Challenging office and industrial markets in metro Phoenix predicted

Posted By Mike Padgett

July 13, 2009

Press Release

PHOENIX, Ariz. – The commercial real estate market in metro Phoenix has been impacted by reduced lending activity, rising unemployment and increased foreclosure rates, according to the second-quarter report from Colliers International.

Following are the report’s highlights:

Office Market

• Overall vacancy is at 21.4 percent, up from 19.9 percent last quarter.

• Overall absorption posted a negative 1.04 million square feet for second quarter and a negative 1.6 million square feet year to date.

• New supply was 723,896 square feet for second quarter, with the Southeast Valley showing the largest new supply at 485,295 square feet. Year-to-date new supply was 1.2 million square feet.

• Total sales activity for the quarter was $45.9 million, down from $87.2 million in first quarter. The average price was $114.53 per square foot, compared to $126.51 per square foot in second quarter.

• Cap rates rose to 8.9 percent, up from 7.5 percent in first quarter.

• The largest sale of the second quarter was a 70,407-square-foot, Class B office at 7619-7699 E. Pinnacle Peak Road, Scottsdale, for approximately $9.5 million.

Despite national indications that the economic recession is nearing its bottom, the office market continues to face big challenges. Declining property values, little to no lending and rising foreclosures have combined to create especially harsh market conditions. With little activity, the office market will remain in hibernation for the foreseeable future. For tenants, these are excellent times to move up to a higher quality space than many would have thought possible only a year ago.

Industrial Market

• Overall vacancy rose modestly to 17 percent, from 16.8 percent in first quarter.

• Absorption posted a negative 2.7 million square feet in second quarter and negative 4.4 million square feet year to date.

• New supply was just 18,981 square feet, which occurred in the Southwest Valley. Year-to-date new supply was 202,170 square feet.

• Sales activity was $86 million, up from first quarter’s $60 million. The average price dropped slightly to $59.22 per square foot in second quarter, compared to $60.18 per square foot in first quarter.

• Cap rates settled at 8.4 percent, up slightly from 8.1 percent in first quarter.

• The largest sale of the second quarter was a 603,910-square-foot distribution building for $31 million, located at 4750 W. Lower Buckeye Road, Phoenix.

The industrial market continues to face mounting challenges. Rising unemployment, scant lending, companies retracting, and growing foreclosures have continued to make it difficult for observers to say exactly when this market will return to growth. Manufacturing, wholesale trade, warehousing and transportation have all had rising unemployment numbers. Investors with available cash or a private equity source are poised to participate in historically stellar bargains. Tenants will have an edge, but will have to work fast as concessions can only go so far.

“It will take some time to reset to new market realities,” says Matt DePinto, research manager for Colliers. “However, I am confident that Phoenix is poised better than most to rebound from these adverse conditions.”

Jul 13th, 2009

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