Orlando commercial real estate one of the top investment opportunities in the nation

According to survey but the National Association of Real Estate Investment Trusts, Orlando is one of the top ten metropolitan areas for commercial real estate investment. Other top cities included New York City, Washington, D.C., Los Angeles, Seattle, Austin, San Francisco, Honolulu, San Jose and San Diego.

Medical Office Complex in Celebration, FL

New York based developer Sherman Group LLC has bought 7 acres of land in Celebration where it plans to build a 90,000sf medical office complex. The property is the last available parcel in Celebration zoned for medical office space use that is not controlled by the Florida Hospital group.

According to Osceola County public records the land was purchased for $486,000 per acre. The project is expected to cost $20MM and lease rates will be approximately $25/sf with office sizes ranging from 1,650sf to 23,500sf.

Central Florida to Withstand Economic Downturn

As other markets around Florida begin to feel the heat of a crumbling real estate market, the greater Orlando commercial real estate market in Orange and Seminole counties should be able to weather the worst of the storm. This is according to Palm City Economist William Furth.

According to Furth, areas such as Orlando, Jacksonville and the Tampa-St. Petersburg areas will do much better than South Florida which he believes is headed for an "economic meltdown". In Central Florida, Orange and Seminole counties will be more resistant to the economic decline because they are more diversified and have a balanced industry make-up compared to Osceola and Lake counties whose economies rely heavily on real estate.

A seperate forecast from the Director of the Institute for Economic Competiveness at the University of Central Florida, Sean Snaith, indicates a slow first half for 2007 but overall employment growth of 2.5 percent between now and 2009. According to Snaith, Orlando will be the strongest region in the state in the coming years.

Orlando condo conversion casualties

Yet another condo conversion project has failed in its effort to cash in on the condo craze that fizzled out in late 2005, early 2006. La Palazza at MetroWest (formerly The Alexan Club Apartments) failed in its effort to pre-sell the minimum number of units by the required deadline in order to secure financing for the project. As a result the lender on the project, Lehman Brothers Holdings, Inc. has foreclosed on the property and will be auctioning it off in its original form as a mult-family/apartment property.

As more failed condo conversion projects return to the rental market, vacancies in the mult-family market are expected to rise to more balanced levels over the coming year.

Hotel/Motel Market Outlook

Hotel occupancies are expected to average 68.1 percent in 2007, up from 67.8 percent last year. Revenue per available room (RevPAR) is seen at $82.30 this year, up from $78.40 in 2006. A record 45,500 hotel rooms are scheduled to be added to the inventory in 52 markets tracked this year, compared with 22,000 in 2006.

Markets with the highest RevPAR include West Palm Beach; New York City; Honolulu; Miami; Fort Lauderdale, Fla.; and Phoenix, all with RevPAR of $125 or more. For properties valued at $5 million or more, transaction activity during 2006 totaled 1,166 hotels with a combined value of $35.3 billion, nearly 20 percent higher than 2005.

This information was provided by the National Association of Realtors.

Apartment/Multifamily Outlook

In the apartment rental market – multifamily housing – vacancy rates are forecast at an average of 5.9 percent at the end of this year, which would be unchanged from the fourth quarter of 2006. Average rent is likely to rise 2.8 percent in 2007, following a 4.1 percent increase last year. This is according to a recent study done by the National Association of Realtors.

With the condo conversion craze coming to an end in most markets, multifamily investment is normalizing. Condo converters accounted for $30 billion out of $88 billion in multifamily transactions in 2005, but were down to $9 billion out of $87.4 billion in 2006. Some converted projects are returning to the rental market, and investors are now focused on income appreciation and improving fundamentals.

Multifamily net absorption should total 223,900 units in 59 tracked metro areas in 2007, up from 221,900 last year. The areas with the lowest apartment vacancies include Northern New Jersey; San Jose; Salt Lake City; Los Angeles; Miami; Washington, D.C., and Norfolk, Va., all with vacancy rates of 3.1 percent or less.

Retail Market Outlook for 2007

According to a recent study done by the National Association of Realtors, consumer confidence is rising at a fairly slow pace, but a sluggish housing market and economic concerns are dampening consumer spending and, possibly, demand for retail space.

