NAIOP-AZ members gather every year around a table, not necessarily a round one, to discuss the national and local issues and trends entering the commercial market. Here are the leading trends, promising statistics and market updates they’re watching.
Moderator: Tom Johnston, Voit Real Estate Services
Participants: Molly Carson, Ryan Companies US, Inc.; Matt Mooney, Parkway Properties; Larry Pobuda, The Opus Group; David Scholl, Vintage Partners; Christopher Toci, Cushman & Wakefield; James Wentworth Jr., Wentworth Properties.
Q: What is different in July 2015 in our local commercial real estate industry from a year ago?
David Scholl: With each passing year, I believe we are seeing a strengthening real estate market from the Great Recession. There seems to be more activity and less fear in the market. We are still not to the point in the cycle where there is much demand for new commercial development, but “chatter” is more about the search for development deals rather than buying existing broken deals. As employment continues to strengthen and the single-family residential market gets on firmer footing, I believe we will begin to see more pressure for new commercial development.
Q: How would you compare our metro Phoenix commercial real estate market to other major markets throughout the nation and, specifically, the Western U.S.?
Larry Pobuda: Without question, Phoenix has had a slower recovery, yet I don’t look at this as a bad thing, and actually think of this in very positive terms. We have come out of the economic downturn with a more diversified economy, driven by growth in technology, healthcare and financial services. This economic diversification provides relief from the construction/ housing roller coaster that has steep inclines and correspondingly steep declines that have taken our breath away in past cycles. In many ways, our recovery is similar to other markets; no longer can you look at aggregated market-wide statistics and draw meaningful conclusions. The Valley has “hot pockets” within various sub- markets. It is difficult to paint with just one brush.
Q: What has been most surprising about Arizona’s commercial real estate recovery?
Chris Toci: The most surprising element about Phoenix’s recovery from the Great Recession compared with other post-recession recoveries is its lack of a “snap back.” The hockey stick, or “J” curve, recovery of aggressive rent growth witnessed from 2002 through 2006 after the September 11-induced recession is sorely missing from this current recovery. The current recovery is more indicative of the 1992 to 1996 post-recession recovery in which zero speculative office construction occurred, 75,000 to 85,000 jobs per year were added, and in excess of 1 million square feet of net annual office absorption occurred. It was during this five-year period that rents grew most aggressively prior to the market’s sustained delivery of consecutive years of speculative office space. The moderation of the ‘92 to ‘96 recovery cycle was predicated on no speculative construction during the early years, which ultimately led to a more sustainable nine-year period of growth that prevailed between the trough of 1991 and the trough of 2001. Similarly, a more moderate current recovery which boasts growth of 52,000 to 55,000 jobs per year, muted speculative office construction deliveries, and net office absorption averaging in excess of 1.5 million to 2 million square feet per year all point to another sustained period of growth that may rival the recovery cycle from 1992 to 2000.
Q: What is the current state of our Metro Phoenix office market and what needs to happen to push the office sector into continued recovery?
Matt Mooney: The Metro Phoenix office market is improving overall but remains very bifurcated in the strength of the recovery. Well-located new product with good access to transportation and amenities in the Southeast Valley and Scottsdale is approaching historic rents in many places — and certainly at rents that justify new development. At the same time, there is a lot of product in Metro Phoenix that is functionally irrelevant, due to location, parking constraints or inefficient floor plates. Some of this inventory still doesn’t make sense to lease at current rental rates and probably should be converted or demolished. The biggest catalyst to continued improvement is simply continued office-using employment growth in diverse industries. We are all invested in the job growth story.
Q: Why does the Tempe sub-market appear to be so hot right now and what is the next hot sub-market? Is it Central Phoenix? Is light rail a driver?
Molly Carson: Adaptive reuse is often not as cost effective as building new, but is a very important element for creating, strengthening and maintaining a city’s culture. This is a recent (and often challenging) trend for Arizona, one I hope continues to gain more traction. The last two years we have seen a number of innovative adaptive reuse projects not only come to fruition but thrive. Restaurants such as Fox (Restaurant Concept)’s The Yard and (Jim) Riley’s The Vig revitalized not only the buildings in which they occupy, but the respective neighborhoods. They’ve created gathering areas where previously there was none, bringing life to these older buildings. The redevelopment of the Monroe and Barrister buildings no doubt will bring life to downtown Phoenix.
Q: What is the current state of our Metro Phoenix industrial market?
James Wentworth Jr.: The Phoenix industrial market is healthy. We have seen strong activity trickle from large users to the mid-sized users. Well-located and functional product is leasing, and we are seeing growth in the rental rates. Similar to the office market, certain sub-markets and building sizes are performing better than others. Vacancy rates are just above 10 percent with new development happening in select sub-markets. This development is much more controlled than in previous cycles.
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