Primary office markets in Central and North Florida continue to show signs of economic growth. Strong investor interest is transforming downtown areas with new housing developments, and as office absorption and rental rates rise to peak levels, new office product is expected to follow. In secondary markets recovery is slower, but there are early indications of growth in tenant demand.
JLL’s Q4 to produce an overview of key trends driving the Orlando, Tampa Bay and Jacksonville office markets.
Class A rents downtown reach pre-recession levels as developer interest grows
Due to steady tenant demand, vacancy in Downtown Orlando’s Class A properties dropped to 9.3 percent by the end of last year, and for the first time since third-quarter 2009, asking rents topped $28.00 per square foot. In response, developers are showing interest in the Church Street Plaza project now under construction. Thanks to the year-end sale to Southwest Value Partners of the 1.0-million-square-foot Cousins Properties portfolio, Orlando’s total office transactions for 2017 reached about $622 million. The deal brings new ownership to the America Building, Citrus Center and Orlando Center.
Suburban submarkets continue to see positive absorption. Class A asking rents in the Southwest market dropped 4.8 percent in fourth quarter 2017 –– probably an adjustment to a 5.0 percent hike in rates in the third quarter. This market also took delivery of 134,000 square feet of new Class A product last year, with another 90,000 square feet underway.
Going forward, the lack of options for large tenant expansions should result in continued speculative development as well as build-to-suit deals.
Market conditions are ripe for new construction
With total vacancy just under 12.0 percent across the market and Downtown Tampa’s prime office towers commanding unprecedented rental rates in the mid-$30s per square foot, Tampa Bay is primed for new construction. The only new product to break ground over the past 24 months –– a speculative 148,000-square-foot, Class A project in the Northwest submarket –– was leased to a single tenant within the quarter. Only 17 blocks of 20,000 square feet or more were available in Class A buildings across the market at the end of the year.
New development in the area has concentrated on multifamily housing in urban submarkets. Close to 2,000 units came to market in Downtown Tampa and Westshore during 2017, with 5,000 more on target for delivery this year. These are primarily high-end rentals, part of revitalization schemes meant to transform urban cores into mixed housing and office centers.
Signs of economic growth and new development spur hopes of a turnaround for office market
A new office development has been proposed by Van Trust for the growing Jacksonville suburb of Nocatee on land entitled for 675,000 square feet of Class A office space. Home sales in Nocatee increased by 25.1 percent in 2016 and were on pace to match that rate in 2017, but the planned community currently has only 140,000 square feet of office space. The new product would provide more options for expanding regional and local tenants.
While Jacksonville’s CBD continues to struggle with high vacancies, ending 2017 with an increase of 8.4 percent over the third quarter, year-over-year market vacancy is 6.0 percent lower than 2016. This tapering off, combined with expectations of economic growth in 2018, is cause for optimism.
For the fifth straight quarter, Southside posted a double-digit decline in the year-over-year rental rate, dropping to $12.70 per square foot by year’s end. With direct vacancy now at 35.1 percent, rent increases are not yet in the cards.