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CENTRAL FLORIDA SUBLEASE UPDATE:
By Lisa McNatt
August 30, 2023 | 10:29 AM
Orlando’s ever-changing office sublease pipeline in 2023 is a case of the good, the bad and the ugly, as the amount of availability is elevated, despite increased deal activity.
The good news is that Orlando’s inventory of sublease space is beginning to decline and has dropped from 2.4 million square feet during the first quarter of this year to 2.1 million square feet currently. There have been more than 40 sublease deals in the past year totaling more than 330,000 square feet, nearly 10 of which were for spaces 10,000 square feet or larger. The average deal size was 7,800 square feet and was on the market for over five months.
The bad news is that direct deals still dominate leasing activity, which means that available sublease space is going to serve as a drag on vacancy in the months to come. There have been roughly 550 lease deals in the trailing 12-month period, and about 510 of them were direct deals totaling 3.5 million square feet. Only about 30 of them were sublease deals collectively totaling around 520,000 square feet.
The ugly is the uncertainty surrounding how much more sublease space will end up on the market in the next year as companies continue to shift and reevaluate their physical space needs. Of all six primary office markets in Florida, only the Tampa market has more available sublease space at 3.4 million square feet, with the sublet share of available space in the market just over 23%. For comparison, in Orlando, that number is 17%, and in Miami, it’s just below 8%.
IS THE MAGIC SPORTS ENTERTAINMENT DISTRICT FINALLY HAPPENING?
The Orlando Magic has announced its collaboration with San Francisco-based JMA Ventures LLC and Houston-based Machete Group for a groundbreaking $500 million Sports & Entertainment District in downtown Orlando. According to Sports Business Journal, JMA Ventures and Machete Group have been selected to lead the design, financing, and management of the project. JMA Ventures, recognized for its sports-related developments, will be contributing their expertise, while Machete Group, described as an advisory firm specializing in venue development and organizational strategy, brings a wealth of experience with clients like NBA, MLS, and NHL entities.
The proposed 8.5-acre district, located opposite the northern entrance of the Amway Center, is set to feature a 260-room hotel tower, 200,000 square feet of Class A office space (including the Magic’s corporate headquarters), 270 residential apartments, 125,000 square feet of retail space, a 3,500-capacity live event venue, a centralized plaza, and a 1,100-space parking garage. This ambitious venture aims to generate employment opportunities and offer diverse dining, hotel, living, and entertainment choices.
The project’s construction is scheduled to commence by the end of 2024 and is expected to be completed within 2.5 years. It has drawn comparisons to similar developments like L.A. Live near the Staples Center, home to the NBA’s LA Lakers and LA Clippers, as well as “Downtown Commons,” a project initiated by the NBA’s Sacramento Kings.
Severe Weather Expected to Make Commercial Property Insurance More Costly, Harder to Find. California, Florida Among States Seeing Premiums Spike as Insurers Stop Issuing New Policies
By Lou Hirsh
August 13, 2023
The increasing frequency of severe weather events, especially in the past five years, is now accelerating the pullout of major insurance companies from states including Florida, Louisiana and most recently California, with some analysts now deeming those areas and other parts of the country nearly uninsurable.
The effects of skyrocketing premiums with coverage that’s hard to find are expected to spread from the hardest-hit homeowners to commercial property owners and tenants.
Climate change and its financial costs are increasingly becoming an issue well beyond the nation’s coastal states. Just in the past few weeks, Vermont and Pennsylvania were inundated with catastrophic floods, and triple-digit temperatures spanning more than two weeks endangered an estimated 100 million residents in several states, including Arizona, Texas and Florida. And deadly wildfires that wreaked devastation in the past week in the tourist hot spot of Hawaii put more lives at risk and may drive up costs.
All this has occurred during a summer when smoke from Canadian wildfires triggered air quality warnings and health concerns across numerous cities in the eastern and midwestern United States.
