East Valley

What is the 2016 commercial real estate outlook?

When Luke Skywalker first cast eyes upon the Millennium Falcon, he was less than impressed. To him it was a “piece of junk.” Although perhaps not viewed as trash, the Phoenix economic and commercial outlook has admittedly taken a beating for some time.

Much like Han Solo, however, experts see something in the slow, yet steadily rising Phoenix market — “She may not look like much, but she’s got it where it counts, kid.” Phoenix’s 2016 commercial real estate industry is getting ready for another smooth-inclined ride, and with any luck a few positive bursts in certain markets.

So, what can we expect from each sector in 2016?

Healthcare and medical:

According to ZipRecruiter, Phoenix is the best city in the nation for healthcare jobs and that is reflected in the commercial real estate world. All arrows point to healthy bioscience and medical sectors in 2016. Projects like the North Phoenix KUD Biomedical corridor in conjunction with Mayo Clinic, Sundt Construction’s work on Banner Health’s 11-story tower at University Medical in Tucson, Phoenix Children’s Hospital’s new Emergency Department and Level 1 Pediatric Trauma Center and ASU’s 193,000-square-foot Biodesign Institute expansion are all promising commercial prospects either underway or slated for 2016. Experts believe these developments will serve as the catalyst for not only future advancement in Biodesign construction, but will undoubtedly stimulate job and economic growth exponentially once completed.

Industrial:

Over the last year, this market remained status quo within each submarket and should remain as such in the oncoming year. In the West Valley, particularly along the 303 corridor, dramatic growth has and will be seen, as will the surrounding area of Mesa Gateway Airport in the East Valley. Industrial vacancy rates continue to decline, but the market is both bifurcated and fickle. Big box has done well, but the small entrepreneurial or construction-related user has been slow to return to the market en masse. Thus, the multi-tenant market has yet to recover.
“(Expect) a lot of conversation on clear height,” says Will Strong, senior vice president of Cushman & Wakefield. “People are saying they want 36-foot clear. They also want power, infrastructure and trailer storage is becoming more of a necessity where it used to be a luxury. Expandability and parking are also big as well as air conditioned space for ecommerce space.”

Multifamily:

Multifamily vacancy rates are their lowest since 1999 and the demographics for those seeking apartments — fueled by Millennials who will stay in apartments longer — have never been stronger. Elliott D. Pollack, chief executive officer of Scottsdale-based economic consulting firm Elliott D. Pollack and Company, says the multifamily market is one of the strongest sectors in Arizona.

Want proof? More than 20 apartment and condominium developments — which will bring 2,000 new housing units to downtown Phoenix — are currently under construction; they range from high-end projects like Portland on the Park and Deco Communities’ Edison Midtown, to Lennar Multifamily Communities’ 367-unit The Muse, to Metrowest Development’s Union @ Roosevelt (a mixed use residential and retail development). All these projects are strategically placed on the light-rail line.

Office:

Currently, office vacancy rates are 20.1 percent. However, this is deceiving with certain markets within Greater Phoenix, including downtown Scottsdale and downtown Tempe, short of space. Rents in these markets are rising rapidly. There is also a problem in terms of certain types of space such as collaborative space with high parking requirements. Nationally, office net absorption totaled 14.6 million square feet in the third quarter of 2015 alone, according to the National Realtors Association. The Phoenix market will continue to tread on the nation’s heals with areas like Tempe, Mesa and Chandler experiencing a surge in office development.

Retail:

The population growth rate of the Phoenix metro area has been nearly four percent per year for the past 40 years and the demand for retail will keep increasing, too. Vacancy is at a pleasant low across the region. Restaurants are partially to thank for filling space and igniting economic stimulation, particularly in Downtown and Midtown Phoenix. “Record-breaking sales occur as marketplace confidence continues upward and as new businesses and residents continue migrating into Arizona,” says Chris Loeffler, CEO of Caliber Companies. Shopping centers are accommodating the population boom — and through innovative and unique means.

Are West Valley’s best days just ahead? 

Will West Valley commercial real estate skyrocket in 2016? Perhaps not, but experts hint we may see a slow burn.

“In my opinion, we’re going to have some pockets of accelerated growth,” Buckeye Mayor Jackie Meck says, “especially in well-positioned infill developments as well as rapidly growing housing communities.”

