While commercial real estate in general, and the office market, specifically, remains a far cry from robust health, several key indicators provide reason for measured optimism this year. Here are a few areas of interest that are worth watching as the economy does a U-turn:
Jobs
Job creation is key, as each new corporate job generates roughly 200 square feet of office space absorption.
Proof that the office market is in the early stages of recovery surfaced in December, when the metro Phoenix market recorded its first positive net absorption figures in a year. The gain was modest – 230,587 square feet compared to the 667,329-square-foot overall net loss for the year – but it demonstrated positive activity, nonetheless.
According to the Arizona Department of Commerce, nearly 196,000 jobs are expected to be lost in 2009 and 2010. While still showing year-over-year losses in December 2009, the rate of decline slowed in the latter part of the year, to -4.8 percent in December, compared to -7.7 percent in August 2009.
The educational and health services category is the only sector in Arizona with job gains forecast for both 2009 (+600) and 2010 (+5,800). These projected increases fall primarily in the healthcare industries, the result of continued growth and aging of the state’s population.
Private educational services and social services also are forecast to gain jobs in 2010, a trend reflected in the renewed leasing interest among continuing education office tenants. Grand Canyon University signed a lease for 54,000 square feet near Peoria Avenue and Interstate 17 last year, while DeVry Online renewed and expanded its Valley presence to roughly 120,000 square feet mid year. Several other healthcare and continuing education users are presently investigating locations in Glendale.
As consumer confidence returns and the economy improves, employers will cautiously bring on more workers this year, state officials predict. Watch the temp industry for renewed signs of life, as employers test the waters with interim workers first, before making a commitment to hire full-time help.
Housing
In February, the Associated Press reported that the end of the foreclosure crisis finally appears to be in sight. For the first time in almost three years, the number of homeowners falling behind on their loans is declining.
Other encouraging news from the housing front includes an almost 30 percent increase in sales volume in 2009, even though values ended the year off by 12.7 percent for the state overall, according to figures from the W.P. Carey School of Business at Arizona State University. Experts, who predict nearly 20 percent growth in housing permits this year, generally agree that 2009 was the bottom of this housing cycle and that 2010 should bring growth.
Growth in housing sales volume is a key indicator of future office leasing activity because it drives jobs in related businesses, including title companies, real estate brokerages, mortgage businesses, insurance companies and appraisal firms.
Sustainability and Technology
While construction and hospitality historically have been among the state’s top economic drivers, many experts predict these industries will take a back seat in the future to the sustainable energy, aerospace and technology industries.
Economic development officials say interest is strong among international companies wanting to establish solar-manufacturing operations in Arizona. Suntech Holding Co.’s November announcement that it would build a Phoenix-area factory, and First Solar’s expansion last fall into a second floor at Tempe’s Papago Gateway, bringing its total to 77,000 square feet, are early evidence of this interest.
In the technology sector, Yelp announced in February it plans to hire 200 people to staff an office at the Galleria Corporate Center in Scottsdale. Chandler’s established high-tech industry contributed strongly to the submarket’s continued positive net absorption last year, despite ongoing losses in other parts of the Valley. Industry observers will be keeping close tabs on Austin-based Capital Commercial Investments’ Continuum at Price Corridor, a state-of-the-art employment park unfolding on the site of the former Motorola plant at the southeast corner of Price and Germann roads in Chandler. Potential users include renewable energy companies, including solar, as well as semiconductor and nanotechnology firms.
Hot Submarkets and Smaller-User Segment
Submarkets of interest this year include Scottsdale (high vacancy, but strong demand), Chandler/ Tempe (well-positioned for recovery, attractive to high-tech companies) and Glendale (seeing an uptick in the private education sector as more unemployed workers seek degrees for career advancement).
Look for smaller office users – 5,000 square feet and below – to re-enter the market as the economy gradually improves. Tenants in this category, including financial institutions, insurance companies, residential real estate firms and others, have been in a holding pattern since 2007, favoring short-term leases over long-term renewals. Already we are seeing increased confidence and an uptick in activity from this user group, which can only help net absorption figures gain ground this year.
Distressed Assets
By far, the number one concern among real estate professionals is the distressed asset market. Records show 46 multi-tenant office buildings in metro Phoenix – representing close to $1 billion in real estate – are in some degree of distress.
A glut of REO property will complicate recovery efforts and put downward pressure on rental rate growth.
Conclusion
No doubt, 2010 will be challenging for all areas of commercial real estate, including the office market.
Valleywide, rental rates will drop to levels not seen since 2000. Vacancies will creep upward with the completion of a handful of new construction projects. And tenants will continue to waiver between making a move and aggressively negotiating terms at their current location.
But with the sharpest declines apparently behind us, positive net absorption is poised to pave the office market’s road to recovery. The remainder of 2010 looks to be time of modest, steady gains, as tenants continue to eat through existing sublease space and developers await the return of market equilibrium. l
Greg Mayer is an office properties specialist in the Phoenix office of CB Richard Ellis. He can be reached at 602-735-5555 or greg.mayer@cbre.com.
