As 2019 begins to take shape, commercial real estate owners and investors are reviewing last year’s prosperity and looking ahead to potential market upsets as they anticipate the upcoming year.
At DAUM Commercial Real Estate Services, we observed strength in the Phoenix industrial and office markets throughout 2018 and predict a similar outlook for the year ahead.
The market for Phoenix industrial product has remained strong and continues to be driven by the demand for large distribution buildings from e-commerce tenants to be used for warehousing of their inventories.
The Phoenix industrial sector has benefitted from the increase of manufacturing and manufacturing jobs nationally, which has bolstered the demand for properties designed for uses other than distribution.
Higher taxation and regulation of California businesses has made Arizona a viable alternative to both industrial and office users which has added to the demand for those types of property in Phoenix. In addition, lower taxes, cheaper labor, affordable housing and its proximity to California ports makes the cost of doing business in Phoenix much less than in California.
Coupled with the expansion of local business and strong Phoenix job growth, demand for office space has been increasing steadily which is reflected in a decrease in office vacancy rates.
An ongoing topic of discussion throughout the year has been if the market will remain strong as we head into 2019. At this point, market fundamentals indicate that the Phoenix real estate market will continue to thrive in the coming year.
Last year, demand for new development of industrial and Class A office properties in Phoenix outpaced supply and both sectors saw an increase in annual rents.
Within the past five years, the industrial market has absorbed 45 million square feet of industrial space, while new construction has added 32.2 million square feet of new space. We also have seen positive net absorption in the office sector in 19 of the past 20 quarters.
Unless the Federal Reserve drastically increases interest rates in 2019, resulting in a significant impact on the economy, or a major trade war emerges, we predict that the Phoenix industrial and office market demand will remain strong and steady.
As expected in a healthy economy, interest rates, and the national cost of living have continued to rise, further cementing Phoenix as a land of opportunity for companies to benefit as they are priced out of other major markets.
Even with strong fundamentals, investors looking to stay competitive and ensure a resilient investment for years to come should select properties that are functionally designed, can be adapted to a broad base of users, and are in submarkets that benefit from freeway access and proximity to population growth.
As the market tightens, the ideal investment properties – primarily those with in-place, long-term leases with creditworthy tenants – will increasingly be acquired off market, requiring that investors are proactive to secure these deals.
Overall, Phoenix job creation will remain strong and the region will continue to attract new business, and fuel growth and the absorption of industrial and office properties. That said, those looking to acquire in the area will be faced with high competition amidst this increasing opportunity, and must approach the market strategically.
Steve McKendry is executive vice president and principal for DAUM Commercial Real Estate Services.