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Office vacancy rate hits 21%, driving down lease prices
by Bill Orben Associate Managing Editor
Easy access to an expressway network, a short drive to Orlando International Airport and defense-rich companies clustered around the University of Central Florida all are driving deals for office space in southeast Orlando.
However, like much of the rest of Central Florida, those deals come with reduced rents, tenant improvements or even periods of up to eight months of free rent.
The east Orlando submarket had a 21 percent office space vacancy rate for first-quarter 2010, which was in line with the 21.1 percent overall Central Florida vacancy rate reported by real estate brokerage firm Cushman & Wakefield Inc. Vacancy rates in east Orlando, which has more than 6.4 million square feet of office space, have climbed from 8.4 percent in first-quarter 2007.
That vacancy rate has risen mostly because tenants have gone out of business or are downsizing due to the slow economy, while some companies are seeking to lower costs by moving out of the market to cheaper space, said Mary Frances West, senior broker associate for Orlando-based Realvest Partners Inc.
As more vacated office space comes on the market, asking lease rates have fallen from a high of nearly $21 per square foot in fourth-quarter 2008 to just under $19 per square foot in first-quarter 2010.
To entice new tenants, or keep existing ones in a building, landlords are offering everything from new carpeting to a dishwasher for the break room, said Jeff Sweeney, president of Grubb & Ellis/Commercial Florida. "There are very few buildings anywhere in Orlando that are not having to deal with this scenario."
Some sections of the east Orlando submarket are performing better than others. The UCF area, with more than 2 million square feet of space, had a 11.3 percent vacancy rate. But the University Research Park area, with 2.7 million square feet of available office space, had a vacancy 17.7 percent rate. The area near the airport, with 1.4 million square feet of available space had a 15.2 percent vacancy rate.
To be sure, the area has its share of companies going out of business or downsizing, but those related to the defense, health or security industries are expanding, said West.
Meanwhile, buildings finished only as a shell after 2008 are having the most difficulty in attracting tenants, said Sweeney. New carpeting, paint and moving a few walls would cost a landlord about $15 a square foot to complete, but the cost to build out the shell of a building would run closer to $40 per square foot, he said.
The building with one of the highest vacancy rates in east Orlando is the Challenger Tech Center II, at 2602 Challenger Tech Court south of the University of Central Florida, which has been mostly vacant for about two years. About 87,000 square feet of the 93,000-square-foot building is available. The asking lease price is $21.75 per square foot. Because the building was used by a manufacturer that moved its operations overseas, it has some specialty equipment like an IT room with air-conditioning vents in the floor, a backup generator and a dock.
Emily Zinaich of Morrison Commercial Real Estate, which is representing the landlord, said a tenant likely would be offered some free rent instead of a lower lease rate. However, the landlord would pay for some for tenant improvements for a five-year lease.
Experts agree conditions aren't likely to improve for office building landlords until more office space comes off the market.
But the future looks bright for the Lake Nona area, with its "medical city" complex, which includes the University of Central Florida's medical school, the Sanford-Burnham Medical Research Institute, as well as the VA Medical Center and Nemours children's hospital, which are under construction.
The jobs created through those facilities will spur home sales, which, in turn, will lead to an increase in demand for office space to support the area's industries, said West.
