latin American markets have not hindered speculative development in the Miami area," Harrison continues. Rising rental rates (averaging $20.24 per sq. ft. at mid-year 1999) and a chronic shortage of large blocks of space have aided office development, which remains vibrant and totaling nearly 1.3 million sq. ft. Most of the construction is occurring in the Brickell Avenue and Airport/West Dade submarkets.
"We have a very cautious attitude toward development here," adds Paul White, president of The Allen Morris Commercial Real Estate Services Co., Miami. "But that will help to ensure minimal overbuilding." The city's going forward with select new office development, he says, with at least one to two new buildings in each submarket.
The demand for office space is expected to remain fueled by tenant expansions for the remainder of the year, Harrison says. "However, due to an increase in sublease space and construction completions, the overall vacancy rate will maintain its upward momentum," he says. Asking rents will continue to increase, thereby retaining developer and investor confidence in the sector. "Barring any further turmoil in the Latin American economies, the outlook for the remainder of the year is favorable for the Miami office market," he says.
Marking its highest figure to date, Miami-Dade County's industrial sector recorded 139.9 million sq. ft. in inventory at mid-year 1999, a growth of more than 8.2 million sq. ft. in the past year, according to Harrison. This record growth, attributed by the more than 3.3 million sq. ft. in new construction delivered in the second quarter of this year alone, signifies the immense demand for new and quality product in the region. "With this new construction also comes a slight upward climb in rental rates," Harrison says. Mid-year figures record $5.92 per sq. ft. for warehouse/distribution space, $5.56 per sq. ft. for manufacturing space and $11.16 per sq. ft. for office service/flex space. "Overall, rental rates increased by a little over .13% during the course of the year," Harrison says.
While rents have climbed minimally, leasing and sales activity have thrived. Over 3.4 million sq. ft. was leased throughout 1999, the majority of which took place in the first quarter of this year including, but not limited to, Inktel Marketing Corp.'s lease of 197,000 sq. ft. in Gratigny Central Industrial Park. Sales for the area also reached an all time high with 3.2 million sq. ft. sold this year.
Airport West, Miami-Dade County's busiest submarket, grew by more than 4.5 million sq. ft. and currently stands at over 40.2 million sq. ft. in inventory. "The largest and most popular industrial submarket in the county, it experienced more than 1.5 million sq. ft. in new construction over the course of a year and also saw the highest increase in rental rates by .26% overall," Harrison says.
Several projects are under way, including ABC Distributing's new 968,000 sq. ft. build-to-suit facility completed at mid-year, and the development of Doral Commerce Park which will encompass more than 620,000 sq. ft.
"Probably the hottest market in retail real estate right now is the state of Florida," says Harrison. Florida's economy has been growing rapidly since the early 1990s and hasn't really shown any signs of slowing down, he says. Last year, an average of 1,000 new residents moved to Florida each day. "That's a staggering figure," Harrison says. "With a population that's growing that quickly, it's easy to see that retail is in incredible demand," he says.
The Miami/Dade County shopping center market remains strong, according to Harrison. The countywide vacancy rate was 7.5% at mid-year, compared to 7% last year. The average retail rent is $13.61 per sq. ft.
One of the largest projects in Miami is the recent construction of Dolphin Mall, a 1.6 million sq. ft. retail and entertainment center located on the Florida Turnpike. The value-oriented center features Marshalls, Saks Fifth Avenue's Off Fifth, Linens 'N Things and Neiman Marcus's Last Call, among others. One of the other most talked-about projects in Florida is Simon DeBartolo's Shops at Sunset Place, a 526,000 sq. ft. center with a multiplex theater, Virgin Megastore, GameWorks and Nike-town, among others.
This trend toward entertainment is nothing new to Florida, says Tri-Stone's Fried. "The shopping center industry is seeing a continued proliferation of entertainment-driven retail centers," he says. "There's no shortage of centers to keep people entertained across Florida."
Neighborhood centers also are being developed and retenanted, Harrison says. Florida-based chains like Publix and Winn-Dixie, among others, are expanding rapidly in the state, bringing other tenants into centers with them. With a large population of retirees, Florida also is seeing new drug stores, many with drive-throughs, pop up on every corner, Harrison says.
Orlando, Fla. For the past two years there has been a surge of construction across the state of Florida, and Orlando has been riding the wave, says Lisa DeVore, research analyst with Cushman & Wakefield, Orlando. In the office market alone, 2.4 million sq. ft. of office space is under construction, she says. Couple that with the more than 1.3 million sq. ft. already delivered this year, and it is obvious that the climate has been right for business in Orlando, she says.
