Commercial real estate’s rocky road in metro Phoenix to continue in 2009

Posted By Mike Padgett

Jan. 13, 2009

For the first time in many years, the office market in metro Phoenix is losing traction to challenging economic conditions unseen in the region for many years, according to new reports about the 2008 market.

The metro Phoenix office market posted negative direct net absorption of 641,450 square feet during 2008, compared to positive direct net absorption of more than 1.3 million square feet in 2007, according to a year-end report from Cushman & Wakefield of Arizona Inc.

At CB Richard Ellis’ Phoenix office, the analysis of 2008 showed a negative absorption of 603,112 square feet. The differences between the two companies’ numbers reflect their different market boundaries.

“This past year, in response to slower national economic conditions, the Phoenix market experienced higher vacancy, lower demand and lower effective lease rates,” Tom Johnston, senior managing director of Cushman & Wakefield of Arizona Inc., said in a prepared statement.

“Further softening is expected throughout 2009 as more new space is completed and demand flounders,” Johnston added.

More than 2.7 million square feet of new office space are under construction and expected to be completed in 2009, adding more pressure to the Valley’s vacancy rate.

The Cushman & Wakefield report for 2008 shows only two areas posting positive direct net absorption – Scottsdale and Southeast Valley.

Negative absorption is the difference between the amount of space leased and the larger amount of space vacated during a specific time period.

Johnston expects the region’s office market downturn will hit bottom in mid-2009. He blames much of the office market’s rising vacancy rates on the national housing crisis and the credit crunch. He says predicting recovery is difficult “as the entire country awaits results of a new administration’s economic policy.”

“Our research indicates that 2009 will be similar to 2008 in terms of negative net absorption and increasing vacancies,” Johnston says. “However, we continue to attract new residents and are poised to recover quickly as the economy turns around.”

CB Richard Ellis’ 2008 analysis of the metro Phoenix office market shows that its vacancy rate increased for a fifth consecutive quarter to 19.1 percent. That is up 5.2 percent from one year ago.

The CBRE analysis also shows that the region’s industrial space was in positive territory, but barely. It shows that absorption for 2008 was 629,838 square feet, the lowest in many years and substantially less than the 8.4 million square feet of absorption in 2007.

Industrial space vacancy for 2008 reached 12.5 percent, up from 8.5 percent at the end of 2007. The CBRE report says the jump in vacancies and the drop in absorption are blamed for a significant decrease in construction.

Finally, in the retail sector, the CBRE report says vacancies in 2008 climbed to 7.5 percent, up from 6.1 percent a year ago. Construction declined significantly in 2008, delivering only 5.9 million square feet, compared to 11.5 million square feet in 2007. It adds that big box retail vacancies increased to 6.8 million square feet at the end of 2008, up from 3.9 million square feet a year earlier.


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Jan 13th, 2009

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