Homeowners are already feeling the brunt of rising insurance costs, and when they can find affordable coverage as a result of increased severe weather. The same issues could eventually play a role in the insuring of commercial properties, and, ultimately, where and how properties like apartments, offices and retail centers get built.
“The commercial property owners would likely be passing on their higher rates to their tenants, probably in the form of higher rents,” said Michael Tachovsky, principal partner at consulting firm Landmark Research Group, in Laguna Beach, California, who tracks real estate damage economics.
Tachovsky told CoStar News in an interview that a significant portion of future insurance cost hikes could be borne by commercial tenants that lease space under “triple-net” arrangements, where they agree to take on expenses such as insurance, taxes and maintenance in addition to paying rent.
Such situations are already surfacing not only in California but also in coastal and inland areas of states such as Rhode Island, Florida and Texas. Insurance companies have been pulling out of Florida for decades, but the pace and intensity is increasing, after several destructive hurricanes, driving up costs for residential and commercial insurance.
The research group Climate Matters reported that extreme heat is now causing increasing risks of wildfires and other costly property fallout in multiple regions. Some of the biggest temperature spikes of the past 50 years have been seen in regions such as Las Vegas and Reno, in Nevada, Boise, Idaho, Salt Lake City and El Paso, Texas.
Phoenix in July had its hottest month ever, with an average temperature of 102.7 degrees, the hottest month on record for any U.S. city, according to climatologists with the state of Arizona.
Hurricane-prone Louisiana has begun offering millions of dollars in state subsidies in a bid to bring insurance companies back to the state after a series of departures in the past two decades. Flood insurance rates in parts of Kentucky are on track to quadruple after several serious storms hit last summer, according to national and regional media reports.
California for the past six years straight has been hit by devastating wildfires during the summer and fall seasons, which previously were much more sporadic. Analysts report that other states encountering similar wildfire risks, such as Colorado and Oregon, could increasingly face similar issues with dwindling insurance carriers and rising costs.
State Farm, California’s largest private insurer, decided in May it would cease issuing new policies for home and business property casualty insurance in the state, though it would continue offering auto insurance. The move followed similar action earlier this year by rival insurance provider Allstate.
State Farm said in a statement it made the California decision “due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” Allstate gave similar reasons in public statements.
Weather catastrophes nationwide have caused rapid increases in the cost of reinsurance, essentially coverage that insurance companies themselves purchase from third-party providers to protect against their own losses from unforeseen events that damage commercial and residential property.
According to insurance brokerage firm Gallagher Re, U.S. property catastrophe reinsurance rates, as of July 1, were as much as 50% higher than a year earlier, largely due to escalating claims in states including California and Florida.
Janet Ruiz, regional communications director for the New York-based Insurance Information Institute, an industry research and advocacy organization, told CoStar News that the annual spate of wildfires now hitting California has exacerbated cost pressures on insurers that have existed under state laws for nearly 40 years.
Under laws passed in the 1980s under Proposition 103, insurers in California are able to base pricing on factors including prior-year risk patterns but are prohibited from basing premiums on future-focused climate models. This factor is a big driver of exits among California insurers because it leaves them unable to project future costs to an accurate degree, and the limitation does not exist in most other states.
Insurers in California are also prohibited from immediately incorporating cost hikes for reinsurance into prices for their policyholders, also rare among states, and they also must submit all rate increase proposals to California’s insurance department for approvals.
Ruiz noted some current climate models are more sophisticated and accurate than those that existed at the time Prop. 103 was passed, and new technologies could help guide future insurance pricing if California allowed them to be used. Yet, such a change would require revising the state’s constitution, which is unlikely to happen soon.
According to state officials, since 2020, California alone has experienced eight disaster-level events causing a total of nearly $50 billion in damage, including fire and flooding events. California’s average annual home insurance premium of $1,300 is now up 16% from 2019, the Insurance Information Institute reported, and Florida’s current average of $6,000 is up 200% from 2019.
Farmers Insurance last month decided it would no longer issue new home, auto and related “umbrella” policies in Florida, following other carriers making similar moves in the face of rising property damage from hurricanes and other severe weather events spurred by climate change.
