Sluggish Phoenix economy hurting most commercial real estate

Posted By Mike Padgett

July 17, 2008

Consumers tightening their belts could force some metro Phoenix retailers to close their doors, or at least seek reduced lease rates.

That is part of the conclusion of new reports on retail space in metro Phoenix. The second quarter review from CB Richard Ellis‘ Phoenix office shows that construction of new retail space is down and the retail vacancy rate reached 6.5 percent at the end of the second quarter, up from 6.4 percent in the previous quarter. One year ago, the vacancy rate stood at nearly 5.5 percent.

In the near future, some tenants suffering from declining sales are expected to ask for rent relief. Plus, as customers cut back on discretionary spending, some restaurants may go out of business.

The report also points out that retail construction in metro Phoenix is down. About 11.5 million square feet of new retail space was added in 2007. So far this year, 4.3 million square feet of new space has been added, with another 5.1 million square feet of space under construction. One year ago, the amount of new retail space under construction was 12.4 million square feet.

CBRE’s analysts reviewing current market conditions are saying “that an increasing number of retail centers will either delay the start of construction or postpone projects indefinitely” until the Phoenix economy rebounds.

The second-quarter report from Grubb & Ellis/BRE Commercial cautions that, because of reductions in consumer spending, “business consolidations and closings can be seen marketwide.”

At the same time, because retail vacancies are up, tenants – especially those with leases expiring soon – will begin negotiating changes with landlords.

Those changes – which also are affecting the office market – could include lowering lease rates, reducing the amount of leased space, or terminating the lease in favor of better lease rates elsewhere, said Larry Downey, executive director at Cushman & Wakefield‘s Phoenix office.

“It’s a great time for a tenant to be out there looking at their occupancy costs and leveraging the softness of the market, whether they renew their existing lease or relocate,” Downey said.

The highest demand area in the metro region is the Camelback Corridor, where the lease rate is $37 per square foot per month for Class A space, according to Grubb & Ellis/BRE Commercial.

As the economy rebounds, Downey said, the downtown Phoenix office market will be influenced by two major office projects under construction. They are One Central Park East, under way at the northeast corner of Central Avenue and Van Buren Street; and CityScape, under construction at the southwest corner of Central and Washington Street.

One Central Park East is a 26-story office tower covering a city block. It will have 760,000 square feet of space. The first floor is designed for retailers. The next 10 floors are for parking, and the top 15 floors are offices. Completion is projected for late 2009.

CityScape’s first phase includes a 28-story, Class A office tower, which is set to open in late 2009. It will have 618,000 square feet of office space.

Owners of the new buildings are courting tenants in other buildings to relocate into the two new projects. Both developments are expected to have office space ready for lease by late 2010, Downey said.

He added that despite the sluggish economy, downtown Phoenix has two other developments that are expected to help the office market. One is the new facilities for Arizona State University’s Walter Cronkite School of Journalism and Mass Communication, which is opening Monday, July 21, at Fillmore Street and Central; and the light rail system, which is set to open late this year through downtown Phoenix.

Downey added that office vacancies in Scottsdale have reached 18.7 percent, one of the highest rates in the Valley.

“It’s getting pretty challenging for some landlords to attract tenants because what tenants are out there are far and few between,” Downey said.

Jul 17th, 2008

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