While many primary and secondary office markets around the country have been contending with negative rent growth for much of 2023, Orlando has been bucking the trend for the past two years. But what goes up must eventually come down, and the pace of deceleration has been swift in 2023. Rent growth has declined by more than 300 basis points in the past 12 months to a current 2.3%, which is still more than three times the national average.
The last time office rent growth was negative in Orlando was during the first half of 2014, when the market was still emerging from the Great Recession.
The pace of growth never turned negative during the early pandemic period and reached a near-record high of 7% during the second quarter of 2022, when the U.S. office sector was recording a more muted 1.2% pace of growth.
Yet even with the pace of growth steadily declining, Orlando still ranked in the top 15 U.S. markets for annual rent growth as of the third quarter of 2023. Moving forward, the area is forecast to be in the top five office markets nationwide for the rate of projected rent growth over the next four years, growing at an average pace of 0.9% per year. And all this is happening when vacancy is on the rise, with the overall vacancy rate rising by 80 basis points in the trailing 12-month period. When the amount of space available but not yet physically vacant is factored in, vacancy moves up to 11.7%. Still, rent growth remains physically vacant is factored in, vacancy moves up to 11.7%. Still, rent growth remains healthy compared to many peer Sun Belt markets. Orlando is ranked ahead of Nashville, Austin and Atlanta but behind the office markets in South Florida, Tampa, Jacksonville and Charlotte, North Carolina.
The fastest rate of growth can be found in higher-tier, four- and five-star office properties, which are still growing at an average annual pace of 2.5% despite having the highest level of availability in the Orlando market. In fact, the vacancy rate for four- and five-star office space has pushed north of 14%, more than twice the rate for three-star space, which is 6.4%.
The cost of insurance is partly to blame for the pace of growth, as rising rates are forcing upward pressure on building operating expenses, and those costs are then pushed through in asking rent. Landlords have been resistant to lowering asking rates, opting instead to come to the negotiating table more willing to discuss concessions in the form of free rent and more generous tenant improvement packages.
Despite the recent rent gains, the market still faces headwinds to occupancy growth in the coming year. However, landlords continue to show a willingness to offer more aggressive concessions to close larger lease deals. In the near term, there should be notable pressure on office asking rents that will likely force a deceleration in rent growth that is likely to push rent growth into negative territory by
the end of 2024. Concessions will also play more of a role in space negotiation than in previous years, and landlords will likely demand a three- to five-year lease term at minimum before opening serious discussions regarding tenant improvements and free rent.