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Central Florida’s office market was at its prime, then the pandemic hit

The Suntrust Center in downtown Orlando consists of the thirty-story main tower and the smaller adjacent building bought by Piedmont Office Realty Trust October 2020.
The Suntrust Center in downtown Orlando consists of the thirty-story main tower and the smaller adjacent building bought by Piedmont Office Realty Trust October 2020. (JLL)

Central Florida’s office market hit a high note early last year.

A 2020 first quarter report by Colliers International said the first couple months of the year marked “one of the most dynamic quarters in history for the office market throughout Central Florida.”

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The year began strong with activity in sales, leasing and construction remaining positive, carrying over from a steady flow of activity in 2019. Lease rates continued to climb quarter over quarter and transaction volume remained above normal.

But the report, published shortly after the arrival of the COVID-19 pandemic, warned of headwinds.

“Going into end of 2020, things looked very good and then, of course, the pandemic happened,” Jason Schrago, executive managing director at Newmark’s Central Florida office in Orlando, said. “[The office market in] 2020 became an unknown for most, and the office market is still unknown as we enter 2021.”

Like many markets around the world, Orlando did not fare the economic shock brought by the pandemic triumphantly, but it did prove to be comparatively resilient.

See how Orlando's office market is bucking the national trend and what it means for rents this year.

A fourth quarter report by Newmark found that approximately 470,000 square feet of supply was returned to the market, which pushed the overall vacancy rate to 8.5%, up from 7.4% a year ago.

“Vacancy rates in the upper single digits is still a healthy market,” Schrago, said. “Orlando and Florida is a place where people want to move to, and where more companies want to move and grow in, so we’re situated well.”

The market saw moderate corrections during the second half of 2020, as the unemployment rate dropped to 7.7% by the end of the year from 21.1% over the summer, according to a CBRE report.

Year-to-date sales included 43 properties, totaling approximately 2.8 million square feet, valued at $430.5 million, according to the Newmark report.

A bulk of those sale transactions happened after the second quarter. Eleven office buildings, totaling 877,340 square feet, traded hands during the fourth quarter of 2020, worth a combined $137.5 million.

Some notable sales include a downtown Orlando office building at 200 S. Orange Ave. that shares an atrium lobby with the 30-story 200 South Orange office tower, formerly known as the SunTrust Center. In October, the 128,000-square-foot building was purchased by Piedmont Office Realty Trust for $20 million. The deal broke down to about $156 per square foot. Piedmont, which owns the neighboring office tower, executed the transaction to stop the previous owner from converting the building for residential use.

That same month, Sentinel Net Lease paid $14.3 million for a 60,000-square-foot office building at 9200 Southpark Center Loop that is fully occupied by Cardworks Servicing.

But compared to 2019, sale activity in Orlando dipped significantly. By the end of 2019, five million square feet had sold for a total of $988.3 million, the report says.

Office market analyst say leasing and sales activity dropped, as the pandemic coupled with an election year, pressured companies and buyers into taking a wait-and-see approach.

COVID is reshaping the modern office building, from air circulation to employee spacing and touchless elevators. Find out how developers and landlords are responding to the new demand for safe work spaces.

Ron Rogg, CBRE capital markets executive vice president, said his office’s sales volume was down 50%. At the height of the pandemic, investors weren’t looking to invest and lenders weren’t looking to underwrite deals for mortgages, he adds.

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“I think that was expected, 95% of it you can blame on COVID,” Rogg said. “Since then, we closed out the quarter pretty strong. The first quarter looks good. And in terms of space utilization, the number of tenants coming back to their physical locations is increasing.”

During the final quarter of 2020, Northrop Grumman signed an 85,000 square foot lease at Discovery Point in the University/Research Park submarket.

According to a JLL market report, healthcare and professional services companies are collecting the most demand from tenants.

Nick Poole, managing director at JLL, said one of the silver linings arising from the year is that average office asking rates have remained relatively stable.

The JLL reports says direct asking rent rates fell by 0.6% to $25.58 per square foot year-over-year, as landlords held out for more clarity on the lasting impacts of COVID-19.

“I don’t think landlords have dropped their asking rent rates,” Poole said. “What they have done is increase concessions in the form of tenant improvements, moving allowances and offering several months free rent or a stepped rent system.”

At the same time, he adds, many companies are taking the opportunity to right size operations and restructure lease terms.

“We’re not so much seeing big seven- to ten-year commitments,” he said. “Short-term leases, and renewals in the three- to five-year range give companies time to figure out what’s best.”

Joe Rossi, executive managing director with Colliers International Central Florida, would agree.

“Everybody has this vision that once the vaccine is widespread we’ll get back to business and back to normal,” he said. “But there’s a difference of opinion on how office space will be used going forward.”

Have a tip about Central Florida development? Contact me at arabines@GrowthSpotter.com or (407)-491-3357, or tweet me at @amanda_rabines. Follow GrowthSpotter on Facebook, Twitter and LinkedIn.

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