Category Archives: Market Trends

Q1 2013 – NAI Office Market Report

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The Phoenix Valley office market continues to trek up the long road to pre-recession levels. With vacancy continuing its slow but steady decline, and absorption continuing to post positive numbers, the sector seems to have stabilized from its low point. The previous year, 2012, boasted the highest leasing activity in several years and hopes are high that the trend will continue well into 2013. The market is beginning to see a noticeable increase in large users, including the announcement by State Farm Insurance of a 1 million SF headquarters campus to be built on the south side of Tempe Town Lake, expected to bring over 5,000 employees. In addition, Governor Brewer announced several promising Valley expansions that could result in over 2,000 new jobs in the next 3 years; 600 new jobs coming to Scottsdale through ZocDoc, 1,000 high tech jobs with the General Motors IT Innovation Center in Chandler, over 300 new jobs in Glendale with Zytech Building Systems, and approximately 250 mortgage professional jobs in Tempe with Union Bank. As the Valley continues to be a hot spot for companies looking to expand, the market should expect to see exponential improvements.

Overall vacancy fell slightly this quarter to 20.4% from its 20.6% rate at the end of 2012, down substantially from Q1 2012 when the vacancy rate was 22.4%. Class A office vacancy continued to decline to a rate of 20%, a significant decrease year over year; Q1 2012 posted a vacancy rate of 23.8%. Class B spaces are also moving in a positive direction, resulting in a vacancy rate of 21%, down from 21.3% at the end of 2012, and down considerably from Q1 2012 at 22.6%. Class C continues to remain stagnant, with vacancy rates increasing slightly to 17.2% this quarter, up from 17.1% from the end of 2012, and rising from the 16.4% rate seen at the beginning of 2012.

While absorption figures remained positive for the first quarter of 2013, total net absorption is down significantly from the impressive Q4 of 2012. With 195,034 SF of net space absorbed this quarter, 226,281SF consisted of Class B office properties, while Class C properties continued to post negative numbers with -50,777 SF of net absorbed space. This trend remains visible as tenants are taking advantage of the market to leave lower grade properties while rental rates remain low.

Despite positive news in vacancy, leasing activity lagged this quarter with 1.6 million SF leased so far this year, the lowest first quarter seen in 5 years. This number is down since the end of 2012, when over 2 million SF of office space was leased in the final quarter. As new large users begin to take advantage of the currently low rental rates it is anticipated that the next several quarters will see an uptick in activity due to these newly signed long-term leases.

Rental rates fell slightly this quarter after three quarters with relatively no change. Q1 posted an average rental rate of $19.68 PSF, compared to the $20.04 PSF exhibited for most of 2012. Class A space rental rates remained flat at $23.16 PSF, while Class B fell slightly to $18.48 PSF after stabilizing at $18.96 PSF over the last three quarters. Class C space fell to $14.01 PSF after three quarters at $14.52 PSF.

It is anticipated that the progress of 2012 will continue into 2013; with absorption stabilizing and vacancy rates continuing to decline, rental rates should begin to improve as the market shows signs of recovery. While a fully sustained recovery in the office sector is still years away, economic conditions in the Phoenix area are continuing to improve at a faster pace than most metro areas in the US.

Economic Outlook 1Q 2013

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As we move into 2013, the second quarter will give great insight about how the rest of the year will unfold. With Q1 starting off slower than anticipated in terms of completed deals, the next three months will tell the story of the year as the market takes shape in Phoenix. While the market seems to be heavy with interest and businesses looking for the right fit, there is still hesitancy to pull the trigger; owners know they have the freedom to be more thorough in their choices and weigh all options before taking the plunge. Rents seem to have stabilized across the board while landlord concessions have shown signs of tightening.

Despite Phoenix’s bumpy housing market history, the Metro Area continues to grow at remarkable rates. Based on updated population change percentages from 2000 through 2012, Metropolitan Phoenix ranked 7th in the US, beating Houston, San Antonio and Dallas Fort Worth as Texas has become direct competition as the other hot spot for businesses fleeing the west coast. Phoenix Metro population increased 32% from 2000-2012, and increased 2.3% from mid-2011 to mid-2012, roughly twice the national average. With that, interest has been coming back to Arizona from companies who may have skipped over the Phoenix Metro Area during the peak in our market in 2003 and 2004. With the wealth of possibilities in our market now, it is a prime alternative to the west coast.

