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2020 CRE Outlook: How Phoenix Shapes Up

Northrop Grumman opened its new Chandler campus in November 2019. The 633,000-square-foot office and manufacturing facility will provide a home for Northrop Grumman’s launch vehicle business, supporting defense and aerospace development. Credit: AZ Big Media

By Steve Burks for AZ Big Media

Consistency may be boring, but when it comes to the commercial real estate outlook and the Greater Phoenix commercial real estate industry, no change is good for business.

The United States is in what most economic experts feel are the latter stages of a growth cycle that is stretching into its 11th year. Many are signaling a global economic slowdown and are warning that could trigger the start of a recession in the U.S.

However, commercial real estate experts in the Greater Phoenix market still see significant room for growth in all of the market sectors. The strongest sectors heading into the next decade are the multifamily and industrial markets, as the influx of people coming to Arizona is expected to continue and the demand for logistics, manufacturing and distribution space will remain strong.

Industrial Outlook

It looks like full steam ahead in 2020 for the industrial market. Deliveries and vacancies were steady heading into 2020 and asking rents were trending upward, so all signs point to a healthy marketplace for industrial products.

“We are a very healthy and active market,” said Steve Larson, executive vice president at JLL. “People are optimistic about the current state of the industry and what appears to be a lot of runway ahead. I expect we’ll see more manufacturing and logistics requirements landing here, which will continue to keep us well balanced.”

The industrial market appears well balanced, with healthy activity in submarkets across the Valley.

“I’m most optimistic about tech-related advanced manufacturing space, particularly around the Chandler and (Phoenix-Mesa) Gateway airports,” said Pat Harlan, executive vice president at JLL. “We are seeing solid pre-leasing activity in both of these submarkets, and both have a finite amount of available land.”

“Right now, the Southeast Valley has about 2.3MSF under construction, which is right where it should be when you look at the vacancy rate of 6.9 percent and the 2MSF absorbed in the area through the third quarter of 2019.”

“There is great vibrancy in the Loop 303/I-10 submarket and the Loop 202/East Chandler submarkets,” added Isy Sonabend, senior vice president at NAI Horizon. “Both industrial markets are in strong build cycles while attracting a myriad of Fortune 500 companies with state-of-the-art construction. The West Valley submarkets are building with an eye towards e-commerce and manufacturing … big box warehouses and plants.”

The majority of new industrial growth in the Valley will come in the form of distribution and logistics centers to cater to the growing e-commerce market. While those will be large-scale products, there is also ample activity heading into 2020 for small and mid-size industrial tenants.

Multifamily Outlook

Solid economic fundamentals? Check.

Huge influx of new residents? Check.

Growing demand for rental housing? Check.

The Greater Phoenix market checks all of the boxes that indicate a very healthy environment for multifamily owners, operators and developers. The strong momentum and the fact that the market is woefully short on supply makes Phoenix one of the top markets for multifamily investors for the next few years.

“These strong fundamentals, coupled with meager levels of overall housing supply (single-family and multifamily), are pushing vacancy rates to historically low levels which should keep Phoenix among the top rent growth markets nationally in 2020,” said Matt Pesch, executive vice president with CBRE Phoenix Multifamily Institutional Properties division. “Phoenix is still one of the most affordable major markets in the Western United States.”

New multifamily projects are being planned all over the Valley, but more is needed. According to Tom Brophy, the director of research at Colliers International in Arizona, there is a 20,000 to 30,000-unit deficit in multifamily based on the population growth Maricopa County is experiencing.

“Our vacancy rates are the lowest they’ve been since the 1970s,” said Chris Roach, associate vice president, Colliers International in Arizona. “Some of the headwinds for developers have been rising construction costs and a shortage of skilled labor.”

But those headwinds are no match for the shifting demographics and desires of people moving into the Valley.

The rising number of residents in Maricopa County and their choice to rent instead of purchase has created a housing shortfall, something that the Phoenix market may not be able to remedy.

“By our estimation, metro Phoenix is building 10,000 to 15,000 too few housing units annually,” said Asher Gunter, executive vice president with CBRE Phoenix Multifamily Institutional Properties division. “Because of the current labor shortage, it’s not likely that developers will be able to build fast enough to keep up.”

Office Outlook

The Greater Phoenix office market is following a similar trajectory as the industrial and multifamily markets. The outlook for 2020 and beyond is strong based on a large influx of companies moving into the market. Those companies are either escaping higher operational costs in coastal markets or expanding into the market, making the demand for office space high.

The numbers leading into the final quarter of 2019 were unprecedented, with record absorption (over 3MSF through Q3), record construction numbers and a healthy amount of pre-leasing activity by coworking companies. Since 2010, the market has seen the vacancy rate drop 40 percent, from 19.7 percent in 2010 to the current record low rate of 11.7 percent.

“Phoenix is extremely well-positioned to continue seeing corporate expansions and relocations,” said Steven Schwartz, managing director of ViaWest Group. “This is due to a pro-business environment that includes a low cost of doing business, low cost of living, proximity to California (without actually being in California), excellent quality of life, and our universities pumping out qualified graduates in critical fields.”

“We have had record office absorption in the last few years and it is coming in all sizes and in diversified industries, including financial services, healthcare and technology. This is really the first growth cycle that we have had such a degree of industry diversity.”

Retail Outlook

One market sector that could see a slowdown is the retail sector, due to shifting consumer habits. In Greater Phoenix, the retail industry is healthy, with an overall vacancy rate at 6.9 percent, which equals pre-recession levels.

“The residential growth, infrastructure, education and employment will drive the retail market in 2020,” said Rommie Mojahed, director of retail leasing and sales for SVN | Desert Commercial Advisors. “However, I am concerned with the rising construction costs and record high lease rates, but we are still much cheaper than California.”

There is retail construction occurring in the suburbs and developers continue to bring new products to where the new housing developments are. In the more established parts of the Valley, there will likely be very little new construction as many big box stores have closed.

“There is very limited new shopping center development due to so many big-box tenants that are retooling themselves to be more competitive in the digital economy,” said Dave Cheatham, president of Velocity Retail Group. “I think in 2020 that the amount of new development will go down at least 30 percent. This will bring about a slowdown of new store development and cause the decline in ground-up construction.”

Read more at AZ Big Media.

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