The nation's continued strong economic health has had rippling effects throughout Central Florida. Business expansions, once considered cautious endeavors, now are commonplace, DeVore says.
Orlando's overall office vacancy rate currently is 10.8%, a 1.3 percentage point increase over year-end. While this may appear a significant increase, it is actually a slight rise given the new inventory delivered, DeVore says. The lack of large blocks of contiguous Class-A office space, coupled with shrinking vacancies and a surging economy, created a space crunch in 1997, according to DeVore. But developers responded quickly. The only drawback is that they all responded at the same time, creating not only vigorous competition, but possibly even creating an eventual surplus of office space as well. The only barrier Orlando will have to overcome is the lease-up of all new construction coming on line, which may take as long as two years, she says.
With the rise in vacancy rates, Orlando's office market is enjoying a tandem rise in rental rates as well. Rental rates marketwide have risen $0.52 per sq. ft. over year-end, with Class-A rates rising $0.97 per sq. ft. Full-service asking rates range from $17 to $24 in the suburbs to $19.75 to $26 per sq. ft. downtown.
Outside of the ongoing pace of construction, the most notable trend is the widespread availability of sublease space in the market, DeVore says. Sublease availabilities a year ago were few and far between, she says. Today there are multiple opportunities that often remain on the market for months at a time.
The CBD has enjoyed a good year so far, DeVore says. With several residential, transportation, commercial and hospitality projects on the drawing board, Orlando's downtown is becoming an attractive place not only in which to work, but to live as well, according to DeVore. The current overall vacancy rate has fallen 1.8 percentage points since year-end and net absorption is in a healthy balance with leasing activity, she says.
Other standout submarkets include Maitland Center, which historically is Orlando's top-performing submarket; Longwood/Lake Mary, a favored destination for software and computer-related firms; University Area, once thought of as a quiet area surrounding the University of Central Florida, it is now the hottest area in which to develop and build office space; the Airport area, occupying approximately one-fourth of all commercial office space within the submarket; and the Southwest area, which has become a hotbed of new construction.
The Orlando industrial market remains rock solid, according to DeVore. Vacancies have slowly dwindled and rental rates have steadily risen. The Central Florida area has profited greatly from the continued success of a surging national market, and economic indicators show no sign of a slowdown in the near future, she says.
Technology now is Central Florida's second-largest industry behind tourism. Much of this year's leasing activity has been comprised of tenants involved in the warehousing and distribution of goods, DeVore says.
One of the biggest challenges Orlando industrial tenants face is finding adequate space, DeVore says. Fueled by a red-hot economy, business expansions have become commonplace, and there has been significant tenant in-migration in recent years.
In a further effort to capitalize on good fortune, many companies here are consolidating their operations. One such company is Lockheed-Martin, which just announced the relocation of its information systems operation from southernto Orlando, DeVore says.
Net absorption to date accounts for 54% of all leasing activity, which is indicative of healthy market conditions, given the fact that more than 1.4 million sq. ft. of inventory has come onto the market since the beginning of the year, DeVore says.
Rental rates are stable, with a current direct weighted average rental rate of $4.97, a modest decline of $0.05 per sq. ft. since year-end. Looking forward, DeVore says, there should be little upward pressure on rents through the end of the year.
In order to survive in today's competitive business environment, the ability to adapt to change is critical, and Orlando's retail market is among the most dynamically changing markets in the nation, according to DeVore. The malls built during the building boom of 1976 to 1990 are being renovated to meet the changing needs of today's shopper.
Central Florida, especially Orlando, has experienced its fair share of this in recent years. The Fashion Square Mall on Colonial Drive was completely renovated a few years ago and was given a complete facelift. The Winter Park Mall fell victim to the new retail age when it lost its anchor stores and vacancies began to skyrocket. The Colonial Plaza Mall went from being anchored by Dillard's to a series of big-box national retailers such as Stein Mart. The current occupancy rate in Orlando's retail inventory of more than 38 million sq. ft. is 89.4%, but reaches 98% in the Southwest area.
Tampa, Fla. As in much of the Sunshine State, Tampa is seeing occupancies steadily rising and new construction moving ahead in most commercial real estate sectors. Though there has been much tenant shifting taking place, with some spaces being vacated while others are being absorbed, Tampa is maintaining its hold on the equilibrium that has kept this market steadfast for many years.
