Monthly Archives: May 2012

NAI Retail Market Report: Available for Download

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Altogether mixed signals of growth and decline make for a tough look at the overall prognosis of our economy. Middle Eastern woes, muddled relations between Iran, Israel and the US are providing for vast escalations in oil prices, which in turn drive up consumer prices on all ends. Globally, the Middle East is only one aspect of the problems we must cross. The sovereign debt crisis continues to be a murky issue, one that must be sorted out, to gain worldwide economic growth. Practical negotiations are taking shape, which could induce calm in the most troubled regions.

Although returns in the real estate market were up to 14.5% for 2011, investors and businesses alike may be hesitant to make any large decisions until the elections are over. The huge sign of 2012 will be the adoption and election of beneficial policy implementations that encourage stability and foster growth. Right now, it’s unclear if the federal reserve will continue to keep borrowing costs at low rates with the economy generating growth. If rates increase, confidence will be enhanced and investment activity will increase across all asset classes.

Unemployment nationwide is finding lower levels from the highs reached during the peak of the recession. Arizona has experienced measurable increases in employment. Manufacturing added gains in job growth, while construction jobs also saw a YTD increase (up 2.4%). Consumer spending increased during the first quarter, yet it was met with rapidly increasing prices.

Manufacturing nationwide has been one of the largest growth factors improving for 34 consecutive months according to ISM.

Arizona has seen overall cap rates trending up to approximately 8.65% which may be due to the excess Class B and Class C property supply, yet reported by Cole Capital, risk and return valuations favor the commercial real estate industry. The 30 year fixed mortgage rate has ticked down since late 2011, a positive factor as our residential housing market has begun to experience a significant increase in sale velocity. For prices to return to pre-recession levels, we need to see significant increases in employment, businesses confidence, and more optimism in the minds of credit lenders. Investors will flock to the real estate markets for steady.

NAI Office Market Report: Available for Download

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The Phoenix office sector entered 2012 with soft but positive indicators. The working theme for the real estate industry in the final quarters of 2011 was the strong reporting of absorption taking hold. The third quarter reported increases nearing 885,000 square feet of absorbed space; that number is down to 501,307 square feet at the end of Q1 2012. We’ve observed white-collar office job growth spurring positive net absorption, while unemployment in the Metro Phoenix area decreased slowly this quarter to 8.7%, helping push the outlook toward a favorable year for office space.

There were varied differences in absorption between class and submarket strata. The worst performing submarket was Sky Harbor Class B property with negative absorption of (-158,813) square feet. On the other hand, the best performing submarkets were Downtown Phoenix Class B, and Northwest Valley Class B space, both absorbing over 300,000 square feet of space. There was a decline in absorption for the suburban markets, as this quarter reported around 202,000 square feet, compared to roughly 615,000 square feet in fourth quarter 2011. Net absorption totals will likely continue with positive figures, but strict lending conditions and slow job growth restrain full acceleration.

Despite some job growth, and a feeling of economic optimism, vacancy rates increased slightly up to 20.8%. We attribute this excess available space to downsizing in underperforming businesses, as well as the downfall in the total space absorbed. Property type did play a large role in the vacancy rate, while Class A space trended up to 23.1% from 20.7%, Class C space trended down to 13.3% from 21.5% across all submarkets. Part of this reported downfall is due to tenants scaling back expenditures, and favoring lower quality, lower priced office space. As we should see with the overall rise in vacant space, rental rates declined this quarter to $20.13. Occupancy rates were trending up from second quarter 2011, however first quarter 2012 noticed a slight decline in this momentum; rates fell .2% to 78.2%.

Construction projects accelerated as a total for Metro Phoenix; new construction increased from approximately 35,000 square feet to over 140,000 square feet, current projects under construction total close to 265,000 square feet. While this will be a great boost for business expansion opportunity, we saw total sale activity maintain similar levels, with a slight decrease from 33 to 32 transactions totaling $222,350,000 in volume; the median price for transactions was $120.41 per square foot. At the same time, leasing activity gained momentum with nearly 590 transactions recorded over first quarter 2012. One of the largest leasing transactions was 80,158 square feet of space signed by Rancho Solano Private School at 9180 E Via De Ventura, as well as 70,000 square feet of space at 1500 N Priest Dr signed by IPOWER. The leading sale transaction was an $86,000,000 purchase by Parkway Properties of 299,540 square feet of space, the Hayden Ferry Lakeside II project.

