Central Florida is looking sunny to investors who are ready to push past the notion that retail real estate is dying.
Brad Peterson, a senior managing director at JLL who co-heads the JLL Capital Markets Group office in Orlando, was never a believer in the idea. In an interview with GrowthSpotter, he said despite having a tough beginning, retail has had a dramatic recovery since the announcement of the vaccines.
“It’s been an absolute banner year [for retail markets],” he said, adding he’s noticed more retail investors and REITs ask about Florida.
Peterson expects retail values and yields to increase, while earnings for popular investments, like apartments and industrial, become thinner as competition heats up and costs-to-build increases.
“Investors have been looking at retail as a better risk-adjusted return,” he said. “Retail, even compared to other asset classes, is gaining favoritism from the investment community.”
The brokerage received about a dozen offers on a fully leased retail center anchored by Bravo Supermarkets in Orlando’s Lake Nona neighborhood. The 60,557-square-foot Shoppes at Nona Place sold for $35 million earlier this summer.
The buyer, a private investment group affiliated with the Flocchini/ Van Wagner families in Nevada, was a first-time Florida investor, Peterson said.
This month, the Williamsburg Downs Shopping Center in Orlando’s tourism corridor sold for $28.8 million. The 109,246-square-foot shopping center is less than half a mile east of SeaWorld Orlando and anchored by Publix. It was 100% occupied at the time of the sale.
“There are certainly large institutional investors that are saying: I need to be in the Top 10 markets in the country and they’re going to gravitate toward Miami,” but then there are also next-tier investors that will rather be in Central Florida because the growth prospects are greater, Peterson said.
According to JLL Research and CoStar, population growth in the Orlando metropolitan statistical area has increased from 2.14 million in 2010 to 2.68 million in 2020. The 25.2% increase is followed by Fort Myers, which saw a 22.9% increase in population. And Jacksonville’s population climbed 19.2% between 2010 and 2020, marking the third-highest percent increase.
The South Florida market, which includes Miami-Dade, Broward and Palm Beach counties, saw a 10% increase from 5.58 million in 2010 to 6.14 million in 2020.
As the population in the Orlando MSA steadily rises, retail inventory is not faring as well.
Population growth is outpacing construction. As of the third quarter, 1.15 million square feet of retail was under construction, according to JLL Research and CoStar. The data shows Orlando’s retail inventory is 82% of the average of what’s been under construction in the past decade.
“Our inventory levels have gone up 8.6%, so the pace of population growth in Orlando is almost three times the pace of new retail square footage added,” Peterson said.
The dynamic is pushing up demand, which will subsequently lead to higher rents.
CoStar data predicts retail rents to grow on average by 4% over the next three years throughout the state. Peterson suspects retail inventory in Orlando will continue to be below average.
“Apartment developers are driving up the land prices,” he said. “There’s not going to be hardly any new retail development and that gives landowners the power to really charge up rents.”
Gregg Hill, president of Oviedo-based Hill Gray Seven is working on at least 10 retail developments, half of which are in the Central Florida market. One of which includes the Palm Hills luxury shopping center at 325 S. Orlando Ave. in Winter Park, slated to open late into 2022.
Hill said they fully leased the retail project about six months ago. Average rents range between $55 to $65 per square foot.
Superica, a restaurant chain by celebrity chef Ford Fry, will be the anchor. Other tenants include Paris Baguette, Buff City Soap, Los Angeles-based hairstyling company Drybar, and an office for Hill Gray Seven.
As of the end of this year’s third quarter, the average direct asking rent for the Winter Park/Maitland area ranged between $32 to $45 per square foot, triple net, according to a recent Colliers report.
Asking rental rates increased 3.1% year-over-year throughout the Orlando metro area, and were 8.3% higher than the third quarter of 2019. “The increased rates, along with staffing shortage, supply chain issues, forced many of the market’s weaker tenants out of business,” the report states.
“It’s a tricky time to be a retail developer,” Hill said. Premium land prices and construction delays are obstacles, he explains. At the same time, retail tenants are being more selective.
“Finding a good deal is harder to achieve,” he said. “We’re always looking for new opportunities, but before we could look at 10 sites and find a deal, now we’re looking at 20 to 30 sites.”
EDITOR’S NOTE: A previous version of the article incorrectly stated Core Investment Management is based out of Clearwater. The company is based out of Miami.