Metro Phoenix Retail, Office & Industrial Recovery By Gary Ringel, CGREA, Director (480) 483-1170 ~ GaryR@hhcpa.com Statistics Indicate Decreased Vacancy Rates, Increased Lease Rates & Positive Absorption Rates in First Quarter of 2015 According to the fifth Commercial Real Estate Survey conducted by the Center for Real Estate Theory and Practice at the W. P. Carey School of Business in the first quarter of 2015, most participants believe the commercial real estate market in the metropolitan Phoenix market ( Phoenix region or Phoenix area ) is definitely gaining momentum at a steady and slightly increasing pace. Below are some of the questions posed to commercial real estate brokers who participated in the survey and their responses. Where are we in the cycle? 58% Expansion, 33% Recovery, 9% Correction, 0% Maturity, 0% Recession In what direction is the metro Phoenix market moving? 100% Up, 0% Stationary, 0% Down Where are big box industrial vacancy rates headed in the next 6 months? Up 0%, Down 36%, Stationary 64% Where are office vacancy rates headed in the next 6 months? Up 27%, Down 46%, Stationary 27% Where are retail vacancy rates headed in the next 6 months? Up 27%, Down 46%, Stationary 27%
Retail The metropolitan Phoenix retail market continued to slowly improve at the end of the first quarter (Q1) of 2015 with the overall vacancy rate decreasing 10.0% from 9.3% in Q1 2014. Developers are being extremely cautious and reluctant to build new product without preleased space and/or anchor tenants. Consequently, the metro Phoenix retail market has recorded positive net absorption in 14 of the last 15 quarters with 8 of the submarkets reporting more space occupied in Q1 2015 than Q1 2014. Submarket Rentable Area Vacancy Rate (%) YTD Net Absorption Under Construction NNN Average Asking Lease Rate ($ SF/Yr.) Maricopa 528,488 1.8 1,300 0 19.00 Paradise Valley 7,968,168 5.4 94,262 20.000 17.87 Apache Junction 4,795,732 6.0 (10,017) 51,413 19.34 Scottsdale 4,401,889 5.6 (8,310) 132,000 18.50 North Scottsdale 15,329,691 7.2 (78,137) 80,056 21.05 Tempe/Ahwatukee 17,964,557 7.4 (25,434) 0 16.35 West/Southwest 19,215,808 7.9 10,785 0 14.99 Phoenix Sun City 9,161,04 8.3 245,174 85,000 16.49 North Bell Rd. 15,694,336 8.6 55,597 0 16.16 East Phoenix 3,519,823 11.1 45,536 0 19.33 Mesa/Chandler/Gilbert 37,657,586 11.8 267,594 0 14.12 Northwest Phoenix 12,523,737 15.1 68,553 40,000 12.74 Metropolitan Phoenix 148,760,857 9.3 446,246 408,469 15.48 Average Net Asking Lease Rates Per S.F. ($) Power Centers 20.76 Community Centers 14.71 Neighborhood Centers 15.25 Strip Centers 13.73 Note NNN is an abbreviation for a triple net lease where the lessee (tenant) agrees to pay for real estate taxes, building insurance, and common area maintenance in addition to rent, utilities, and other expenses stipulated in the lease agreement.
Office The metropolitan Phoenix office market continued to gain momentum in Q1 2015 as asking prices increased, vacancy rates declined and net absorption gains were experienced in almost every submarket. The Q1 2015 average asking lease rate for all classes of office space (Class A, Class B and Class C) in the Phoenix region was $21.74 per square foot representing a 25 cent increase from Q 4 2014 and an 83 cent increase from Q1 2015. According to CBRE, Q1 2015 marked the eighth consecutive quarter in which asking rental rates have increased, after twelve consecutive quarters of rental rate decreases. Submarket Rentable Area Vacancy Rate (%) YTD Net Absorption Under Construction NNN Ave. Asking Lease Rate ($ SF/Yr.) Central/South Scottsdale 9,113,922 11.5 61,358 0 22.96 Tempe 5,369,905 12.7 (30,971) 2,630,000 22.21 Southeast Valley 9,044,847 18.6 82,807 1,232,450 20.42 East Phoenix 8,745,944 20.7 68,085 0 20.26 Scottsdale Airpark/Desert 10,701,268 20.7 118,342 139,189 24.16 Ridge Central Business District 16,604,319 23.8 110,921 0 21.53 Camelback/Piestewa 9,772,804 24.1 (9,944) 0 24.37 Peak West/Northwest Phoenix 12,513,163 24.7 77,303 0 18.34 Metropolitan Phoenix 81,866,172 20.6 477,901 4,001,729 21.74 Average Asking Lease Rates For Class A, Class B And Class C Office Space Per S.F. ($) Class A Class B Class C 26.88 21.021 15.85 Average Asking Lease Rates For Class A, Class B And Class C Office Space Per S.F. ($) In Central Business District Class A Class B Class C 26.25 19.83 18.57 Average Asking Lease Rates For Class A, Class B And Class C Office Space Per S.F. ($) In Suburban Market Class A Class B Class C 27.11 21.33 15.09
