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PHOENIX: FASTEST
GROWTH UNDER THE SUN
Peter Bolton
Metropolitan Phoenix, the business center of Arizona, flourishes
as one of the most vibrant and livable cities in the United
States. It is one of the fastest growing business communities
in the country and consistently ranks among the top markets
in population and employment growth.
According to Economic Change in Greater Phoenix, a recent report
prepared by the Maricopa Association of Governments in cooperation
with the Greater Phoenix Economic Council and Salt River Project,
“The outstanding characteristic of the greater Phoenix
economy is its sustained growth. For the past 30 years, its
growth rate has been nearly three times greater than the nation’s.”
Even during the economic slowdown, population growth in Phoenix
has increased annually. With a population of 3.5 million, the
Phoenix area is projected to continue to experience strong growth
exceeding the national averages for large cities. The population
of Phoenix increased more than 52 percent between 1990 and 2002,
and is projected to grow by approximately 60,000 residents per
year during the next 5 years.
Lured by improved economic prospects and quality of life, skilled
workers have migrated to the state, keeping the labor pool competitive
and young — the average age is 33. Arizona is also a right-to-work
state and maintains the lowest unionization rate within the
manufacturing industry in the country. During the last 10 years,
employment growth for Phoenix has averaged 3.6 percent per year
compared to 1.2 percent per year nationally.
Phoenix offers a business climate that supports a wide range
of industries — from high-tech manufacturing to financial
and business services to transportation and distribution industries.
The relatively high quality and low cost of Phoenix’s
labor pool has made it a favored location for information-based
industries such as data processing, telecommunications and customer
service operations. Many financial services and banking institutions
have established data processing, credit card and customer service
operations in Phoenix during the last 5 years.
As of August 2003, Phoenix had an unemployment rate of 5.4 percent,
compared with 5.6 percent a year ago. The rate remains lower
than that of the state of Arizona and the nation, which have
rates of 6 percent and 6.1 percent, respectively. Nearly 17,000
non-farm jobs have been added to the economy since August 2002.
Job gains are expected to continue for the rest of the year,
primarily because of increases in healthcare and construction
expansion.
New residential developments have exploded in Phoenix with more
than 30,000 houses built every year since the mid-1990s. New
residents discover they can get more house for their money in
Phoenix than in other large metropolitan areas.
Phoenix is strategically located between California, Texas and
Mexico. Excellent access to these markets via the interstate
highway system — north and south via I-17, east and west
via I-10 — is an important factor supporting business
growth. The North American Free Trade Agreement (NAFTA) continues
to bring an abundance of business to Phoenix and has helped
to increase the state’s exports. Mexico is Arizona’s
largest trading partner.
Sky Harbor International Airport ranks as the fifth busiest
FAA air traffic control operation in the country — third
in the western U.S. behind Los Angeles and Dallas. Located centrally
rather than on the region’s outskirts like most major
airports, Sky Harbor is ideally suited to meet the needs of
business commuters and travelers. Phoenix is served by more
than 24 airlines with non-stop flights to nearly every major
U.S. city. There are more than 1,300 daily non-stop flights
to 105 destinations, including London and Frankfurt. Thirty-three
million passengers pass through Sky Harbor annually, with that
number expected to increase to more than 42 million in 2004.
Because of its market size, transportation, diversified economy
and location, Phoenix is the hub of the Southwest. Following
is an overview of Phoenix’s retail, office, industrial
and multifamily commercial real estate sectors.
Retail
The retail market continues to be driven by the housing market
and in-migration as the Valley of the Sun continues to expand
its boundaries. The Valley housing market continues to set records
as more single-family permits are issued. R.L. Brown’s
Phoenix housing marketing letter reports that 31,508 single-family
homes have been permitted year-to-date.
The metropolitan Phoenix retail market has a total of 842 retail
properties consisting of approximately 108.2 million square
feet, of which 8.2 million square feet is vacant. The current
vacancy rate of 7.54 percent is very low by any market’s
standard.
In the third quarter, approximately 734,000 square feet of new
space was completed. Approximately 3.9 million square feet is
currently under construction, compared to 3.3 million square
feet under construction a year ago. Planned projects total 17.3
million square feet.
Fourth quarter statistics will be greatly influenced by the
opening of the first Kohl’s stores in Arizona. On October
10, 2003, the retailer opened 10 new stores in metropolitan
Phoenix, totaling 865,000 square feet. In addition, new grocery
store entrants to the market include Sprouts, Henry’s,
Whole Foods and Wal-Mart Neighborhood Market. Store openings
scheduled for 2005 and 2006 will coincide with the Loop 202
Freeway completion and new housing developments.
In the third quarter, the vacancy rate for retail space in metro
Phoenix increased slightly to 7.54 percent from 7.22 percent
at the end of the second quarter. Through three quarters, the
overall Valley retail market had absorption of 2.32 million
square feet compared to 1.58 million square feet a year ago.
Lease rates remained stable with property owners taking an aggressive
position in negotiating rates and concessions.