With close to an 11 percent increase since 2014 in year-over-year residential sales, retail and office sectors have noted improvement, specifically in the Southeast and Northeast markets. Although having experienced a taste of this increase, the West Valley still has catching up to do.
“Building permits are below norms by almost half compared with averages within the last 30 years,” explains DMB President Charley Freericks.

He elaborates that single-family home building permits, averaging more than 25,000 for decades, have been well below 15,000 over the past 7 years.

“Commercial development typically follows residential growth and presently the Southwest Valley is lagging behind the rest of the Valley in all categories,” Freericks says.

Not only lagging, according to Freericks, but also dragging from sustaining a harder hit during the economic and employment downturn, especially related to construction job losses.
Meck stresses the importance of rectifying the struggling job market.

“Since workforce and human capital is of the top concern with businesses across the board, we must be able to prepare and invest in our ability to attract, retain and retrain our workforce to be relevant to those business sectors we are trying to grow” he says.

Job recovery, it appears, may continue to be the West Valley’s Achilles heel, thus halting drastic commercial growth — at least for a while. Sunbelt Holdings President and CEO John Graham suspects it may be the latter part of 2016 and into 2017 before we realize noticeable improvement.

Need for infrastructure 

Another impediment to commercial advancement: lack of infrastructure.

“We’re slower in growth in the West Valley because we’re just filling our infrastructure,” Meck says, “whereas other submarkets have it already in place.”

Despite the uncertainty surrounding residential and employment prosperity combined with needed infrastructure improvement, there are beacons of light along the West Valley commercial landscape.

Experts agree that medical and industrial submarkets currently reflect a positive future.
Most existing industrial/distribution buildings have been absorbed and Meck predicts the potential of attracting additional large industrial users. Buckeye alone plans to capture up to 1 million square feet of industrial space within the next 12 to 18 months.

Along the I-10 and Loop 101, the medical market has taken over with Cancer Treatment Centers of America, Abrazo West Campus (formerly West Valley Hospital) and Banner Estrella Medical Center. Healthcare is a bright spot, according to Freericks, who believes this can only boost the residential and employment economic outlook.

“These medical facilities attract higher education levels and better wage earners who attract people who want to live in close proximity,” Freericks says. “We’ve already seen strong impacts in areas of Litchfield Park and Verrado in becoming home for some of the people from these employers.”

Even brighter to the West Valley’s commercial prosperity is the progression of Loop 303. In between Luke Air Force Base and Palo Verde, the 303 is priming the West Valley’s viability as an attractive commercial base. As is Sunbelt Holdings’ PV303. With 1,600 acres primed for 20 million square feet of office, retail and industrial space, PV303 is already host to heavy-hitter distribution centers like Dick’s Sporting Goods and REI.

As Loop 303 and the employment market become more solidified, so will retail, office, multifamily and other areas that have thus far remained subpar. For now, however, the overall pace of commercial expansion appears to be stable at a slow burn.
“I think the West Valley is still getting through its adolescent stage,” Graham says, adding, “I think its best days are coming soon.”

Tech, healthcare will fuel East Valley 

“The landscape is changing and you can’t tell when you leave one city and go into another because it is so built up,” said Roc Arnett, president and CEO of East Valley partnership.

With a current population of 1.4 million and predicted to be home to more than 1.9 million residents by 2024, the East Valley is a prime location for companies looking to relocate and expand. The interest in the area is causing a drop in vacancy rates and an increase in industrial speculative office development, experts say. This is largely because the Greater Phoenix area is one of the top job-growth markets, said Chris Camacho, CEO of the Greater Phoenix Economic Council. Because of that, private-sector investment will continue the fuel the East Valley through 2016 as product moves and is absorbed, Camacho added.

For 2016, experts predict the principal property type in the East Valley will be office space. Class A office buildings are in high demand, Camacho said. He expects to see a lot of Class A, low- to mid-rise, three- to four-story, campus-style office buildings continue as a trend in 2016.

Tempe leads the way 

Tempe is seeing a lot of activity when it comes to commercial real estate and experts attribute Tempe’s high demand to its central location. According to Arnett, there are 20 million square feet of new development going up in the next four to five years on Rio Salado Parkway between McClintock Road and Priest Drive.

