Category Archives: Market Trends

Q3 2012 – NAI Multifamily Market Report

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The Phoenix multifamily sector was the best performing sector of commercial real estate during the third quarter. Vacancy rates were down to 8.19% from 8.56%, and forecasts point to continuing declines. With the positive vacancy turn, rental rates are increasing; projecting through the duration of 2012, rents should reach $787. Also beneficial for the sector, the tight credit conditions for unqualified buyers will induce tenants to pursue apartment housing. As noticed during the previous quarter, investors will look for value-add in properties where minor capital injections can find larger turnaround returns. According to the National Association of Home Builders, throughout the US home builder confidence spiked an 11.6% gain in construction permit issuance, and a 15% gain in new housing construction. Both cases of growth are the strongest recorded numbers since July of 2008.

Third quarter vacancy rates for stabilized units improved to 8.19%, while there were six submarkets that recorded vacancy below 6%. The Gilbert/Queen Creek submarket noticed the lowest vacancy at 5.45%, while North Scottsdale/Fountain Hills also yielded a low vacancy rate of 5.48%. On the opposite end of the spectrum, the Central Black Canyon submarket and the West Central Phoenix submarket posted the highest vacancy rates of 12.68% and 12.04%, respectively. Additionally, the East Mesa submarket had the largest increase of 1.35% to vacancy this quarter, increasing to 6.09%.

The absorption figures during the third quarter increased to 695 units from the previous 268 units recorded during the second quarter. Although positive, fluctuations are prominent throughout each commercial real estate industry as construction strengthens supply and tenant demand searches for the most appropriate deals. On a historical trend basis, this was the lowest third quarter absorption noticed since 2006. Nevertheless third quarter marked the 14th quarter out of 15 with positive absorption. The North Tempe submarket recorded the highest increase in absorption at an additional 455 units. The Goodyear Avondale Submarket absorbed 145 units. Suffering the largest loss of occupied units was the Central Phoenix Submarket with 182 units absorbed. Occupied space should continue increasing; as the level of college debt escalates and the creation of new entry level jobs moves horizontally, a significant number of tenants will choose apartment housing.

Third quarter 2012 maintained average monthly rental rates with a slight uptick of .39% to $777. There were five submarkets that observed rents per unit above $900, while the highest rental rates were noticed in the Central City/Sky Harbor submarket at $1,159, a 7.81% increase. As with the previous quarter, the lowest rent was recorded in the Central Black Canyon submarket at $551. There are barriers that will impede further rent growth; the higher costs of transportation, inflation on all consumer products, and in general the drop in disposable income. However, apartment communities that offer location efficiency will find a flood of tenants.

The average sale price per unit was $86,722 and $96.35 per square foot, representing a $27,213 increases in sale price. According to Real Capital Analytics, the total sale volume for the Phoenix market was at $668,300,000. This level is only down slightly, from the approximate $730,000,000 noticed in the previous quarter. Both levels are significantly high for historical standards. The top multifamily transaction of the quarter was Andante, a 576 unit complex that sold for $61,300,000 at 15801 S 48th St in Phoenix, AZ. Price per square foot was listed at $119.58 and the price per unit at $106,424.

In the new construction development arena, there are nearly 2,750 units either under construction or scheduled for construction. Furthermore, 1,250 units are conditioned for final plan approval. Amidst the troubling economy, the slight uptick in growth has also induced a luxury friendly group of tenants. Such tenants have created an opportunity for developers to increase building on properties that offer amenities like dog parks, resort style swimming pools, and actual movie theaters. A 75,000 SF former LA Fitness center in Tempe will be re-developed into a 240-unit luxury complex. Also, in the DC Ranch area of Scottsdale, 224 luxury apartment condos have development underway. Such initiatives show the mix of tenants and opportunities abundant for multifamily housing.

Across the US, sale volume for apartments through the first two months of the third quarter totaled $9.9 billion; the volume in August 2012 accounted for 38.2% of all sales of commercial properties over $2.5 million, according to Pension Real Estate Association. Also, cap rates throughout the US have trended up from lows noticed during the second quarter. Cap rates averaged 6.35% during the first two months of the third quarter. In the Phoenix market, cap rates offered similar returns at 6.3%.

Q3 2012 – NAI Retail Market Report

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Third quarter was a small hurdle for the retail market, as fluctuations saw absorption trend down and rental rates drop. Despite these contractions, construction employment is up and consumer confidence is growing, according to the Conference Board. Retail sales across the nation showed signs of growth, according to the Department of Commerce. There was a 1.2% advance in consumer demand in August; the growth was noticed in 12 of the 13 retail sectors. Furthermore, on a national scale the outlook for manufacturing job growth and the increase in expendable income should boost the demand for retail products and space alike. Retailers will need to continue to compete with the online market, which, according to Forrester Research, will bring an estimated $327 billion in sales throughout the US by 2016, by enhancing the shopping experience. For consumers, the act of shopping is now more about the social interaction and ambiance of a store or mall, rather than the product options that that cannot compete with an online resource.

