Job Growth Heats Up Arizona Outlook
Arizona has become a preferred destination for businesses as several recently have relocated to the state. “The Phoenix metro area — and the state in general — is attracting new significantly sized employers,” says Steven Nagy, CCIM, of Nagy Property Consultants in Phoenix. “Economic conditions are robust, driven by strong population gains and strong job growth.” As a result, most commercial property segments are in a period of prosperity.
“Tucson’s industrial real estate market continues to experience net absorption with low vacancy rates and escalating rents,” says Dave Gallaher, CCIM, of Tucson Industrial Realty. The market’s average vacancy rate is between 8 percent and 12 percent, with some submarkets as low as 5 percent.
“The past 12 months, rents have increased an average of 10 percent to 15 percent,” Gallaher says. Monthly lease rates for class A and B industrial properties range from 50 cents psf to 65 cents psf. “Prices for buildings and land have correspondingly also increased about the same percentage,” he says. Industrial sales prices average between $45 psf and $60 psf — their highest levels since 1986.
While most construction has been build to suit, this year “will produce some rather large speculative industrial developments,” Gallaher says. “Financing for most construction is readily available from all the major lending sources, such as banks, mortgage lenders, and secondary sources,” he adds.
The industrial market in Sky Harbor, a Phoenix submarket, is active, says Bo Mills, CCIM, of Trammell Crow Co. in Phoenix. “There is a tremendous amount of spec and build-to-suit activity,” he says. “Companies are expanding and new business is moving to Phoenix.
“Overall, the vacancy rate across all sectors is holding steady at less than 10 percent,” Mills says. Lease rates range from $3 psf to $14 psf depending on the property’s size, according to a year-end 1999 report from the Society of Industrial and Office Realtors. Sales prices ranged from $70 psf to $112 psf depending on the property’s location and size.
The area should continue to experience strong growth in the next few years, with call centers and Internet companies commanding the most space, Mills says. However, high land prices will keep new construction in check, he says.
“The [Phoenix] multifamily real estate market has been consistently strong for the past six years after a lull and significant market correction in the prior five years,” Nagy says. The market is driven by a population boom, which is fueled by an expanding job market.
The addition of roughly 8,000 units last year bumped the vacancy rate up about 1.5 percent to between 6 percent and 7 percent, Nagy says. Monthly lease rates also have experienced a modest increase in the past several years, averaging 79 cents psf. “Sales [are] occurring in all segments of the market, with average prices near $57,000 per unit, or approximately $64 psf,” he says.
“Construction occurs on a spec basis, as well as build to suit for institutional investors and investment trusts,” Nagy says. Development financing is available from major local and national banks.
In southern Arizona, the multifamily market is tight with a high demand for — and low supply of — quality apartment projects, says Ronald E. Campbell, CCIM, of Long Realty Commercial Real Estate Services in Tucson. “Most available complexes between 24 and 100 units sold to California investors seeking 1031 exchanges in 1999,” he says.
Relief for the crowded market doesn’t appear to be in sight. “There are just over 1,000 apartment units scheduled to be built in all of Pima County for 2000, although our vacancy rate is the lowest it has been in possibly five years at 6.8 percent,” Campbell says.
Monthly lease rates average $325 for studios, $350 for one bedrooms, and $450 for two bedrooms. “Rates should climb 2.5 percent to 3 percent for 2000,” Campbell says. “There are no rental concessions being offered by owners.”
In greater Phoenix, “Retail leasing is the strongest it’s been in many years,” says David Goldberg, CCIM, of Goldberg Real Estate in Scottsdale. “Tenants are having a hard time finding locations.” Occupancy rates average between 95 percent and 97 percent depending on the area, which is about even with the last few years.
Lease rates also are stable from recent years, Goldberg says. “Annual rates are $10 psf to $14 psf [triple net] for unanchored strips [with] mostly older properties,” he says. “Anchored is $16 psf to $24 psf [triple net] depending on location and age.”
Construction — both build to suit and spec — is occurring at a steady pace in the Phoenix area, which may affect the market negatively, Goldberg says. “Basically there is too much product on the market,” he says. “I think there will be a slowdown with vacancy rates creeping up.”
