By Peter Madrid and AZBEX Staff for Arizona Builder’s Exchange
While it was nearly a given multifamily would be king of the hill in the 2017 commercial construction landscape, many other trends the Arizona Builder’s Exchange staff uncovered in preparation for its inaugural 2018 Construction Forecast event last Friday caught both them and several industry experts by surprise.
“We track individual projects every day. We know the market. We live this stuff; this is what we do. Even I was surprised to see how the exact construction activity percentages worked out,” said AZBEX Owner and Publisher Rebekah Morris.
Multifamily construction accounted for the lion’s share of the Maricopa County construction activity in 2017. It also accounted for almost 20 percent of the estimated $10.2B generated by the construction industry in the Phoenix metro area in 2017.
With more than 220 new residents moving to Maricopa County each day, the area leads the U.S. in population growth. “The demand for multifamily is not going anywhere soon,” said Arizona Builder’s Exchange Market Analyst, Lya Parrish, speaking before a nearly at capacity crowd of 300 at the 2018 Construction Forecast at the DoubleTree by Hilton in Tempe. “The outlook is very positive as big-name companies begin moving national and regional headquarters to Arizona.”
Single-family residential construction was a close second. In 2017, 21,000 permits were pulled, mainly in outlying areas. The outlook for new single-family residential construction is forecasted to grow in the coming two years.
In her opening remarks, Morris pointed out two blank tables on the event program and asked attendees to note their estimates as to how much of the market each sector constituted, then fill the true amounts as they were revealed over the course of the presentation. There were audible gasps from around the room on many occasions as the actual values were revealed.
A look at the Valley’s commercial market sectors revealed a mix of “glass half empty/glass half full” and “if you build it they will come.” Morris and Parrish reviewed 11 primary market sectors listing the major projects in each; identifying the top owners, design firms and construction companies by market share; and offering up projections – by year – for 2018, 2019 and 2020.
In explaining the methodology, Parrish explained the project only examined projects in the Phoenix metro area to keep the scope to a manageable size. All data was taken from the AZBEX Database, which tracks public and private projects around the state with valuations of at least $5M. Even with these restrictions, more than 700 projects were examined in preparation for the event.
Sectors, major projects and highlights in each included:
- Federal and Tribal: Most of the active and planned federal projects were outside of Maricopa County in the form of ports of entry, the Grand Canyon water line and the proposed border wall. Tribal projects included the Wild Horse Pass entertainment district and the new Desert Diamond Casino in the West Valley. Outlook: neutral to poor. New Federal funding for big construction projects is not likely on the horizon.
- Transportation and Parks: Projects include the Loop 202 South Mountain Freeway, Tempe Streetcar and Valley Metro light rail extensions. Money is coming from the federal level through ADOT. Outlook: very positive. Valley Metro is coming into a peak level of activity in the next 3 to 4 years.
- Utilities, Water and Wastewater: Funding came from user fees, and rate increases that do not require voter approval. Top projects were the Ocotillo Power Plant and the Ocotillo Water Reclamation Facility Expansion.
- Aviation: The big increases were tied to work being performed at Sky Harbor International Airport, most notably the Terminal 3 Redevelopment, Sky Train Phase II and Terminal 4 S1 Concourse.
- Education and Public Spaces: A big question: What is the environment for funding K-12 education? 2017 saw high-dollar amount projects in Agua Fria High School and Hopi Elementary. In higher education, top projects were ISTB 7 on the Arizona State University Tempe campus, ASU/Mayo Health Solutions Innovation Campus and a new parking garage at Grand Canyon University. In public spaces, the Maricopa County Intake Transfer Facility is the largest project going. Outlook: Positive, particularly if a firm is already in the space.
- Healthcare: There are few owners in this market sector. Banner Health had the largest single project with its Banner University Medical Center Phoenix Emergency Department Expansion. Medical office buildings and senior living/assisted living facilities also buoyed this market and were examined in detail. Outlook: Neutral to negative. The market is susceptible to changes, especially in healthcare legislation.
- Multifamily: This market sector has seen immense growth and is expected to remain strong. The Great Recession caused foreclosures, which led to more renters in the marketplace. Also, Millennials desire a live/work/play environment. Top projects in multifamily included The LINK PHX, Fillmore Mixed-Use and Lyon’s Gate Apartments.
- Hospitality: Tourism and sports facilities are the main drivers of demand. Top sports projects include: Attesa Motorsports Center in Casa Grande and the Sun Devil Stadium Among the top general hospitality projects mentioned were: Paradise Valley Ritz-Carlton and One Hundred Mill in Tempe. Outlook: Very positive, as Phoenix remains a good market for hotels and resorts.
- Industrial and Data Centers: Strong absorption in the industrial sector a big plus. Look for new product to pop up along the Loop 303 with projects proposed once the Loop 202 South Mountain Freeway opens. Look for Intel, Apple, and Lucid Motors to be big players. Data centers will be built as users sign on. New freeways will bring new parcels to development, and the Valley has some very savvy developers.
- Office and Retail: Vacancy is near the bottom of the cycle, pushing rents higher. Corporate relocations have made Tempe one of the hottest submarkets for office. Retail is experiencing a change as more mixed-use projects break ground, and adaptive reuse continues to be popular. Major projects here include Chandler Viridian and the Scottsdale Fashion Square redevelopment and expansion. Outlook: Activity is projected to decline, although major corporations locating here could overcome that. Existing corporate campuses have plans to expand.
As a result of all this activity, 2017 saw a market volume of $10.2B. That’s expected to increase over the course of 2018 and then trend slightly lower over 2019 and 2020.