Commercial real estate set to heat up in Phoenix area

Metro Phoenix’s commercial-real-estate market, once battered like the region’s housing sector during the crash, is on the rebound and rapidly gaining popularity with big investors again.

In the latest “Emerging Trends in Real Estate” report, considered one of the real-estate industry’s most influential surveys, Phoenix moved up eight spots from last year, to rank No. 25, in a list of the best places in the U.S. for investors to put their money.

The Valley’s employment and population growth, as well as a relatively low cost of doing business, helped the area improve its position with small and large investment funds.

Phoenix’s population is projected to grow 2.6 percent in 2014, according to the report’s publishers, PwC and the Urban Land Institute.

That figure is higher than local estimates.

The report also predicts the number of the coveted millennial-generation residents, ages 20 to 34, in the region will increase by 11 percent over the next five years.

The report projects the number of jobs in the region will increase by 2.4 percent in 2014, another figure slightly higher than local economists forecast. The Emerging Trend forecast also predicts that employers needing office space will account for the biggest growth in jobs.

“Survey respondents feel that the investment outlook (for metro Phoenix) will be better in 2014,” said the report, which was released in November. “The outlook for development and homebuilding really boosted Phoenix’s overall rank.”

The majority of the 1,000 investors polled saw Phoenix’s office market as a sector to buy in during the next year because of the projected increase in jobs.

“We’ve seen several major employers bring their operations to the Valley or expand existing operations,” said Craig Henig, senior director of CBRE Phoenix. “We’re back on the map as an attractive place for major companies. Apple, in particular, was a big win. Now that they’re invested in the Valley, we’re going to see suppliers for the tech giant migrating here, too.”

In November, Apple Inc. created its first a significant Arizona presence.

A company that will make high-tech glass for Apple products announced it planned to employ about 700 people at former First Solar Inc. factory in east Mesa. At the time, Apple announced it was buying the building for the supplier, GT Advanced Technologies Inc.

Here is a quick new year’s forecast for commercial properties:

Office: More buildings on way

Metro Phoenix’s office vacancy rate has dropped to about 22 percent, based on research reports from metro Phoenix brokerages. The vacancy rate soared above 27 percent in 2009.

Some office areas in the Valley are faring better.

Downtown Phoenix has drawn several new tenants during the past few years, as well as more restaurants and other amenities. The overall office vacancy rate downtown has dropped to 15 percent, according commercial-real-estate firm Cushman & Wakefield.

Rents for office space are climbing as a result.

“We are forecasting office-rent increases in 2014 of between 2 and 4 percent, with more robust growth in 2015,” said Bob Mulhern, managing director of real-estate brokerage Colliers International in Phoenix.

CBRE is predicting demand will entice developers to build new office space. About 700,000 square feet of office space is under construction now, and development of additional buildings is expected to start this year.

Recently, international investor Lowe Enterprises, with J.P. Morgan Asset Management, bought a Phoenix office building just north of Paradise Valley and a central Scottsdale building with a total of 327,263 square feet of space for $51 million.

“We like the strength of the Phoenix office market, with occupancy rates on the rise and unemployment rates falling,” Rick Newman, CEO of Lowe Enterprises, said in a news release. “These buildings offer the opportunity to acquire well-located, well-maintained properties in markets that will continue to benefit from improving economic conditions.”

He said Lowe is looking to invest more in metro Phoenix’s real-estate market.

Jim Fijan of CBRE, who negotiated the deal for the seller, Newport Beach-based CJK Investments, said the sale exemplifies the strong demand from institutional investors for office properties in the Valley.

One of the biggest deals in 2013 was the $600 million Marina Heights development in downtown Tempe. It will be anchored by an office building for insurer State Farm, which is expected to become a job hub that will draw hundreds of workers.

Ground was broken on the 2 million-square-foot, 20-acre mixed-use project in August.
Industrial: Strong demand

The Valley’s industrial market had seen new development and drawn several big tenants, including online retail giant Amazon.com, over the past few years.

The majority of investors polled by the Emerging Trends survey said 2014 would be a good year to hold onto industrial properties in the Valley because prices could increase.

Currently, there are prospective tenants looking for more than 7 million square feet of industrial space in metro Phoenix, according to Jones Lang LaSalle.

During the third quarter, LaSalle reports Marathon Equipment signed a lease for more than 220,000 square feet of warehouse space in the southwest Valley, and several companies, including Hensley and Sears, inked deals for more than 70,000 square feet of industrial space.

The vacancy rate for warehouse space across metro Phoenix is currently 12.9 percent, according to brokerage Cassidy Turley. That’s up slightly from 12.5 percent at the end of July.

In the last week in December, trucking company Inland Kenworth paid $5 million for 17 acres in Tolleson, where it plans a facility with as much as 100,000 square feet, said Steve Mardian of Cassidy Turley.

A third-quarter report from Phoenix-based brokerage Lee & Associates showed more than 1.5 million square feet of industrial space was built in 2013, with another 5 million square feet under construction across the Valley.

Retail: Big boxes being filled

The many big boxes that were emptied by retailers during the recession are slowly filling up.

Metro Phoenix is leading the nation in demand for more retail space.

A new study by national real-estate group CoStar shows demand for new retail space in the region climbed 2 percent in the past year.

Investors are mixed on their feeling about the region’s retail outlook, according to the Emerging Trends survey. About half say its a good year to sell Valley shopping centers, and the other half believe it’s a good time to hold onto them.

Phoenix-based developer Vestar’s Canyon Trails Towne Center in Goodyear sold for $23.5 million during the last week of December, according to Cassidy Turley.

Retail expert Judi Butterworth with Velocity Retail said the lease and sale of big boxes in the region has been “robust” in the past several months, with traditional and non-traditional users moving into vacant space.

Large national retailers including Burlington Coat Factory and Ross are filling big spots again.

The vacancy rate for metro Phoenix retail space is about 10 percent, according to Cushman. That’s down from nearly 15 percent in 2010.