The unemployment rate in Greater Phoenix as of February is 6.7%, down from 7.2% in January of this year and 7.7% in February 2012, according to the Department of Administration. For comparison, Arizona added 22,900 jobs in February of this year; from 2004 through 2007, the state added between 31,000 and 44,000 jobs in the months of February, before the recession hit. Nationally, the unemployment rate fell slightly to 7.6% as of March, but only due to the 496,000 people who left the labor force. March posted the lowest job count in nine months, at only 88,000 jobs created. While these figures may be partly due to a wintery March and the increased taxes that began in 2013, the disappointing numbers could start to set the tone for the new American workforce. Only 63% of American adults are now working or looking for work, the lowest percentage since 1979. Economic factors affecting businesses continue to shift the make-up of our work force, redefining part time and full time employment mixes and changing the way the average American earns a living and spends those earnings.

Nationally, a mild housing rebound and steady employment gains continue to support moderate economic growth. In the commercial real estate sector, US properties showed a 24% increase in sales volume over last year, and rent growth in the office, industrial, multifamily and retail sectors is projected to continue through 2014. The nation seems to be settling into a “new normal” with slight but steady improvements. Secondary markets such as Seattle, Austin, Baltimore and Phoenix cited significant year over year investment gains illustrating the regrowth of areas hit hard by the recession. George Ratiu, Manager of Quantitative and Commercial Research for the National Association of REALTORS®, who hosted the CCIM Institute’s Feb. 27 webinar, “The 2013 Economy and Its Effect on Commercial Real Estate”, shared that his projections included a continuing momentum for the economic recovery; “I feel more optimistic about the economy’s direction than I did even just a few months ago.” Such optimism gives hope that we are leaving recovery mode and getting back to a new kind of business as usual.

Q4 2012 – NAI Retail Market Report

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The Phoenix housing market, a primary pulse check for the Valleys commerical real estate market, has had a positive impact on the retail sector. With constant news of climbing home prices and leaps in construction dominating daily news, the previous doom and gloom mindset of any homeowner in Phoenix has begun to shift. With a path out of the residential slump in sight, fears have been eased and consumer spending is on the rise, with less reservation as to when things will improve. Adding to this confidence is an employment increase that may soon come close to pre-recession levels. In November of 2012, 224,000 retail jobs were added in the Phoenix market, a difference of just 20,000 jobs compared to pre-recession 2007 totals. These numbers represent an 8.38% decline in employment for the Phoenix retail sector over the last 5 years, compared to the 4.3% drop seen nationwide. While the struggle continues, these signs show that what was once viewed as impossible may be just around the corner.

Average rental rates fell during the fourth quarter of 2012, but are showing hopeful signs of slowing the downward trend. The year began with average rental rates of $14.72, and ended Q4 with an average of $14.28. In contrast, both 2010 and 2011 showed an average rental rate decrease throughout the year of over $1.10. While still on the decline, the fall seems to be slowing and even stabilizing in some areas; the Scottsdale, North Scottsdale, and Northeast Phoenix submarket clusters all showed slight increases in rental rates.

Net absorption levels showed positive signs of improvement throughout 2012. The fourth quarter raised the bar with over 1.5 million net SF absorbed, bringing the yearly total to 2,814,752 net SF absorbed. Leasing activity fell slightly in the final quarter of 2012, down 9.4% from Q3. Overall, the total 2012 leasing activity increased 6.6% compared to 2011, and is up a staggering 20% from the total SF leased in 2010.

Vacancy also brought positivity to the fourth quarter posting rates not seen since 2009. The overall vacancy rate fell to 11.3%, down from the 11.9% posted at the beginning of 2012. Both the West Phoenix and Airport Area submarkets boasted the lowest vacancy rates with 8.3%, while the East Valley left the most to be desired with a 13.6% vacancy rate for the fourth quarter. While vacancy rates are continuing a slow and steady decline, down from the peak of 12.6% seen in the beginning of 2011, there is still a long way to go to reach the lows seen before the recession when rates were steadily between 6% and 7%. While the Phoenix retail market will not recover to that level for a few more years, the data indicates that the Phoenix market is trending up and is on a slow and steady path to recovery.

The top lease transactions for the third quarter included two large leases by Burlington Coat Factory, one in the Airport Area Submarket Cluster, and one in the Scottsdale Pavillions shopping center that was hard hit during the recession. Also leasing a large space in The Pavillions is Octane Raceway, signing 45,086 in the revitalized shopping center near Talking Stick Resort.