News Ticker

Office & Industrial Have Diversified, Room to Grow

Speakers pictured from left to right: Craig Coppola, Principal , Lee & Associates; Rusty Martin, Project Executive, Graycor; Jenna Borcherding, Director, Development, VanTrust Real Estate; Megan Creecy- Herman, Vice President, Investment Officer, Prologis; Korey Wilkes, Principal, Butler Design Group

By Rebekah Morris for AZBEX

The final Leading Market Series (LMS) event for 2019 was held on Thursday, December 5, 2019, featuring Craig Coppola, Lee & Associates, Megan Creecy-Herman, Prologis, Jenna Borcherding, VanTrust Real Estate, Korey Wilkes, Butler Design Group, moderated by Rusty Martin with Graycor Construction. The topic of Office & Industrial was discussed, focusing on how much future construction activity will happen, constraints, opportunities and trends in the marketplace.

Overview of the Office & Industrial Market

Coppola and Creecy-Herman provided office and industrial statistics to put the current cycle into perspective. The focus on job growth and population growth are fueling the demand for new office and industrial spaces. Coppola highlighted facts that include:

  • 1 out of every 7 people moving across state lines nationally will end up in Arizona
  • 80 percent of all growth in the state happens in Maricopa County
  • 17 percent vacancy rate in office product is healthy

Creecy-Herman recapped the state of the industrial market by stating that vacancy has declined steadily since 2009; 12MSF of industrial product is currently under construction; 2019 will likely be the highest volume of new product to market ever, and this year will also likely mark the first time since the crash that deliveries outpace absorption. Borcherding also noted that 2019 will have the largest delivery of speculative office since 2010.

All panelists agreed that the pro-business mentality of Governor Ducey and the efforts of the economic development organizations like GPEC and ACA have benefitted the state. “The brand of Arizona has never been stronger,” Borcherding added.

What Makes This Cycle Different?

Creecy-Herman described a study she completed that looked into who the users are in the industrial space. Before the crash a full 60-70 percent were construction-related tenants who were expanding due to the furious pace of residential construction. This cycle is much different. Less than 30 percent are made up of users in the construction industry. Now the tenants are more likely to be retail support (e-commerce), light manufacturing, and similar.

The sources of capital for office and industrial developments have also changed drastically. Coppola described the market 20+ years ago as primarily driven by smaller local developers who were very susceptible to market turns. Now he describes the active players as ‘deep pocketed’ and ‘generational money’. Borcherding also described some of her firms’ holdings as ‘patient money’, including the 27 acres at Price Road and Chandler Blvd in Chandler, which will ultimately build out to include 1MSF of office, 200-units of multifamily and more.

From Higher Clear-heights to Amenities, Trends in Demands are Changing

Uber effect. Taller clear heights. Open office space. Less Parking. Less space per employee.

All these trends are pulling at development in different ways. Reality is not always matching the trendy headlines either. Wilkes described current office space plans evolving from an open concept into an even smaller space with some employees going to bench workstations. Coppola countered with the fact that efforts to get more productivity out of employees is driving workers into more ‘head down work’ areas like private offices. Cramming more persons into the same space has actually increased the need for parking. Coppola predicts the pendulum of open office space is going to swing back towards privatized work spaces.

Wilkes also explained how design trends for industrial spaces are changing. Seasonality of use requires a higher volume of parking for part of the year. Creecy-Herman added that depending on the tenant, power demands for industrial spaces might be incredibly high.

Outlook: 2020 is Looking Great

“Crashes are caused by either over-building or under-absorbing. We’re not doing either.” Coppola.

Whenever a recession does occur, and the general consensus is that a recession will not happen in 2020, the Phoenix market is well positioned to weather it with little impact.

E-commerce is often pointed to as a driver of new industrial space. Creecy-Herman identified the total e-commerce market as only 12-13 percent of all retail. She used this statistic to reinforce that e-commerce will continue to grow for the foreseeable future, driving continued demand for industrial space.

Labor and Rising Costs are Constraints

Labor is constraining firms across the industry in ways that are not always apparent. While the craft labor shortage is making headlines nationally and locally, the restrictions on moving plans through municipalities due to their workforce capacity has not been mentioned nearly as much. Creecy-Herman stated that there are major issues at no less than four major municipalities across the Valley where developers cannot even pay for expedited plan review because the city does not have the staff to dedicate to the task.

On the flip side, the war for talent is driving employers and real estate decision-makers of even traditionally lower wage positions to invest more heavily into the spaces where workers will be spending their time. A warehouse that has unconditioned space is less likely to attract a worker than a comparable business with a conditioned space for that same role. Back office call center type spaces similarly see amenities for workers as critical to attracting and retaining workers.

Borcherding described a local office product that was delivered in 2019 in Chandler, but the carbon copy office building saw an increase of 10 to 15 percent in only seven months on the cost of the shelled building. Creecy-Herman and Coppola took that increase a step further, stating that a $1/SF increase in construction costs leads to a $0.10/SF increase in required rental rate; the market is not keeping up with that pace. Price conscious tenants can avoid such price increases by looking at traditionally less desirable submarkets such as Midtown Phoenix.

West Valley vs. East Valley

“When you pick up a real estate exec from the airport, you’re not heading west.” Borcherding described how the East Valley has dominated office development in the last decade. Coppola stated that the West Valley is ‘not there yet’ when it comes to office development. There was agreement that eventually the West Valley will get its share of office space, but that will require a major employer willing to take a risk and create a comp that the industry can use to draw others to the West Valley. Industrial development in the West Valley is going very well and will continue to do so, especially with the opening of the Loop 202 South Mountain freeway in the next few weeks.

The topics and dates for the 2020 Leading Market Series are now available. Go to http://bex-events.com/lms/ to view the new lineup or to register for the next event.

Leave a comment

Your email address will not be published.


*