Slow And Steady Is The Key
Welcome To The New Year!
2019 Year End Phoenix Office Report
According to the recent CoStar report, as National Office Market absorption closes in on a tenth consecutive year of positive gains, the National vacancy rate is hovering around its historic trough. Despite this long run of strong demand, tenants are still able to find space in an environment of relatively restrained new supply. While the pace of asking rent growth has moderated, it remains close to the long-term historical average. Though in the 2%-range, this is particularly strong considering the US has recorded 35 consecutive quarters of growth. Tech and sunbelt markets continue to be among the top performers.
Economic indicators at the national level, are also at record levels. Unemployment is at 3.5%, the lowest in 50 years. Interest rates remain at record lows with the 10-year Treasuries below 2.0%. And while the Gross Domestic Product has not been growing at record rates, it has been consistently in the 2%-3% range in recent years. Maybe slow and steady wins the race for the GDP TORTOISE against the HARE and will serve us better to extend our good fortune.
So, what can we expect in 2020? Cautious optimism is a good way to describe it. The trade war with China, which is not good for anyone, may be coming to an end. The upcoming election is anyone’s guess but does not seem to be a major concern. And while growth in Europe has been sluggish, the outlook for 2020 and 2021 points to improvement as they move beyond Brexit. A recession in 2020? Most experts agree that is unlikely, so let’s move on slow and steady and make the best of 2020 and leave that OVERCONFIDENT HARE in the dust!
The Arizona economy has been one of the fastest growing in the country with strong job and population growth. We also lead the nation with more people moving to Phoenix and Maricopa County than anywhere else in the nation according to a census report last year. With this growth and relatively limited new supply are supporting the Phoenix office market. Office using employment growth, fueled by major corporate expansions and relocations, has fueled demand for office space, particularly at the top of the market. Demand has outpaced new supply for eight consecutive years, and vacancies remain below the market’s historical average according to CoStar’s recent Phoenix Office Report.
Robust employment growth and relatively limited new supply are supporting the Phoenix office market. Office using employment growth, fueled by major corporate expansions and relocations, has fueled demand for office space, particularly at the top of the market. Demand has outpaced new supply for eight consecutive years, and vacancies remain below the market’s historical average.
Robust employment growth in Phoenix is fueling demand for office space, and developers are attempting to keep pace. Since 2011, office demand has consistently outpaced new supply and compressed vacancies far below the market average to 11.7%.
Strong demand and limited new supply have resulted in significant preleasing, even for projects that have not yet broken ground. In July, WageWorks signed a 150,000 SF lease agreement at the proposed Union at Riverview office development within Mesa’s Riverview District. The company announced that it would add 500 new jobs when it moves to the new location. Upon completion of the new building, the California-based health benefits company will vacate its 76,000-SF space at Liberty Center at Rio Salado in Tempe.
Healthy fundamentals have translated into steady rent gains that have consistently outpaced U.S. growth over the past several years. Like most markets, rent growth is decelerating from the highs of 2015–16, although at 3.2%, growth is above the metro’s historical average.
Development is on the rise in Phoenix following several years of relatively limited construction. Over the past two years, developers completed less than 2 million SF annually, which trails the market’s long-term average of 3.8 million SF and far below the 8.9 million SF that delivered in 2007.
Investors are bullish about the Phoenix office market. Strong office-using employment growth and a balanced supply and demand pipeline are attracting the attention of investors and increasing competition for Phoenix assets. Institutional players are making big splashes, as well. Some investors are taking another look and returning to the metro after having recovered from significant losses during the last recession.
Population growth, a large and growing labor pool, the diversifying economy, an attractive cost of living and doing business, and a business-friendly regulatory environment have strengthened the Phoenix value proposition. These characteristics are attracting new residents and businesses to the region, making Phoenix one of the most dynamic metros in the country. Phoenix is the 11th-largest metro and the second-fastest growing MSA in the nation, adding more than 96,000 residents in 2018. During the same period, metro Phoenix ranked second for net migration, attracting 72,900 new people, for an average of 200 people moving to Phoenix daily. Despite its reputation as a retirement community, the median age in Phoenix is 36 years, below the U.S. median of 38 years. The millennial age group (20–34-year-olds) accounts for the largest share of the metro’s population, making Phoenix attractive to companies searching for a vibrant and young workforce.
While the number of companies expanding to metro Phoenix is noteworthy, the diversity of industries is necessary in sustaining the region’s long-term viability. Diversification of the local economy is shifting Phoenix away from its “boom-and-bust” tendency towards a more sustainable economy.
Report Source: CoStar
Craig Trbovich is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Craig applies over 35 years of experience as a CPA and an investor to help other owners and investors maximize their returns.
Since its inception, CPI has grown into a full-service brokerage and property management firm for all product types. Currently CPI’s listings include more than 55.5 million available square feet for sale or lease, and over 12 million square feet under management.
Bookmark www.craigtrbovich.com to keep informed of relevant real estate news and articles designed to “TrboCharge” you and your income property investment results. Follow Craig at http://twitter.com/TrboCommRealEst and connect with Craig at http://www.linkedin.com.
Craig Trbovich, CPA
Commercial Real Estate Advisor
Commercial Properties, Inc.