Cap rates were seen trending down for the office sector to 7.91% from 8.89%. Office space gave way to a peak of 12% cap rates in 2011. The movement down supports the positive absorption data seen across both Class A and Class B space. As investors look to higher quality properties, and with interest rates remaining low, cap rates should remain at current levels through 2012.

NAI Industrial Market Report: Available for Download

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The Phoenix industrial sector lost part of the momentum it had gained during the late stages of 2011. Absorption rates declined from their highs late last year, while rental rates stayed at a steady level. Build-to-suit transactions and speculative development will drive new activity and be a steady force in the industrial market throughout the year. Construction projects should start progressing as the supply of industrial space shrinks, further encouraging activity with large growth companies that are looking to expand into updated space. In line with forecasts for a positive year, the ISM manufacturing index was showing some growth since late last quarter; the gauge measuring overall production in the manufacturing sector nationwide. It was recorded at 53.4%, up 1% this quarter; a reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Absorption was positive over all submarkets but declined from fourth quarter, levels which were consistent with forecasts made in late 2011. The Southwest Valley was the worst performing submarket with a loss of 505,118 square feet, while the Northeast Valley had gains nearing 400,000 square feet. The great news and playing theme of 2011 was increased absorption at high rates.However, with the first quarter of 2012 slowing, the final three quarters will have to find strong acceleration to meet the initial annualized forecast. According to those forecasts, we should see a continued expansion in net absorption, leading to 7.5 million square feet, up from the 7.1 million square feet absorbed in 2011; a slow start is commonplace as investors/tenants are usually cautious in the first quarter.

Vacancy was little affected as we began the first quarter. Tenants and investors look on with wary eyes, finding any conviction difficult to grasp with improving but volatile conditions nationwide. Industrial vacancy remained unchanged, just under 14%. Job growth within the two main contributing sectors for industrial space, manufacturing and construction, was positive but fleeting. Flex space has persisted to record the highest vacancy rates averaging out around 20.5%; it has remained above 20% for the past three years. This property type will struggle against the subdued pricing of lower class industrial and office space properties. We hope to see business growth improving with low borrowing costs, green technology incentives, and a turnaround from one of the deepest recessions. If we continue to push forward, estimates surmise that up to 5 million square feet of vacant space throughout the year should be absorbed by tenants who are more confident in their business sectors. The first quarter showed that there was an increase in properties under construction; totaling up to approximately 3.4 million square feet. This will support expected new job creation and provide for an increase in class A highly desirable, first generation space.

Rental rate averages remained level with the average rate being at $0.49 per month, and we should continue to see average industrial rents unchanged, or have slight improvements as demand in the industrial sector increases. However, with a limited supply of large box space, and increased foreign investment nationwide, rents may find the effort to edge up. Additionally, a larger circulation of goods paired with increased economic activity will benefit the industrial sector as warehouse space will be in greater demand. The first quarter gave way to nearly 560,000 square feet of completed space, and approximately 3.3 million square feet of industrial space was under construction. The submarket with the highest addition was the Southeast Valley, with 2.2 million square feet of manufacturing space. We will need to see drastic improvement in rental rates to compensate for the declines experienced over the last four years, but moving in a positive direction is the momentum the market needs.

Consumer spending has already shown signs of improvement, albeit at a slow pace. Large movements of capital will be reserved after elections take place late in the year, and investor confidence will be restored if constructive outcomes are reached. The quarter was marked with passive, but improving job growth, coupled with a declining unemployment rate throughout Metropolitan Phoenix. The largest transaction seen in the first quarter was MiTek Industries acquiring roughly 260,000 square feet of warehouse space at 7890 W Lincoln. The quarter’s largest sale transaction was a purchase of a 3 property portfolio for $18,325,000 by Alliance Commercial Partners.