In Tucson, the retail market is experiencing significant activity in leasing, sales, and development, says George C. Larsen, CCIM, of Larsen Baker LLC in Tucson. Larsen attributes the strong market to the creation of 15,000 new jobs in the city last year. “Job growth is fueling population growth, which fuels retail sales and new development,” he says.
The year-end 1999 vacancy rate was 9.9 percent, which is down slightly from 10.6 percent in 1998, Larsen says. “Lease rates are up 5 percent for existing centers [and] 20 percent for new centers,” he says. “The best in-line space in new centers now rents for $22 psf to $25 psf net. Rents in older centers are $10 psf to $16 psf.”
Sales prices also increased over 1998 figures. “Anchored retail centers are now selling at or above replacement costs at $90 psf to $110 psf,” Larsen says. Construction is occurring in the area, with five or six grocery-anchored centers under development.
“The 1999 Tucson office market ended on a strong note with an overall occupancy rate at a 15-year high of 93.8 percent,” says Tari M. Auletta, CCIM, of Mark Irvin Commercial Real Estate Services in Tucson. “Over 200,000 sf of positive absorption occurred in 1999, compared to 15,000 sf of negative absorption reported at the end of 1998.”
Lease rates for class A and B buildings reached an all-time high in 1999, Auletta says. Class A rates range from $20 psf to $24 psf full service, while class B rates range from $16 psf to $19 psf full service. The rates should stabilize this year, she says.
“From a sales standpoint, the average sales price increased over $20 psf in 1999 over the prior year, and we see this trend continuing into the new year,” Auletta says. Prices for existing product range from $85 psf to $100 psf.
The Phoenix office market absorbed almost 1.9 million sf of space in 1999, according to the Society of Industrial and Office Realtors report. Lease rates in the central business district averaged $22.99 psf for class A space and $18.25 for class B space. Almost 4 million sf of space is expected to come on line this year.
Real Estate Stars in L.A.
An explosion in the growth of high-tech companies and the entertainment industry has led to prosperous times in the City of Angels. The economy is strong, which bodes well for most commercial real estate property types.
“The [office] market is dominated by dot-com and entertainment companies,” says Joseph Gabbaian, CCIM, of Grubb & Ellis Co. in Los Angeles. “Most of our nine submarkets have single-digit vacancy rates, [reaching] as low as 2.5 percent in Santa Monica.” Annual lease rates range from $18 psf to $50 psf depending on the class.
“Our office market will continue to do well as long as the Internet economy keeps growing,” Gabbaian says. “If high-tech companies fall out of favor with Wall Street and venture capital funds and start going out of business in droves, our office market can get hurt.”
The multifamily market has seen tremendous growth in the last 18 months, says Festus Ilegbodu, CCIM, of Re/Max 100 Realty Group in Los Angeles. He attributes this growth to an influx of new businesses and residents.
“There is strong upward pressure on the rents because we are experiencing 95 percent to 100 percent occupancy in almost all grades of multifamily real estate,” Ilegbodu says. Annual lease rates average $8 psf for low-end space and between $18 psf and $20 psf for high-end space.
After a period of frenzied activity, the retail market has calmed down, says Jodi Meade, CCIM, of CB Richard Ellis in Los Angeles. “Sellers seem to have higher price expectations today, which is affecting the buyers’ interest ... in the market,” she says.
Still, opportunities are available. “The product that will be in the most demand is institutional-quality, grocery-anchored shopping centers and smaller deals in the $2 million to $5 million range for private investors and 1031 exchange buyers,” she says.
All types of industrial product are in demand, says Letty Bierschenk, CCIM, of the Bierschenk Group in Los Angeles. “Over 10 million sf of industrial space was sold or leased in the first quarter of this year,” she says.
“Typical lease rates are generally up from previous years and expected to have additional upward pressure, since construction is barely keeping pace with demand and vacancy rates are currently low,” Bierschenk says. The vacancy rate for first-quarter 2000 was 4.3 percent, down from 5.3 percent a year ago.
The hotel occupancy rate for downtown Los Angeles is 67 percent, while the average daily room rate is $127, says Eddy Chao, CCIM, of Asia Pacific Capital Co. in Los Angeles. Both rates are up a little from recent years. “I think the limited-service and extended-stay [segments] may face difficult times due to oversupply, however the upscale and luxury sector is still doing well,” he says.