The largest office project in the state’s history is underway in the Tempe — State Farm’s $600 million regional headquarters in Marina Heights is a 20-acre, 2 million-square-foot mixed-use project that will house up to 10,000 employees.

“Tempe is on fire,” Arnett said.

Mesa is another hot spot in the East Valley. “Mesa got a lot of infill and office space with the light rail coming downtown and more is beginning to percolate,” Arnett said.

Along the light rail corridor, Mesa is pushing for vertical integration of mixed-use development that will encompass residential, office and retail development, said Mesa Economic Director William Jabjiniak. Also, as some of the submarkets become built out, they become land-locked, making Mesa an affordable alternative, Jabjiniak added.

The Phoenix–Mesa Gateway Airport area is seeing a lot of industrial interest and there in interest in the transit corridors along Loops 202 and 101 for office space development, Camacho said.

Along those high traffic areas into Chandler, there are a number of high-quality projects in the works, said Micah Miranda, the economic development director for Chandler.

“Companies are excited for the labor pool in Chandler because they are able to acquire high-quality talented people to fill positions,” Miranda said.

There is major corporate interest in Chandler, especially for tech centers, Camacho added, while Gilbert is seeing interest in healthcare and financial service property types.

But because of the region’s attractive qualities,experts predict that the growing technology and financial sectors will continue to move their assets to the East Valley.

However, even with much of the East Valley being built up, Apache Junction and Queen Creek have not seen an increase in demand like the rest of the region, Arnett said.

Will we see Phoenix rising this year? 

The commercial outlook for Phoenix in 2016 brings to mind the wise and well known words of poet Robert Llyod: “Slow and steady wins the race.”

Although sluggish, the fruit of a steadily laboring, but growing Arizona economy is beginning to blossom. Unlike other areas where commercial growth is rapidly sprouting — industrial in the West Valley and office and retail in the East — Metro Phoenix will continue to see stability across all sectors.

“Diversified and balanced growth from technology, financial services and healthcare are positioning the region for a steady, sustainable recovery,” says Savills Studley Senior Vice President Tiffany Winne. “Many of our clients are intrigued by the Phoenix market for its highly favorable business rates and deep labor pool; the perfect breeding ground for business growth.”

Proof of business attraction to the Phoenix market is clearly visible in declining vacancy rates. According to a Cushman & Wakefield report, the Metro Phoenix retail market realized its 16th consecutive quarter of declining vacancy, experiencing 552,000 square feet of growth in the third quarter of 2015. Similarly, office vacancy retention is on a slow, albeit upward trend, lingering at 22.6 percent, according to a Savills Studley Report.

“In the industrial sector, vacancy rates in all product categories remained nearly unchanged from 2014 to 2015,” says Curtis Hornaday, research analyst for Cushman & Wakefield, “but we saw the supply of new space rise just over 2 percent from the historical.”

Hungry for growth 

According to Hornaday, Metro Phoenix will continue to prevail in its “small but mighty” attitude toward vacancy absorption, maintaining a Top 10 ranking. “We ranked fifth for industrial and 10th in overall office absorption in 2014 and are on track to be Top 10 again for 2015.”

Like fellow sectors, multifamily will continue a steady climb, with vacancy dropping and new construction offering up to 4,000 apartment units to the Greater Phoenix market in 2015 according to a third-quarter Colliers Multifamily Report).

Phoenix is hungry to keep rising in commercial prosperity. We can literally thank the stomachs of Phoenicians for the growth, who, because of more padding to their pocket books, have more income to divvy toward downtown dining.

“For retailers, we expect continued growth from restaurants and food users,” Hornaday says. “These users are currently 50 percent of the planned retail growth in the U.S.”

While foodies with innovative and unique restaurant concepts will continue to capture infill opportunities in Downtown and Midtown Phoenix, there is still plenty more to offer. According to the Savills Studley Report, Phoenix Metro has 165 buildings comprised of 25,000 square feet plus, and even more blocks under construction, many of which are grouped along Central Avenue.

“We see Phoenix becoming an even more compelling place to do business,” Winne says, “and we look forward to being a part of it.”

Staff writer Meryl Fishler contributed to this report.