Vacancy rates in the retail sector will probably slip to 8.1 percent in the fourth quarter of 2007 from 8.2 percent in the same quarter last year. Average retail rent is expected to grow 1.1 percent this year, following a 3.9 percent gain in 2006. Retail markets with the lowest vacancies include Orange County; San Francisco; San Jose, Calif.; Las Vegas; Honolulu and Miami, all with vacancy rates of 4.4 percent or less. Net absorption of retail space in 54 tracked markets is projected at 19.9 million square feet in 2007, up from 8.4 million in 2006.

Retail transaction volume declined 7 percent in 2006 to a total of $46.9 billion; much of the decline was in regional shopping centers. However, unanchored strip centers, free-standing drug stores and big box retail centers saw large gains. At the same time, pricing for retail space rose 13 percent in 2006 to an average of $168 per square foot.

Industrial Space Outlook for 2007

According to the latest Commercial Real Estate Outlook provided by the National Association of Realtors, trade is continuing to be the dominant influence in the industrial sector in terms of investing and leasing. The needs of modern distribution networks are fueling demand for new space. Property pricing and rising rents in some markets are forcing users to consider other locations where both land and operational costs may be lower.

According to the report, vacancy rates in the industrial sector should average 10.1 percent by the end of the year, up from 9.4 percent in the fourth quarter of 2006. Annual rent growth is likely to be 2.3 percent by the fourth quarter, up from a 1.4 percent annual gain in the fourth quarter of 2006.

The areas with the lowest industrial vacancies include Los Angeles; West Palm Beach, Fla.; Orange County; Ventura County, Calif.; Tucson and Tampa, all with vacancy rates of 5.7 percent or less. Overall net absorption of industrial space in 54 markets tracked is estimated at 75.9 million square feet in 2007, down from 189.1 million last year. Industrial transaction volume in 2006 was a record $38.9 billion, up 9 percent from 2005.

Commercial Real Estate Outlook - Office space

According to the latest Commercial Real Estate Outlook by the National Association of Realtors, many office space users are relocating their operations into newer class A type property raising vacancy rates in older class B and class C buildings. In addition, employers are using space more efficiently and speculative new construction is being held in-check.

According to the report, office vacancies are expected to rise to an average of 13.9 percent by the end of the year from 12.6 percent in the fourth quarter of 2006. Annual rent growth in the office sector is forecast at 3.2 percent in 2007, following a 5.2 percent gain last year. Estimates for the first quarter show areas with the lowest office vacancies include New York City; Seattle; Honolulu; Orange County, Calif.; Washington, D.C., and Miami, all with vacancy rates of 9.7 percent or less.

Overall net absorption of office space in the 56 markets tracked by the study, which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be 21.9 million square feet this year, down from 76.2 million in 2006. Office building transaction volume set a record of $133.6 billion trading hands last year, up 32 percent from 2005.

Lease vs Own - Part 1: Ownership Advantages and Disadvantages

As with any business decision, there are certain advantages and disadvantages of leasing as well as owning commercial real estate. The right solution depends on each individual property's location and features as well as the user's personal financial and tax situation. Let's first discuss ownership.

From the user's perspective, ownership means to obtain the full economic and physical use of a property. Their are several advantages of this approach not the least of which is that it gives the user complete control to operate the building as they see fit. Being able to change the appearance of a property and take advantage of the prestige of its location can be important to many users. The financial benefits of owning include tax savings, potential appreciation and additional rental income. Tax savings come from cost-recovery rules and and mortgage interest paid during the holding period and when the property is sold. As the owner of the property the user is entitled to any appreciation in the value of the property during the time period that the propery is held. Lastly, if a portion of the property is rented, income from the other users can be used to pay a portion of the mortage on the property, fund the owner's prinicpal business or be used for any other use as the owner see fit.

There are disadvantages to ownership and these should be weighed before making a decision to purchase rather than lease. The initial cash down payment to acquire the property is cash that could otherwise be used to fund the user's principal business or for other investment opportunities that are available at the time of purchase. Financing for commercial real estate purchases require strong financial statements on the company and may sometimes require personal guarantees from the principals of the company. Often times, the addition of long-term debt on the balance sheet can make it difficult for some companies to even qualify for a mortage under the lender's debt ratio restrictions. As the owner of the property, the user bears substantial risk in the form of property damage, functional obsolescense, illiquidity, safety of the building's occupants and visitors, and changes in codes or zoning ordinances that may be unforeseen.

I'll discuss the advantages and disadvantages of leasing commercial real estate in Part 2 which will soon follow.