Monthly Archives: January 2013

Q4 2012 – NAI Office Market Report

After a long struggle to regain ground, the Phoenix Office Market ends 2012 with record absorption numbers and falling vacancy. Office sector employment steadily increased throughout 2012 in the Valley, aiding in the recovery of the wounded market. Improvement should be expected to continue into 2013, as the local housing market continues to improve and businesses move away from the uncertain pre-election period. The pace of improvement will likely be moderate compared to the sharp increases seen in the final quarter of 2012.

Total net absorption was the stand out of Q4 2012 with 1,582,903 SF absorbed, a level not seen in over five years. This notable increase helped mark 2012 as the first year since 2006 to post positive absorption numbers for all four quarters, ending the year with 3.25 million SF absorbed. Vacancy also headed in a positive direction falling to 20.4% for Q4, down from the 22.3% seen in the beginning of 2012. This decrease in vacancy is a hopeful sign for the future; vacancy levels have not been this low since the beginning of 2009, and peaked at 22.8% mid-year 2011.

While the record year of space absorbed leads the market strongly into 2013, a considerable percentage of this was due to a handful of large users and may not reflect all submarkets fairly. Tenants such as State Farm, QBE Insurance, and U.S. Foods absorbed close to 600,000 SF alone in 2012, making up almost 20% of the year-end total. As consistency is regained in the office market, the positive absorption figures can expect to even out among tenants in varying sizes and submarkets.

Somewhat clouding the positivity seen in absorption and vacancy figures was the continued decline in rental rates. It has been a long and steady decline from the $25+ PSF rates seen in 2007 and 2008; rental rates began in Q1 12 at $20.24 PSF, dropping to $20.07 PSF for both Q2 and Q3, and ending the year at $20 PSF. While vacancy rates are on the decline, they still remain at historical highs, leaving rental rates depressed until more competition for space occurs in the Phoenix Metro market. This has left considerable room for tenants to benefit from the lower rates and greater concessions, making it unlikely for rates to grow substantially.

Leasing activity declined in the second half of 2012, most likely due to decision halts in anticipation of the fiscal cliff. The second quarter of 2012 peaked with 624 lease completions and 2.6 million SF leased. The year ended with Q4 posting 500 completed leases and just 1.4 million SF leased. As the fiscal cliff is resolved, business activity should return to previous levels and the positive effects of job growth will begin to trickle down to the commercial real estate market.

Q4 2012 – NAI Industrial Market Report

The Phoenix Industrial Market transitioned into 2013 with positive indicators giving an outlook to a sustainable future. After two years of steady rebuilding of the market, not without its pitfalls, Q4 12 comes out solid with a strong positive net absorption, declining vacancy rates, and increased construction. With election year uncertainty behind us, the Phoenix CRE market has the chance to maintain this ground, brightening the mindset towards recovery from the lowest points of the recent recession. Metro Phoenix helped lead the way by adding the fifth-highest number of construction jobs in the nation, over 5,400 new construction jobs year-over-year as of November. Combined with the rapidly recovering housing market, it is only a matter of time for the positive momentum to impact the commercial market.

While 2012 began with a negative net absorption, the market quickly recovered from this stumble, which turned out to be the only negative net absorption posted in 11 months. The second quarter finished with close to 2.5 million SF of positive absorption. Continuing the trend at 1,956,473 SF absorbed, Q4 helped end 2012 on a positive note. While the 2012 year-end total of 4,994,590 SF was down over 1.5 million SF from the previous year, 2013 appears to continue the momentum of positive net absorption occurring during the last 2 years. Each of the five industrial submarket clusters posted positive absorption numbers, with the Southeast Valley headlining with over a 1 million SF absorbed.

In addition to the prolonged positive absorption run, vacancy continues its steady decline. With a similar vacancy rate not seen in the Phoenix industrial sector since midyear 2008, Q4 12 ended the year with a rate of 12.7%, a long way down from the 17% vacancy rates seen at the beginning of 2010. The Northwest Valley led the Phoenix market with the lowest vacancy rate of 11.8%, while the Sky Harbor submarket showed the highest rate at 13.4%.