Absorption for the third quarter retail market stands at 137,091 SF. This marks the third consecutive quarter that absorption has decreased for retail space. Metro Phoenix’s absorption level is down nearly 35% from the previous quarter. The Scottsdale submarket followed that trend by displaying a reversal from last quarter, as absorption was (43,444) SF compared to second quarter’s 210,000 SF. Third quarter’s best performing submarket was the East Valley, where space absorbed was recorded at 112,878 SF. The commercial real estate industry has noticed the impacts of efficient technology such as smart phones and tablet PCs, all encouraging a reduction in square footage and employees.

The top lease transactions during this quarter include the 34,162 SF community center lease signed by Planet Fitness at 7333 W Thomas Rd in Phoenix, the 28,000 SF community center lease signed by Goodwill at 1546 E Southern Ave in Tempe, and the 18,646 SF community center at 1346 W Southern Ave in Mesa signed by K-MOMO, an urban lifestyle clothing retailer. On average, rental rates continued to trend down, averaging at $14.49 for the third quarter.

The Phoenix retail vacancy rate found no room for movement, and posted the same level of 12.1% as the previous quarter. By submarket, the Phoenix Airport area had the best recorded change in vacancy, declining from 13.5% to 9.0%. The lowest vacancy rate was observed in the Northwest Valley submarket which includes Surprise, North Peoria, and Anthem at 8.4%. Historical vacancy and average rental rates are both trending down and converging. Nevertheless, as vacancy rates continue to decline, and approach the historical 7% level, landlords should find more room to cease concessions and raise rental rates. Occupancy percentages have trended up since third quarter of last year, posting a rate of 87.7%

Construction activity on retail properties dropped during the third quarter. Third quarter recorded 192,484 SF of space under construction. Delivered space declined to 94,940 SF, a 42% decrease, while construction starts fell 84% to 55,000 SF. In September of 2012, the Producer Price index for inputs to construction, a weighted average of the cost of all materials used in construction plus items consumed by contractors such as diesel fuel, increased .9% in both September and August. Even with the onset of heightened costs, throughout the past year the addition of construction jobs put Metro Phoenix at the top of “new construction jobs” list, according to Associated General Contractors. As noted last quarter, it will take a considerable amount of time, or a huge spark in consumer confidence, to overcome the indecisiveness and market fluctuations throughout the US.

Nationwide, retail properties valued over $2.5 million had a total sales volume of $9 billion for the third quarter, down from the previous quarter’s $12.1 billion. Also on a national scale, capitalization rates for retail properties had little to no movement, averaging 7.15%. In Phoenix, cap rates trended down to 7.96%, recording a 2.7% decline. Year to date leveraged buyouts of US retail companies realized a significant allocation of capital, standing at $7.66 billion. This level is up from the $4.45 billion recorded throughout 2011. Investors will look to high quality retailers who can weather a recession, and are still finding pricing discounts, according to National Real Estate Investor.

Q3 2012 – NAI Office Market Report

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The Phoenix Office Market trudged along during the third quarter with mediocre growth. The Coincident Index for Phoenix, which includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries, increased during the third quarter from approximately 179 to 180.5. Another measurement of job growth that has impact on the Phoenix office sector is the Professional and Business Services Employment rate. According to the Bureau of Labor Statistics, the number of individuals employed in Arizona in these fields increased to approximately 348,000 from 355,000 during the third quarter.

The third quarter recorded positive absorption at 467,529 SF, marking a 22% decrease from the 570,000 SF absorbed in the second quarter. The Tempe and Central Scottsdale submarket posted the highest positive absorption figures at 219,820 SF and 158,417 SF, respectively. The Deer Valley submarket recorded the highest negative absorption figures, with (8,879) SF of space. This movement is consistent with recent trends; tenants are continuing their flight to higher quality space driven by accessibility. According to data, such Class A properties are being met with the highest demand.

Square footage leased totaled 1.6 million SF this quarter, compared to the 2.6 million SF recorded in the second quarter. Sales data recorded an even larger downfall; the total dollar volume of sales declined nearly 80% to $25.33 million. The top lease transactions during this quarter included: the 139,404 square foot lease at 4500 E Cotton Center Blvd in Phoenix signed by Aetna, the 138,240 square foot lease at 444 N 44th Street in Phoenix signed by State Farm Mutual Automobile, and the 105,000 square foot lease at 2222 W Dunlap Ave in Phoenix to United Healthcare.

The office vacancy rate declined slightly during the third quarter to 20.0%, an improvement from the second quarter rate of 20.2%. However, the slight improvement in vacancy did not translate to increased rents. Rental rates are still being priced by tenants; demand is not strong enough for price increases to take effect. Rental rates in the third quarter dropped to $20.18 per SF from $20.20 in the second quarter. The supply of vacant space must still be worked through for rental rates to trend up.

Office building construction matched the low levels seen during the second quarter. There were no new construction starts this quarter, and only 55,617 SF of space was delivered. There is currently 374,390 SF of space under construction. On a positive note, the final phase of Hayden Ferry Lakeside, a Class A office tower in Tempe, will potentially begin construction in the future quarters. This project has been stalled since the recession began and marks the first anticipated high-rise to break ground in Tempe since 2007.