Tag Archives: outlook

Economic Outlook | Q4 2013


This year showed signs of recovering activity in all sectors of the commercial market, but the rallies seemed to come in fits and starts. The most consistent increase in activity took place in the retail sector. Office and industrial leasing seemed to show signs of activity, then stall, and then come back from one quarter to the next. The lack of consistent leasing momentum throughout the year was reflective of the overall lack of job growth and economic uncertainty in local and national markets. The investment markets were active in multifamily and institutional grade properties, but cap rates remained too low for many investors given the risks in the economy. There are still unanswered questions about where 2014 will take the commercial real estate market, but many indicators point to an increase in leasing activity and owner/user buying beginning in the second quarter of 2014 and continuing with a more consistent velocity as the year progresses.

As 2014 progresses, the economic climate of uncertainty should continue to stabilize. The biggest hurdle to overcome is general consumer confidence and the willingness to spend money as before the recession. According to Dr. Peter Linneman, Chief Economist of NAI Global, “We don’t feel as rich as we used to, and we don’t feel as rich as we used to by a substantial amount. This is holding back consumer activity, and that’s a self-reinforcing problem. ” However, Linneman points out how this is slowly improving. Household debt service as a percentage of disposable personal income is lower than it has been in 20 years, and real US disposable personal income per capita is back to the 2008 high, while still below trend. While we have recovered to pre-recession level, most people are where they were five years ago, aiding in the lack of consumer confidence when expecting normal increases. As this continues to improve and the recession falls further into the past, consumers will begin to “feel rich” again, aiding in the overall economic recovery.

The Greater Phoenix Market also continued down the road to recovery in 2013, and will remain on this path in the New Year. As vacancy continues to decline in most sectors, and rental rates stabilize, 2014 is expected to be another year of the market correcting itself, preparing for a more prosperous 2015. With changes to the commercial market typically following those in residential, the forecast for increased permits and home buying in 2014 should result in an improved commercial market in 2015.

During 2013, the Phoenix industrial, retail, and office sectors saw flat or declining vacancy rates from the end of 2012. Both office and industrial average rental rates saw slight increases, with office increasing from $19.99 in Q4 of 2012 to $20.42 in Q4 of 2013, and industrial increasing from $6.03 to $6.25. Net absorption fell in industrial and office, with an approximate 48% decrease from 2012 to 2013 in both sectors. Retail however increased absorption by almost a million SF from 2012 to 2013.

As of November, Arizona’s unemployment rate dropped by four-tenths of one percent to 7.8%, adding 25,900 nonfarm jobs in November, the vast majority being added in the private sector. The state’s seasonally adjusted unemployment rate in October was 8.2%, down from 8.3% in September. The national jobless rate dropped nearly as much as the state rate coming in at 7%, down from 7.3% the previous month. President and CEO of NAI Horizon, Thad Seligman, stresses the importance of positive employment news. “In the final analysis, job growth is the key to our recovery in Arizona and it looks like we will see, albeit somewhat limited, growth in newly created jobs in the market during the coming year.”

Q3 2013 – NAI Horizon Office Market Report

While the first half of the year proved slow for the Phoenix office sector, the second half of the year has started off on the right foot. Net absorption posted an impressive 1,098,466 SF for this quarter, only the second quarter to break the million SF mark since 2007. Valley wide vacancies continue to constrict, and average rents continue to slowly rise. The combination of these factors points to a steadying of the sector and paves the way for real recovery.

Economic Outlook | Q3 2013

While the momentum has been slow, the Phoenix market is showing signs of recovery. As of the third quarter of this year, the office and retail sectors have both seen a significant decline in vacancy from just a year before; office vacancy is down to 19.8% from 21.5% in the third quarter of 2013, and retail has fallen to 10.5% from 11.9% just a year before. The industrial sector has seen a slight increase in vacancy coming in at 12.9% this quarter, but is still down from the highs seen in 2011 when vacancy rates were over 15.5%. Both the office and retail sectors showed impressive net absorption this quarter with more than 1 million SF of space absorbed, while industrial remained relatively stagnant from the previous quarter with a loss of 190,000 SF. While leasing activity in the office sector remained relatively the same in terms of SF leased and number of deals, the retail and industrial sectors saw slight drops in activity this quarter. As expected, the consistent nature of the market continues as the Phoenix area begins to define a new norm.

Recovery has been tracked on a nationwide scale as well. The six major metro areas have averaged a price recovery of 90% of peak compared to non-major metro areas averaging a 75% recovery. Of these six major metro areas, two have met previous peak-price levels, compared to just three among the remaining non-major metros nationwide, including Dallas, Houston, and Austin. Increased purchasing activity was also recorded across all property types in the U.S. as of August, with a recent influx of institutional and private buyers for retail properties causing prices to rise faster for the retail sector than others. Conversely, the multifamily sector has experienced a slowing of price gains after consistently leading the other sectors, potentially due to the slowing of the recent rush to rent by those hit in the housing downfall. Sales of significant commercial property nationwide totaled $24 billion in August, up 12% year-over-year.

As of September, the unemployment rate for the Phoenix Metropolitan Area sat at 6.9% compared to the national rate of 7.3%. The Valley also continued to recover in the residential sector, with one-year house value growth coming in at 18.5% in September. According to the On Numbers Economic Index, Phoenix ranked No. 29 in September, up two places from August. This ranking, a monthly snapshot of economies in the nation’s top 102 metropolitan areas by population, is an overall score based on 18 categories, including various job growth indicators, home value, and earnings information. Leading the ranks in the On Numbers Economic Index is Austin at number one, with Provo, Dallas-Fort Worth, Houston, and Oklahoma City rounding out the top five.
In September, the W.P. Carey School of Business and the Center for Real Estate Theory and Practice held a survey and panel discussion to gauge the current commercial market from those who know it best, brokers. Overwhelmingly, the experts believe that Phoenix Metro is currently in the recovery stage, with 87% of brokers in agreement. In addition, the majority of brokers believe that vacancy rates are on the decline and will trend down in the fourth quarter for the retail, industrial, and office sectors. Positive news was also forecasted for rental rates with more than 40% of the vote in all sectors and categories pointing to rates stabilizing and remaining stationary for the next 3 months; the second most popular vote predicted increased rates in almost all categories. These opinions point to a positive future with effects of the recession moving farther into the rearview mirror.