Industrial building completions for Q4 12 added just over 2 million SF, more than doubling the delivered square footage for the previous three quarters of the year. The year-end total of 2,894,298 SF is an approximate 1.8 million SF increase of delivered space over 2011. One of the most notable deliveries for the year occurred in the final quarter of 2012; 3740 S Signal Butte Rd, a 1,328,075 SF facility that is now over 45% occupied. In addition to delivered space, future deliveries look positive with 15 industrial projects totaling 5,375,404 SF under construction during the final quarter.

While these indicators show signs of the industrial market resurgence, areas for improvement remain. Rental rates held at $0.51 PSF for the third straight quarter. While overall more submarkets reversing their downward trend in rental rates, the Phoenix market still has hurdles to overcome until these rates return to pre-recession levels. While vacancy and absorption seem to show stamina, the rental rates remain stagnant.

As economic conditions settle throughout 2013, optimistic economic trends viewed in 2012 could begin to trickle down and show their effect on the CRE market. The largest lease transaction recorded in Q4 12 was a 164,486 SF lease at 2550 N Nevada St in Chandler for the i/o Data Center. The largest sale transactions for the quarter were all a part of larger portfolio sales; 7980-7990 W Buckeye was part of a $178 million, 13 state, 20 property portfolio sale to the Chicago based real estate investment firm Brennan Investment Group, while both 4201 N 45th Ave and 2555 N Nevada St were part of a $76 million, 3 property sale leaseback sold by the Hensley Beverage Company to Angelo, Gordon & Co., a privately-held registered investment advisor.

Economic Outlook 4Q 2012

As the threat of the fiscal cliff is resolved, 2013 is expected to slightly improve economically and recover from halted businesses decisions experienced at the end of 2012 due to the unknown outcome. With taxes rising less than previously anticipated, consumer spending is forecasted to inch upwards as things begin to settle post-election, expecting to rise at a 1.6% pace through 2013. While the impending economic Armageddon has been avoided for now and may brighten the short term outlook, the looming unknown may strike again as the March deadline for federal budget sequestrations approaches. The second half of 2013 should bring more real change as consumer confidence, already the highest it has been in five years, will likely continue to strengthen. Current home prices and employment figures continue to improve from the years of struggle that appear to be behind us.

On a regional level, Arizona began 2012 with an unemployment rate of 8.7%, above the US rate of 8.3%. As of November, Arizona caught up with the US average and ended the year at 7.8%. This marks a four-year low for the state, which brought in 22,700 new jobs in November. Nationally, the US expects to see around 2 million jobs added in 2013, up slightly from the 1.84 million gained in 2012. While this increase shows sustainment, the pace of job creation will need to improve significantly for the long-term unemployed statistics to improve.

Another positive throughout 2012 and continuing into the new year is Arizona’s changing housing market. Phoenix area home prices are up 34% year-over-year with new home sales increasing by a staggering 85%. In addition to the growth, the plaguing effects of foreclosure seem to be improving. As of November, there were 34% less completed foreclosures year-over-year, and a 43% drop in overall supply of distressed properties. While still low in comparison to 2004-2006 levels, residential permitting was up more than 60% in 2012. That trend is likely to continue into 2013. With construction and housing being the pulse of the Valley, the improving residential market provides a foundation for the commercial real estate market to continue its fight back and begin to make headway toward a full recovery.

Another factor that could help brighten the long term horizon for the Phoenix CRE market is the recent tax changes in California. A combination of increased income taxes, state sales taxes and multistate business taxes have created the perfect environment for businesses to further consider the Valley of the Sun as the next smart move. Arizona has spent the last few years making strong efforts to improve the business environment by lowering capital gains and corporate taxes, initiating business-friendly policies, and creating programs to support new or expanding businesses to excel in the Valley. GPEC (Greater Phoenix Economic Council) has created a California 50 program to bring interested CEOs to the city so they can tout the many benefits Phoenix has to offer. This effort, combined with a market on the verge of full rebound, adds optimism to a year full of possibilities.