Office activity in Tampa has been mild so far this year compared to the recent past. The bulk of absorption occurred in a handful of buildings, most of which were newly constructed, according to Lee E. Arnold Jr., chairman and CEO of Colliers Arnold, Clearwater. Overall, he says, 75% of net absorption, or 225,000 sq. ft., occurred in new buildings. "With an increase in development activity, landlords have been aggressive in attracting new tenants," he says. "Some have been so bold as to offer free rent, while others have been offering rental rates in the high teens for anchor tenants."
These concessions lead Arnold to anticipate a softening in the market as developers continue to construct speculative space and several office users depart for build-to-suit projects. "The downtown Tampa market will be hit the hardest as several large users are expected to depart from that market," he says. Currently, at least six tenants totaling approximately 300,000 sq. ft., are moving, or are expected to leave downtown by year-end. As a result, Arnold looks for downtown's vacancy rate to increase at least three percentage points to 15%.
Overall, Tampa Bay's office market has an occupancy of 92.2%, the highest rate recorded. However, with signs of a softening market, it appears to have peaked. Pre-leasing for recently constructed buildings and buildings under construction has fallen to 62%, down from 83%, according to Arnold. With the addition of 1.5 million sq. ft. of speculative space to be completed during the next 12 months, Arnold expects several buildings to come on-line this year with vacancies of more than 50%.
Construction activity during the past 12 months reached the highest level in a decade. This was due, in part, to two campus projects built along the Interstate 75 corridor. Citicorp built three buildings totaling 588,000 sq. ft. in Sabal Park, Progressive Insurance completed a 307,000 sq. ft. building in the Crescent Business park and Highwoods Properties announced it will develop an 800,000 sq. ft. office campus for Intermedia Communications.
"During the next 12 months the Tampa Bay office market will expand by a robust 2 million sq. ft.," Arnold says. New construction coming on-line will push total office inventory over the 40 million sq. ft. mark, he says. Speculative construction will account for 67% of all new office development during that time. "Look for the speculative construction to remain moderate, especially in suburban markets, as vacancy rates remain low and Class-A rental rates are between $19 and $25 per sq. ft.
Among new projects under way is 700,000 sq. ft. of office space in Lakewood Ranch. Two phases of 350,000 sq. ft. each, will be built on 42 acres in Lakewood Ranch Corporate Park. According to John S. Swart, president of Lakewood Ranch Realty Co., an additional 500,000 sq. ft. is in the site-planning stage. "The office market is very strong with very little immediate space available," he says. "This project, in Sarasota County, took an extended period of time to work out because it's a complicated plan, but it's all worked out very nicely."
"I expect demand to be strong during the next 12 months with the market recording more than 1.8 million sq. ft. of net absorption," says Arnold. "However, the majority of space absorbed will result from existing companies expanding into new facilities."
The Tampa Bay industrial market experienced mild leasing during the first half of the year. Overall, the market recorded a negative 294,000 sq. ft. of net absorption. However, the bulk of space released into the market can be attributed to three large tenants vacating space, according to Arnold. Affiliated of Florida, Amana and Gayfers all vacated space totaling 600,000 sq. ft. As a result, Arnold says, occupancy decreased 1.2 percentage points to a rate of 92.9%.
Arnold expects vacancy rates in the Tampa Bay market to soften during the next several months. East Tampa will be hit the hardest with 500,000 to 700,000 sq. ft. of space vacated. With interest rates remaining low, build-to-suit projects continue to pull industrial users from speculative buildings.
Over the next 12 months, the Tampa Bay industrial market will experience a shift in construction activity, according to Arnold. In the past, the bulk of new development consisted of build-to-suit projects and bulk distribution buildings. However, Arnold looks for new development during the next year to be dominated by flex space and service center buildings. "Low vacancies, coupled with increasing rental rates in the market, have increased demand for service-center-type buildings," he says. As a result, more than 500,000 sq. ft. of service center and flex space is under construction. Arnold projects net absorption of 1.4 million sq. ft. during the next 12 months, he says.
Tampa Bay's 56 million sq. ft. retail market continued to record strong leasing and construction activity during the first half of 1999, according to Arnold. The bulk of activity was attributed to the new 1.2 million sq. ft. Citrus Park Towne Centre. The new regional mall was built in the Carrollwood area and opened 100% leased. Construction started on the new International Plaza Mall in the Westshore district. The new mall, which also will have 1.2 million sq. ft., will include Neiman Marcus, Nordstrom's, Lord & Taylor and Dillard's, and should open in September 2001.