Central Business District Absorption Rate Class A 25,880 Class B 86,300 Class C (1,259) Suburban Market Absorption Rate Class A 55,209 Class B 279,521 Class C 32,250 Notes Class A buildings represent the highest quality buildings in their markets. They are generally the most attractively constructed and possess high quality building infrastructure. Class A buildings are normally well located, have good access, and are professionally managed. Consequently, they command the highest rent and generally attract credit worthy tenants. Class B buildings are generally a little older, leased to good quality tenants, and are professionally managed. Value-added investors frequently purchase this type of building as an investment since a well-located Class B building can be returned to Class A quality through renovation such as façade and common area improvements. Class C is the lowest classification of office building. This building type is usually more than 20 years old, located in a less desirable area, and in need of extensive renovation. Architecturally, these buildings are the least desirable and building infrastructure and technology is outdated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities. A full service lease typically refers to a lease agreement in which the owner (lessor) is responsible for payment of the building s operating expenses which include, but are not limited to: real estate taxes, insurance, utilities, maintenance, etc. The terms of a full service lease usually require the tenant to be monetarily responsible for any increases in the owner s operating expenses beyond the base year (first year) of the lease. The office market inventory is comprised of all classes of single and multi-tenant buildings that are 10,000 square feet or larger. Single tenant owned occupied buildings, government owned buildings, and medical buildings are not included in the CBRE office market statistics.
Industrial The metropolitan Phoenix industrial market once again experienced robust activity in Q1 2015 attributable to the 20 th consecutive quarter of positive net absorption driven by users seeking space between 20,000 and 150,000 square feet. According to CBRE, fundamentals for industrial space in metro Phoenix are strong. As a result, sustained net absorption gains, average asking rental rate appreciation and incremental declines in vacancy rates are expected in the foreseeable future. Submarket Rentable Area Vacancy Rate (%) YTD Net Absorption Under Construction NNN Average Asking Lease Rate ($ SF/Mo.) Northwest 48,816,455 8.9 476,993 235,410 0.70 Airport 73,377,685 9.8 204,606 364,372 0.69 Northeast 13,746,847 10.5 (59,440) 0 0.93 Southeast 68,640,091 10.6 493,340 1,046,058 0.78 Southwest 90,651,284 13.4 858,699 1,180,818 0.39 Metropolitan Phoenix 295,232,362 11.0 1,974,198 2,826,658 0.58 Influence of Employment and Population Growth on the Market Values of Commercial Real Estate in Metropolitan Phoenix As always, the two factors that have the most influence on values of retail, office and industrial properties (as well as housing) in the Phoenix area are employment and population growth. In Q1 2015, the University of Arizona projected that metropolitan Phoenix would add 42,200 jobs in 2015, followed by increases respectively of 47,500 and 58,300 in 2016 and 2017. By comparison, only about 33,700 jobs were added in 2014. According to the Arizona Department of Administration, metro Phoenix s unemployment rate was 5.4% in February of 2015 compared to 5.9% at the end of 2014. A May 26, 2015 article in the Phoenix Business Journal reported that the Phoenix metropolitan area, which includes both Maricopa and Pinal County, posted a 1.9% increase in 2014. This gain placed the Phoenix metro area historically a top 5 region for population growth to a tie for 32 nd in the U.S. However, the nearly 85,000 new residents placed the two-county metro region at number 6 in the country for actual number of people added.
In summary, population growth rates and new jobs have historically driven the metro Phoenix economy. During previous post-recession cycles, the region s population grew between 5% and 6% compared to the anemic 2014 figure. Therefore, most economists are guardedly optimistic about the continued improvement of the metro Phoenix commercial market. Gary Ringel, CGREA, is a Director of Henry & Horne, LLP s Business Valuation & Litigation Support Services Group and real Estate Appraisal & Consulting Group. He has prepared more than 3,000 business valuations and real estate appraisals for attorneys, accountants, trust officers, financial planners, real estate developers, and lending institutions. He can be reached at (480) 483 1170 or GaryR@hhcpa.com. Tempe Scottsdale Casa Grande 2055 E. Warner Road 7098 E. Cochise 1115 E. Cottonwood Suite 101 Suite 100 Suite 100 Tempe, AZ 85284 Scottsdale, AZ 85253 Casa Grande, AZ 85122 (480) 839-4900 (480) 483-1170 (520) 836-8201 w w w. h e n r y a n d h o r n e. c o m