Commercial property vacancy rates climbing in metro Phoenix

Posted By Mike Padgett

Oct. 8, 2008

Vacancy rates are up throughout the metro Phoenix commercial real estate sector, while construction of new buildings continues, according to third quarter analyses released this week.

The third-quarter analysis from Colliers International says the challenging economic times “provide an opportunity for all players to come together with a realistic mindset that could break the logjam that has stifled investment and opportunity over the past year.”

It goes on to say that sales activity in the Phoenix area office market hit a major slowdown in 2008 – sales volume in the third quarter was $99.2 million, down from $160.3 million in the second quarter.

The Colliers third-quarter report on metro Phoenix shows that:

• Vacancies in the office market reached 17.5 percent, ranging from 13.9 percent in the Phoenix Central Business District to 20.2 percent in the Northeast Valley.

• Office rental rates averaged $25.85 per square foot.

• Industrial market vacancies reached 14.9 percent, up from 10.6 percent for the same time in 2007.

• The third-quarter price per square foot was $138, compared with more than $208 in the second quarter and nearly $268 in the first quarter.

Meanwhile, the report from CB Richard Ellis shows that:

• In the office market, vacancies increased for the fourth consecutive quarter, rising to 17.1 percent at the end of the third quarter. This is up from 16.3 percent at the end of the second quarter and up from 12.9 percent at the end of the third quarter 2007. The large jump in vacancies from a year ago is attributed to “a slowing in the economy and the delivery of 6.3 million square feet of new space to the market since 2007.”

• In the industrial division, vacancies reached 11.5 percent, up 4.4 percent from a year ago.

• In retail, the vacancy rate was 6.9 percent, up from 6.5 percent at the end of the second quarter and 5.8 percent at the end of the third quarter in 2007.

There are differences between the quarterly reports from CBRE, Colliers and others because the companies use different submarket boundaries.

The CBRE report refers to an August analysis from the University of Arizona that says “the state is in a recession and that the economy has yet to reach bottom.”

The university forecasters believe “that by the middle of 2009 the housing market should bottom, credit will once again expand and consumers will begin to release some pent up demand,” the CBRE report says.

It also says the forecast from the university “concluded that by mid-2010, the state’s economy will see promised growth.”

Citing Arizona Department of Commerce figures, the CBRE report says unemployment in metro Phoenix in August was 5.1 percent, compared to 4.3 percent in June and 3.2 percent 12 months ago.

Despite the rising office vacancy rate, new office buildings remain under construction because, unlike construction of new industrial or retail space, “the construction of an office building is more difficult to stop or delay once the project has started,” the CBRE report says.

By the end of 2009, most of the new office buildings with 3.9 million square feet in new space are expected to be completed.

All of which is good news for tenants, since rising vacancy rates push down lease rates. The full-service lease rate in metro Phoenix is now $25.44, down from $25.71 at the end of the second quarter and $25.96 at the end of 2007.

The saying that “retail follows rooftops” is especially resonant in today’s metro Phoenix housing market. The CBRE analysts cite the research of R.L. Brown, publisher of The Phoenix Housing Market Letter, which shows that:

• 10,708 single-family home permits were issued through August, compared to 25,957 for the same time period in 2007, and an annual average of 49,158 issued during the period of 2003 through 2007. Brown’s monthly report shows that 60,872 permits were issued in 2004 and 63,570 in 2005.

CBRE also quotes analyst Elliott D. Pollack and Co., which notes that metro Phoenix “is still affected by slower population growth, home builders holding inventory, the oversupply of homes on listing services, more foreclosures in 2009 and home builders that are still building.”

“Pollack forecasts that the bottom of the housing market may occur in 2009, but a full recovery will probably take multiple years,” according to the CBRE quarterly report.

CBRE also quotes, which it says reports that metropolitan Phoenix will emerge from its current struggles better positioned to sustain long-term growth because of the region’s relatively low costs of living and doing business.

In the industrial market, the numbers are equally grim. Year to date, absorption is 1.5 million square feet, down from 6.4 million one year ago.

“It is expected that absorption of industrial space in 2008 will be the lowest since 2001, when the market only absorbed 2.8 million square feet,” the CBRE report says.

Despite all the gloom and doom in the third quarter reports, there are opportunities, according to the Colliers industrial space report.

“With the current economic fallout still rumbling through the mortgage and securities markets, market volatility will remain at the forefront of every decision,” the Colliers report says. “If the federal bailout succeeds as presented, banks may well begin to loosen their grips on capital, thus allowing transactions and opportunities to move forward.

“Hopefully, levelheaded practices and a return to basics can bring stability back to this troubled market,” it says.

Oct 8th, 2008

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