Shop rents in newer neighborhood centers are in the $20- to
$26-per-square-foot range. Second generation space — including
space in older centers — continues to experience a wide
range of rents from $10 to $20 per square foot.
Office
In the past year, metropolitan Phoenix’s office market
has improved significantly and the future is brighter for 2004.
The majority of office leasing activity throughout the remainder
of the year will continue to occur in new suburban projects.
Scottsdale will continue to be the leader in tenant activity
with the Central Phoenix Corridor — midtown and downtown
Phoenix — struggling a bit as tenants follow the freeways
and relocate to newer, more efficient buildings.
Quality projects in good locations continue to get the bulk
of new leasing activity with such movement at older Class B
buildings declining. In 2003, North Scottsdale continues to
outpace the market average in occupancy and absorption. Barring
major global events, the economy will continue to pick up steam
and interest rates will remain low. This all points to a steady
expansion with large, quality blocks of space in short supply
by 2004.
One of the most exciting projects on the North Scottsdale forefront
is The Alter Group’s mixed-use 187-acre business park
being built at Loop 101 and Indian Bend Road. The project is
recognized as the nation’s largest single commercial development
on Native American property to date. Total office product will
be approximately 1.5 million square feet — including Class
A multi-story, two-story tilt-up and single-story flex space.
Retail product will be approximately 800,000 square feet. The
development is expected to create up to 15,000 new jobs. The
Alter Group, based in Skokie, Illinois, plans to begin construction
in early 2004. The Salt River Pima-Maricopa Indian Community
is home to the Pima and Maricopa Indians, descendants of the
ancient Hohokam Indians.
The vacancy rate in the third quarter decreased to 18.6 percent
from 19.4 percent at the end of the second quarter. Net absorption
in the third quarter was 617,623 square feet compared to 108,497
square feet for the same period in 2002. Net absorption through
the third quarter is 1.03 million square feet. Asking rental
rates have remained relatively stable. Rental rates for Class
A office space range between $22 to $32 per square foot, the
range for Class B buildings is $16 to $21, and $12 to $13 for
Class C buildings.
In the third quarter, 126,000 square feet of multi-tenant buildings
came on line. There are currently 982,071 square feet of new
product under construction with the majority of the buildings
to be delivered in 2004. The Scottsdale submarkets represent
81 percent of all product under construction. CB Richard Ellis
presided over Wireless Retail’s office lease of 90,000
square feet in North Scottsdale this year. The office condo
market is continuing to play a major role for the small- to
mid-size user, with Scottsdale continuing to dominate this market
segment as well.
Industrial
California’s higher taxes, workmen’s compensation
rates and utility rates coupled with its environmental restrictions
and labor issues are helping to fuel Phoenix’s industrial
market. As the national economy recovers, Phoenix will continue
to benefit from firms looking to lower their operational costs
and expand or relocate to the Phoenix market.
The industrial market has a total of 5,880 buildings consisting
of 214 million square feet, with 22 million of that vacant.
The third-quarter vacancy rate of 10.28 percent was down 0.33
percent from the end of the second quarter.
In the third quarter, there were approximately 1.05 million
square feet in building completions. Build-to-suits accounted
for 45 percent of the new product that was completed in the
quarter. New product currently under construction is 2.6 million
square feet compared to 1.05 million square feet a year ago.
In the third quarter, speculative building represented 61 percent
of the construction activity. The industrial market currently
has 6.7 million square feet of planned projects. Year-to-date
net absorption through the third quarter was 2.3 million square
feet. Distribution buildings have accounted for 55 percent of
the net absorption by the end of the third quarter. Gross leasing
activity for the year is 10.2 million square feet.
The average industrial asking lease rates within metropolitan
Phoenix vary significantly by market and product type. Third-quarter
average asking rates remained relatively stable, while concessions
and incentives by property owners remain in the marketplace.
The current monthly average net asking lease rates by product
type are 32 cents per square foot for warehouse/distribution,
62 cents per square foot for manufacturing and 95 cents per
square foot for back office space.
Multifamily
Investor interest, fueled by private capital, is strong in the
metropolitan Phoenix multifamily marketplace. Attractive debt
markets, low interest rates, and population and job growth are
driving demand for apartment complex purchases. While average
rent per square foot has remained flat and concessions are still
high, new construction has declined, resulting in a much-needed
market correction. This has made apartment investments all that
much more attractive.
Looking forward, increasing absorption and dwindling new construction
are causing vacancies to fall, leading to the return of real
rent growth. The lowest vacancies are currently in North and
South Scottsdale, North Paradise Valley and Deer Valley - North
Peoria. Some of the most noteworthy recent apartment sales transactions
include the $23 million sale of the Alexan at Frank Lloyd Wright
in Scottsdale, which was 94 percent occupied; the $4.45 million
sale of Maryland Gardens Apartments in Glendale; the $5.1 million
sale of Brook Creek Apartments, also in Glendale; and the $1.8
million sale of Central Mountain Villas in North Phoenix.
Peter Bolton is senior managing director of CB Richard Ellis’
Phoenix office.
©2003 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints of
this article contact Barbara
Sherer at (630) 554-6054.
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