Arizona Commerical Real Estate Services

Phoenix Office Sector Recovery an Arduous Process

January 20th, 2012 | Posted by Matt DePinto, Research Manager

The Valley’s office sector continued to pace along the bottom over the past year.  As we enter 2012 a new attitude is taking hold.  Though conditions remain weak, 2011 saw an increase in in-migration population and new job creation, creating optimism about improvement in this sector.

Phoenix’s office inventory is still struggling along with other hard hit markets such as Las Vegas, Sacramento and Atlanta. A three year run of increased unemployment, corporate contractions (i.e. less space needed) and the flight to quality (with no one to fill the old space) left the Phoenix office market battered. This quarter, there have been some modest gains in occupancy and absorption numbers; both moving in the right direction. More activity is needed for Phoenix to move into full recovery. Leasing activity dropped by nearly 200 transactions this quarter from last to less than 500.  

Sales transaction volume in Phoenix dipped this quarter to just 83 market transactions totaling $124.2 million. Price per square foot, however, increased to $109.78 per square foot. Transaction volume has remained low with only a few large investors making purchases in this market.  REITs have taken notice of the very limited inventory of high quality properties and are scouting the market as pricing remains at bargain levels. Many realize that low commercial real estate values today provide the best return on investment long term.

Vacancy rates for the Phoenix office market dropped a modest 40 basis points to 20.7% from last quarter’s 21.5% last quarter. This quarter, the highest vacancy rate remains in the Central Phoenix submarket cluster with 23.4% and the lowest reported was in the Sky Harbor Airport cluster at 17.4%. Absorption was up by 437,738 square feet with most coming from the East Valley at 267,812 SF and 207,843 SF in Sky Harbor. Four of eight submarkets did experience negative absorption. An extremely low 21,145 square feet was delivered this quarter. It is the second lowest delivery in a quarter since local records of delivery data have been kept.

Rental rates dropped again this quarter to $20.29 per square foot, down from an adjusted $20.54 last quarter. A total of 388,327 square feet was under construction during this quarter encompassing five built-to-suit Class B office buildings. Construction totals in this suppressed sector are in line with current conditions but are down severely from a consistent 8-9 million square feet under construction during the boom years from 2005 to late 2007.

The largest office building sale of the quarter was the purchase of the 3 building Phoenix Gateway Center at 410-432 N 44th St in Phoenix for $43 million ($99.40 psf). Oaktree Capital Management of Los Angeles was the buyer. The largest lease transaction for the quarter was US Foods lease for 133,225 square feet ($22.50 est. psf) at River Corporate Center/ASU Research Park at 8075 S. River Pkwy in Tempe.

 At the close of 2011, experts expect that commercial real estate will accelerate more. Various worldwide factors can change predictions in an instant; however, better times are expected in 2012.

Category: Inside Perspectives, Investment, Market Trends, Office, Press Release | Comments (0)

Phoenix Office Sector Still Faces Strong Headwinds

October 18th, 2011 | Posted by Matt DePinto, Research Manager

PHOENIX – NAI Horizon – The Phoenix office market continues to be weighed down by slow demand, corporate downsizing and a glut of vacant office space. The building of spec projects in the mid-2000s and the current economic crisis have led to an oversupply in the market that will take some years to absorb. Specific pressures to this sector, and to this metropolitan area, will be hard to overcome.

Companies are not expanding, rather contracting their space once their current leases expire. Many have made the move to a higher class space at the same or less than their current lease. This activity, though normal for a market such as this, is a majority of the transactions. The space left behind does nothing to improve conditions, other than leave lesser quality space in its wake and keep vacancy rates flat from quarter to quarter. Leasing activity has slowed to just 600 total transactions in the third quarter. This is the lowest amount since fourth quarter 2008. This has also put enormous downward pressure on market rents which are down yet again. The last time rates were this low was first quarter 2005.

Overall sales transaction volume does remain strong with 126 market transactions in the third quarter. However, total dollar volume at $145.5 million is half what is what last quarter. In a sign of good things to come, this quarter produced a $300 + per square foot transaction and one just under that amount. This is welcome news where price per square foot transactions have been depressed for some time. High value properties with strong income continue to lure astute investors. The market is somewhat limited in its A+ buildings for sale so demand is strong for this select inventory.

