Employment gains fail to boost Orlando industrial

After nearly two years of job losses, decreasing consumer confidence and declining business and consumer spending, the Florida economy is starting to show some signs of improvement.

Employment increased by 62,400 from July 2009 through August 2009, according to the Florida Agency for Workforce Innovation. Additionally, consumer confidence was up 3% in September to 74, the highest point since December 2007, according to the University of Florida’s Bureau of Economic and Business Research.

The Orlando Metropolitan Statistical Area accounted for 10,900 of the statewide employment increase. Gains in employment came in two industries tied directly to the industrial market - construction (1,100) and trade, transportation and utilities (800).

Unfortunately, the monthly employment gain did not translate into a stronger industrial market in the third quarter of 2009. Tenant demand remained negative as businesses continued to downsize or vacate space. Additionally, overall vacancy increased and rental rates declined in comparison to the same period in 2008.

Overview

Overall absorption recorded negative 149,810sf in the third quarter of 2009 bringing the year-to-date total to negative 1.5 msf. Although demand was negative for the sixth straight quarter, the rate of decline seems to be slowing, down from negative 210,690sf in the first quarter and negative 1.2 msf in the second quarter. The decline in tenant demand led to a decrease in new and expansion leasing activity, which totaled 2.3 msf through the first nine months of 2009, down 23.5% over the 3.0 msf recorded during the same time period in 2008.

Overall vacancy continued the incline that began over two years ago, up 4.8% over the last year to 13.6% by the end of September 2009, the highest level on record. Warehouse/distribution space posted the largest increase in vacancy, up 5.2% to 12.6%. This was due in part to the 500,000sf distribution center that was completed for Walgreens, which they put on the market for sublease instead of moving into the building as planned.

The rise in vacancy pushed the average direct net asking rental rate for all property types combined down to $6.16 psf at the close of the third quarter of 2009, an $1.51 psf, or 19.7%, decline over the previous year.

Sales activity decreased to just less than 2.0 msf through the first three quarters of 2009, down 7.6% over the same time period in 2008. Two significant portfolio sales were recorded in the third quarter, showing that the credit markets are starting to open up for quality deals. The 366,271sf Northwestern Mutual portfolio, in the Orlando Central Park, sold for $38.22 psf to McCraney Property Company and the 321,375sf Quorum Center, which is in the 33rd Street/LB McLeod submarket, sold for $90.24 psf to a joint venture of The Praedium Group and Tower Realty Partners Inc.

Forecast

Even though green shoots appeared in the Orlando MSA economy over the last month, we need to move through the remainder of the year with cautious optimism. If employment turns negative again as some economists are predicting, the economy could wither instead of blossoming. If that occurs, industrial market fundamentals will then continue to deteriorate until a sustained recovery is in place, which could be well into 2010.