Reducing Risk in Florida
Hurricane Ian by itself caused about $114 billion in inflation-adjusted damage in September 2022 to become Florida’s most expensive storm and the third most expensive in United States history, according to the National Oceanic and Atmospheric Administration.
Farmers has about 100,000 customers in Florida, many of whom will now be looking elsewhere when current policies expire, though continuing coverage will remain available to customers of Farmers subsidiaries, including Foremost Signature and Bristol West.
Hurricane Ian struck southern Florida in September 2022 and now ranks among the nation’s costliest storms on record for insured property damage. (Getty Images)
A long string of insurance company departures during the past two decades has left Florida’s state-run Citizens Property Insurance as the state’s largest and fastest-growing insurer, now covering about 1.4 million policies compared with 500,000 in 2019, according to state data.
The Florida state agency faces increasing cost pressures that make it difficult to offer affordable policies amid escalating risks from recurring hurricanes and rising sea levels.
Property insurance concerns are rising in places like South Florida, particularly related to aging apartments and condos originally built in the 1960s and 1970s and now facing risks from hurricanes and rising sea levels. More property owners could face long-term higher costs to insure, rebuild and replace multifamily structures after the 2021 collapse of a condo tower in Surfside, Florida, which killed 98 people.
These concerns and cost hikes will probably be shared by developers and operators that would normally set up coastal businesses to serve those multifamily residents, including hotels, stores and restaurants.
“It’s raised alarms for the insurance industry and property owners because now people are thinking about the effects of things like rising ocean levels and the effects that saltwater exposure can have on some of these older properties,” said Ray Lehmann, a Miami-based senior fellow with the International Center for Law & Economics, a nonpartisan and nonprofit research organization that tracks issues including business risks associated with climate change.
Insurer Challenges Mount
Lehmann told CoStar News that commercial property insurers in California generally have more leeway to negotiate pricing with customers than exists in other states, including Florida. But those insurers’ rising costs for their own reinsurance are making it difficult to earn profits from policies without being able to pass on those costs to California commercial customers in the face of escalating wildfire, flooding and other risks.
Lehmann said those risks are also making it difficult for insurers to profit from previously lucrative, high-end commercial and residential policies that were offered for many years in California hubs of the wealthy, like Malibu and Santa Barbara, now increasingly prone to fires and other damaging weather events.
Similar cost and coverage challenges may face high-end policy-holders in other states in the future.
With several California communities still rebuilding from wildfires of three or four years ago, a process slowed by high construction costs and shortages of qualified workers, the end result of the latest weather events could be permanent changes in where insurers decide to take risks, and ultimately where developers decide to build and where communities approve projects.
“The insurance companies are probably going to be extra vigilant about enforcing their prevention standards. They’re going to be making sure that owners have created and are maintaining a defensible space around their properties,” Tachovsky of Landmark Research, said in reference to upcoming wildfire risks.
After a spate of heavy rains and floods earlier this year, California and other states are now bracing for upcoming wildfire damage from hot and drying conditions. California has more than 1.2 million homes at risk for wildfire destruction, far above any other state, according to the insurance institute.
“Despite this year’s rainy season, nothing has really changed that much in terms of the fire risk in California,” Tachovsky said. “It’s mainly a matter of how big the damage will be this year.”
I loved working with Lloyd Commercial Advisors, and specifically Scott Lloyd. Scott’s extensive knowledge of the Orlando market was instrumental in helping us find a perfect warehouse in a challenging location. His expertise and understanding of the local market was spot-on and his determination and attention to detail were impressive. He left no stone unturned in the search process and even approached owners that had not listed their property.
Skip Perkins, Avante Group, Inc.
Scott’s command of the Central Florida market and expert utilization of demographic data allowed my company to make two highly-informed site selection decisions. I could not recommend Lloyd Commercial Advisors more. Their expertise and utilization of expert demographic data made the site selection process seamless and efficient. He also negotiated excellent leases for both of our Florida locations and I am extremely grateful.