Overall vacancy rates for the Phoenix office market dropped slightly from last quarter to 21.1% from 21.5% last quarter (based on adjusted quarterly figures). The highest vacancy rate was reported in the Central Phoenix submarket cluster with 24.2% and the lowest reported was in the Sky Harbor Airport cluster at 18.9%. Absorption was up by 514, 237 square feet; however deliveries to the market were posted at 327,037 square feet which makes for little movement in vacancy rates.

Rental rates dropped slightly this quarter to $20.57 per square foot, down from an adjusted $20.87 last quarter. A total of 388,327 square feet was under construction during this quarter. A total of 327,037 square feet was delivered this quarter; the largest, a 273,780 square foot, Class A building for University of Phoenix was brought on line in July. The building is located at 1625 W. Fountainhead Parkway in Tempe. This is the second building delivered to the market by the University of Phoenix this year.

Consequently, the largest office building sale of the quarter was the 2 building Fountainhead Office Plaza in Tempe for $137 million. KBS Realty Advisors LLC of Newport Beach, CA, was the buyer of this Class A, 439,070 square foot pair of buildings. The office project commanded a hefty $312.02 per square foot price. In the largest lease transaction of the quarter, Fennemore Craig renewed for 121,000 square feet of Class A space at Biltmore Financial Center III, 2394 E. Camelback Rd. No public lease rate information was available.

The Phoenix office market continues to drag along the bottom as it has for the past two years. Steady sales activity levels and a tightening of large contiguous A+ space are the few bright spots in this sector. The pace of recovery will strongly mirror the overall economy as jobs, business confidence and loan availabilities all continue to bear weight on the office market. Once these restrictions lessen, momentum will build and there’s no stopping a strong rebound. Patience is the key.

Category: Market Trends, Office, Press Release | Comments (0)

CRE Sectors Continue to Fight Against Overall Economic Slowdown

August 30th, 2011 | Posted by Matt DePinto, Research Manager

With the overall economy at a relative standstill, CRE sectors continue to march forward during the slow summer season. According to Moody’s REAL Commercial Property Price Indices (CPPI) for August measured a slight increase in June which was the second consecutive positive move. This movement forward, although small, represents a firming up of the market bottom. With fears of a “double dip” recession and turmoil in the capital markets, this could delay near-term pricing gains. The report also shows that investors are moving past trophy properties and into the broader pool of properties and are looking at secondary and tertiary markets for higher yields. This bodes well for Phoenix in the long run.

The Phoenix multifamily market continues to strengthen on the investment side as signature properties have traded hands steadily in the past year. Talk of new construction throughout the Valley and the continuing stagnation of home sales, make this a strong multifamily market. Until the housing market returns in the Valley, and some expect 5 years or more, apartment rental investments could be the way to go.

Retail continues to struggle with near record vacancy and changing dynamics. High-end retail continues to buck the trend. Upscale boutiques, dine-in movie theatres and specialty shops are catering to the well-healed clientele. With the lower-end of the sector, discount retailers are still in charge and are expanding even in higher rent areas. General shopping centers are still struggling with too few traditional renters to fill up their vacant space.

The industrial sector is poised rather well for the next quarter. Large blocks of warehouse and distribution space are becoming a rarity. As a result, build-to-suit buildings will be discussed as a solution. The West Valley should be the recipient of much of this building where abundant space and transportation corridors are strong.

The office market continues to struggle under the weight of the past decade’s overbuilding. However, leasing has increased and pricing have stabilized. The move from B to A class properties continues, but won’t for long as Class A properties are filling fast. Submarkets like Downtown Phoenix have virtually no large blocks of Class A inventory left, so companies are forced to move uptown or to Tempe for space.

The overall mood in Phoenix is that the worst is past (in all sectors) and the rebuilding has begun. Prices are still volatile and subject to market fluctuations and tight lending. However, in spite of all the gloom in the overall economy, Phoenix commercial real estate is becoming a better bet as the months tick on by.

Category: Industrial, Inside Perspectives, Market Trends, Multifamily, Office, Retail | Comments (0)
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