Craig Trbovich Commercial Real Estate –
The ultimate sport competition is the Olympics, the ultimate life competition is Business. Either way, competition is exciting and inspiring, and competition improves us. Keeping score is important to measure results in both as we all go for gold!
Scoring below, GDP completely missed the podium in the second quarter with a low score of 1.2% growth. Speaking of low scores, Golf and Unemployment share a unique characteristic where low score wins, and unemployment continues to go low for gold.(Remember what everyone said would be the key to economic recovery? – It’s the jobs baby!) Also noteworthy was the Federal Reserve recently reported that near-term risks to the economic outlook have diminished.
Keeping score matters so please review some important business and economic scores below as athletes and business people strive for gold in 2016!
Industrial Output – Industrial Output and Capacity Utilization have shown signs of increasing after 18 months of decline caused by global economic concerns and declining oil prices. Output was up 0.6% in June, the highest monthly increase since November, 2014. And Capacity Utilization may have bottomed out in March at 74.8%, rebounding since then to 75.9% in June.
Retail Sales – June retail sales (excluding food service) rose 0.7% over May. It was the best June increase in the past 5 years and well above the previous 12 month average of 0.2%.
Gross Domestic Product – As mentioned above, Real GDP increased at an annual rate of 1.2% in the 2nd quarter report from the Fed. This was partially caused by a significant decline in inventories. On the positive side, the need to replenish inventories in future quarters could help fuel a comeback for GDP in Q3 and Q4. First quarter results, originally reported 1.1% were revised down to 0.8%.
Global Economy – The Global outlook from the World Bank continues to be modest. Growth has recently been projected at 2.4% for 2016, after a 2.9% forecast earlier this year. It will be interesting to see what effect Brexit will have on the European Union in coming quarters.
US Unemployment Rate – Employers created 287,000 jobs in June after only 11,000 in May. A strong rebound since average growth over the past year was 199,000. Unemployment rose from 4.7% to 4.9% as workers re-entered the market. New jobs occurred in leisure and hospitality, healthcare and social assistance, and financial activities, while employment in the mining industry continued to decrease.
Inflation – Expected to remain historically low, in the 1%-2% range for this year, gradually moving higher next year.
Interest Rates – No increase yet, but the Fed continues to hint it is coming soon. Overall, rates should remain historically low with minor increases over the next 2-3 years.
US Debt – Another score we need to lower. Since 2008, our national debt has grown from 64% of GDP to 106% of GDP, which is $9 trillion to $19 trillion. As a comparison, from 1966-1986, US Debt averaged 35% of GDP, and from 1986 to 2008, the average was 58%. Fortunately interest rates have not started to increase yet. Watch out when they do. It could be a ticking time bomb…tick tock, tick tock.
2016 Q2 Phoenix Leasing Statistics
The Bureau of Economic Analysis listed Arizona’s first quarter GDP growth at 2.6%, first in the Southwest and tied for 5th nationally. Their most recent Economic Conditions Index for the Phoenix metropolitan area reported a 4.44% average growth. Phoenix unemployment was down to 4.6% in March but has climbed up to 5.3% in June, mainly due to summer slowdowns in the hospitality industry. And seasonally adjusted Arizona single family home permits issued for June were 2,019, up from 1,780 a year ago.
Phoenix leasing activity has continued to as rates increase and vacancies decrease. New development and redevelopment is occurring more and more around the Valley of the Sun in the major commercial sectors below.
Phoenix Industrial Warehouse
With Arizona’s overall economic strength and USA industrial output showing signs of improvement, the Phoenix industrial market should continue expanding at a steady rate. Q2 Net Absorption was significantly positive as vacancies declined to 9.8% from 11.1% a year ago and lease rates increased to $5.79 per square foot, up 7.2% from a year ago. Construction starts for the first half of the year are in line with previous years’ midway points.
With strong activity in the market, it’s a interesting to compare current lease rates to the peaks prior to the recession. Current average rate – $5.79, peak rate $6.96; 17% below the peak.
Phoenix Office
The office market is heating up. Vacancies are decreasing at a much higher pace than two 
years ago as net absorption took off. Lease rates have grown by 11.1% since 2014. And after vacancies hovered in the 20-21% range for four years, vacancies are now at.
Current average rate – $22.73, peak rate – $25.77; 12% below the peak.
Phoenix Retail
Retail vacancy has dipped below 9.0% for the first time since 2008. And rates have surpassed $14.50 after being stuck between $13.50 and $14.50 since 2012, a good sign for the future.
Current average rate – $14.57, peak rate – $19.90; 27% below the peak.
In the next couple of weeks, I’ll take a closer look at year-to-date investment sales and discuss emerging trends. For a no obligation analysis of your property, please call me at (408) 522-2799 to “TrboCharge” your investment real estate today.