A view of Midtown Phoenix looking south towards Downtown Phoenix. (Photo by Mike Mertes)
Report: Phoenix CRE market shows strong activity across all sectors
CBRE has released its Q3 MarketView reports, which analyze the third quarter performance of metro Phoenix’s office, retail and industrial commercial real estate sectors. Overall, the market exhibited strong activity across all property sectors.
“Metro Phoenix remains one of the fastest growing regions in the nation,” said Jessica Morin, Senior Research Analyst for CBRE’s Phoenix office. “Robust employment and population growth, combined with high levels of business confidence, underpin the positive performance of all commercial real estate sectors so far this year.”
According to CBRE Research, the top-level highlights include:
Q3 Office Highlights
• Net absorption in the third quarter totaled 599,884 square feet, resulting in 1.5 million square feet of net absorption year-to-date.
• Vacancy fell 110 basis points year-over-year to 15.7 percent. The Tempe submarket continues to hold the lowest vacancy in the market at 4.7 percent.
• Demand for Class B office space was particularly strong during the third quarter. As a result, vacancy fell 90 basis points quarter-over-quarter and 200 basis points year-over-year to 16.6 percent.
• Tightening vacancy put upward pressure on average rent. At the end of the quarter, the average leasing rate increased 3.3 percent annually to $26.03 per square foot (FSG-annual).
• Office demand outpaced new supply in the third quarter. Developers completed 194,000 square feet of office space in Q3 with an additional 3.3 million square feet underway. Nearly 73 percent of the space currently under construction is speculative development – signaling continued developer optimism in tenant demand. New development is highly concentrated in the Tempe and Chandler submarkets.
Q3 Industrial Highlights
• Net absorption reached 3,962,011 square feet in Q3 2018 and 7,739,857 square feet year-to-date.
• Overall, vacancy fell 160 basis points during the quarter to 5.7 percent—the lowest rate since Q4 2005.
• In the third quarter, 2,008,110 square feet of space was delivered. Currently, 7,739,857 square feet is underway, with speculative development accounting for 80 percent of this space. Construction is heavily concentrated in the Southwest Valley due to availability and affordability of land.
• Despite tightening conditions, the market’s average asking lease rate slipped from $0.64 to $0.63 NNN per square foot (monthly), where its hovered for the past few years.
• Industrial users across the Valley have become increasingly diverse. While manufacturing, third-party logistics, pharmaceutical, e-commerce, and food and beverage users remain active, data center users have increasingly expanded their footprint. The Valley continues to attract these users due to the ease of access to major national and international markets, comparatively affordable lease rates, and the availability and affordability of labor and land.
Q3 Retail Highlights
• Big-box users were particularly active in Q3 2018, absorbing more than 550,000 square feet of space. This was offset by recent big box move-outs including Sears, K-Mart, Sam’s Club and Toys “R” Us.
• The Phoenix retail market recorded 259,915 square feet of net absorption in the third quarter. Year-to-date, net absorption was 147,471 square feet.
• The marketwide vacancy rate edged up 10 basis points over the last 12 months to 8.4 percent.
• The Phoenix retail market’s average asking lease rate settled at $17.95 per square foot (NNN).