UPDATE on CRE

Commercial real estate growth is slight but mighty

by Mike Hunter

10WLogistics Commercial real estate is a strong indicator as to the overall strength of the local economy, and key indicators address where we are as a market and how that compares to other markets. The Greater Phoenix area is still the fifth-largest metropolitan area in the country, by population, and has proven to live up to its ranking with new construction and improved properties throughout.

Each of the major sectors — office, retail, industrial and multi-family — is doing well and is showing signs of healthy growth. In Business Magazine, with the help of both CBRE and DTZ, provides an update on each of these sectors in this special commercial real estate section.

The Office Market

Office is seeing excellent gains and growth in areas like the Scottsdale Airpark, Arrowhead and the 44th Street Corridor, but is still in recovery mode as it is propelling the market closer to vast growth given some key factors. The overall economic growth is finally paying off for the commercial market, with strong demand for Class A space, higher asking rates and significant net absorption gains seen in most of the submarkets.

The need for better, quality space has become evident in the high occupancy rates in submarkets with abundant Class A space. The need for high-tech office space is growing while the need for exceptionally large space is declining as many companies are realizing it is quality not quantity they need to offer to attract talent and a sharp work force. Technology, for instance, is making it easier for businesses to utilize less space and eliminate things like a law library, a server room or an expansive reception area. This demand for quality is also resulting in a focus on improvements of existing space. Property owners are seeing the benefit of retrofitting space and improving the quality and aesthetic of their properties to get space leased, and these actions are showing results in absorption rates on the rise and buildings that have sat vacant now getting occupants.

Asking rates are on the rise as the occupancy rate is decreasing. According to CBRE’s Q1 2015 report, the vacancy rate decreased to 20.6 percent from 22.1 percent a year prior. Along with this, the full-service average asking lease rate for existing properties in metropolitan Phoenix for Q1 2015 was $21.74 per square foot, compared to $21.49 in Q4 of 2014 and $20.91 a year prior.

Absorption was a factor especially in Scottsdale Airpark, Downtown Phoenix and Midtown Phoenix. The market overall absorbed 477,901 square feet of office space in the first quarter of 2015.

Overall economic gains within the marketplace, chiefly employment recovery, are the underpinnings of this growth. Employment growth and the health of the commercial market are strongly connected; while employment growth has been on the rise for some time, the commercial market is just now seeing those gains.

The Retail Market

While retail vacancies have fallen 15 of the past 20 quarters, the decreases are minimal. Growth in the sector is inevitable and absorption is on the rise, but both the consumer fragility and e-commerce seem to be impacting the sector in the metropolitan Phoenix area.

Shopping center vacancies are down, according to DTZ, whose quarterly numbers report a very slight decline from 11.5 percent last quarter of 2014 to the current 11.3 percent in Q1 2015. Not a major shift. The decrease from last year is more significant, with a 12.5 percent level in Q1 2014.

Despite the fact that unemployment continues to fall and gas prices had been declining over the past year, consumers are still focused on getting a good deal and are cautious when it comes to major purchases. Discount stores are still expanding as consumers demand more for less. While there has been overall positive income growth, it has largely been with upper-income Americans, and this is not changing the spectrum of the consumer spending habits to greatly improve retail. The expansion of the luxury market and the discount concepts is leaving out the middle-market expansion, making for moderate growth.

E-commerce is another factor in the minimal growth as mid-priced hard-goods chains are seeing consumers flocking online for discounted pricing. The need for expansive retail space in some of the larger chains is diminishing and they are shifting their capital expenditure budgets to e-commerce growth. Restaurants and grocery are driving the brick-and-mortar retail segment, but not at a pace that is balancing the effect of big-box retail closures and downsizing.

The Industrial Market

Since its peak five years ago, industrial space has seen moderate growth and will continue at that pace, according to DTZ’s Q1 2015 report on the segment. Vacancy rates have decreased mildly to 11. 1 percent from 11.4 percent the prior quarter and from 12. 2 percent from the same time last year. Absorption has driven vacancy rates down considerably as businesses are seeing the benefit to leasing older improved space. The industrial market absorbed 32. 8 million square feet while adding only 23.4 million square feet of new space — driving rates down.

Like the office market, the need for updated, newer space by large corporations is benefiting the industrial segment greatly. The moderate rent growth for newer projects has yet to affect the rate, which remains at $0.51 per square feet. Much of the space occupied in the last quarter was expansion owner-built projects due to a lack of some of the newer space sprouting some projected speculative construction growth.

InBusiness-0515-CREAbout this section: As part of our service to our readers, our editorial staff has invited these top commercial real estate companies to provide information on themselves, their expertise and details relating to their business in this Commercial Real Estate: Spotlight on the Best special section. The real estate market is improving and these companies are proven leaders in the Valley. Click here to view the Commercial Real Estate Section

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