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The metro’s population is just over 4.7 million people and it ranks fourth for population growth and second for net migration. The influx of people is expanding the local talent pool and supporting demand for all CRE segments.
FIGURE 1: ROBUST EMPLOYMENT GROWTH KEEPS UNEMPLOYMENT LOW
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In December, the metro increased by 76,900 jobs and employment expanded by 3.7%. This growth ranked Phoenix second for metro employment growth on a percentage basis and fourth for number of jobs added.
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The Professional and Business Services sector, a user of office space, led job gains in December, increasing by 16,900 jobs over the last 12 months. Construction followed with 16,200 new jobs, Leisure and Hospitality with 8,300 more jobs, and Manufacturing with another 6,900 jobs.
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OUTLOOK: The economic outlook for Phoenix is positive in 2019, bolstered by employment growth, corporate expansions and relocations to the metro, a healthy housing market and wage growth.
Phoenix’s growth shows no signs of slowing, solidifying its position in the national spotlight.
CBRE is pleased to present our 2019 Market Outlook for metro Phoenix. Combining our best-in-class local market data with thoughtful insights from our research and brokerage professionals, the report highlights the performance of the Phoenix commercial real estate market during 2018 and predicts how key trends will impact the major commercial real estate sectors in the year ahead.
The Phoenix market continues to perform well overall. Although supply and demand scenarios vary across property types, there is great opportunity remaining. Last year was filled with excitement, economic expansion, population growth, and tempered development of new product across all property types. We expect these factors and increased interest from investors seeking higher yields in dynamic secondary markets like Phoenix to play out throughout the year.
At CBRE, we leverage our insight, experience and the resources of the world’s largest commercial real estate services firm to build distinct advantage for our clients. At the core of our business are our people, who share a passion for delivering exceptional outcomes through best practices and superior service.
We thank our clients, colleagues and business partners for a successful 2018, and we look forward to continuing those partnerships and enabling our clients to make informed real estate decisions in 2019.
Paul Komadina
Senior Managing Director
+1 602 735 5500
paul.komadina@cbre.com
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2
1
2
U.S. Census Bureau, most current data 2017.
U.S. Bureau of Labor Statistics, November 2018.
Source: U.S. Bureau of Labor Statistics, Moody's Analytics Forecast, 2018.
*Forecast
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OUTLOOK: Much needed new space in attractive submarkets, such as Tempe and Scottsdale, will be well received and spur further rent growth; however, an outsized development pipeline in the popular Chandler submarket could result in a short-term rise in vacancy and nominal rent growth.
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The market’s 22 consecutive quarters of annual rent growth is following the national trend and beginning to taper. At the close of 2018, the average office rent increased 4.2% compared with 5%-6% growth in the previous two years.
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In addition to robust demand, moderate levels of new construction resulted in another healthy year of net absorption during 2018, totaling 2.5 million sq. ft. While slightly down from 2017, net absorption closed 2018 above the market’s long-term average annual net absorption of 1.9 million sq. ft.
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Strong office-using job growth bolstered office demand, which outpaced new supply in 2018. Net absorption has outpaced new supply since 2011, further pushing down vacancy from its recessionary peak of 26.2% to 15.2% in Q4 2018.
Office developers attempt to keep pace with strong office space demand in Phoenix.
FIGURE 2: Office demand outpaces supply for eighth consecutive year
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OUTLOOK: Population growth, job gains, and a strong housing market will attract new industrial users to the metro, supporting fundamentals. Strong demand and years of relatively stagnant rent growth will give owners additional leverage to put upward pressure on asking rents over the next year.
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Developers have ramped up production to keep pace with strong demand. Currently, 6.1 million sq. ft. are underway with speculative construction accounting for 62.7% of the total. The majority of space is concentrated in the Southwest Valley, Airport area, and Southeast Valley.
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Net absorption has outpaced new supply since 2010, pushing down vacancy from its recessionary peak of 16.1% to 6.6% in Q4 2018. Marketwide, vacancy is at the lowest year-end rate since 2005.
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An influx of new households and strong industrial-using employment growth are supporting demand for last-mile facilities and manufacturing space. This dynamic resulted in another strong year for industrial net absorption, reaching 9.8 million sq. ft at the end of 2018 and marking a third consecutive year where net absorption exceeded 9.0 million sq. ft.
The industrial market benefits from its strategic location, robust population, employment growth, and relative affordability that is driving users to metro Phoenix.
FIGURE 3: Developers attempt to Meet robust industrial demand
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Despite strong fundamentals, the average market rent has hovered in the $0.63-$0.65 per sq. ft. range for the last few years, still below peak pricing of $0.73 per sq. ft. in 2006. Rents vary significantly by location and product type.
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OUTLOOK: Agile retailers that adapt to consumer preferences and the evolving retail landscape by creating experiences and embracing technology will be successful in 2019. Steady retail demand, combined with conservative levels of new supply, will bode well for Phoenix retail metrics in 2019.
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The market-wide average rent has steadily increased since falling to its low in 2014. Average rent differs significantly by submarket. Scottsdale has the highest average rent at above $32.00 per sq. ft. compared with roughly $17.00 per sq. ft. in West/Southwest Phoenix.
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On the supply side, developers have avoided the temptation to overbuild. New supply has been consistently below 1.0 million sq. ft. since 2010 resulting in a healthy supply and demand balance, a significant shift from the nearly 12 million sq. ft. of space that poured onto the market in 2007.
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Demand for retail space was fueled by healthy job growth, a strong housing market, and consumer confidence. Net absorption was most prominent in the Southeast Valley and Northwest Valley—areas with new home building.
Source: Moody's Analytics, 2019.
*Forecast
Steady demand for space and limited construction are supporting Phoenix retail fundamentals. Expanding retailers are finding additional opportunities in well-located big-box spaces that became available following several national closures.
FIGURE 4: Retail Sales growth on Upward Trajectory Buoyed by Households formation
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OUTLOOK: Strong demand fueled by population and employment growth, low vacancy, and affordable rent compared with other major markets leaves additional runway for healthy rent growth in Phoenix.
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Tightening vacancy put upward pressure on average rent in 2018. Over the year, rent growth accelerated 7.4%. Though strong across submarkets, rent growth in Class A properties outpaced still healthy Class B rent growth at year end.
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Completions accelerated in 2018 to meet strong demand with nearly 8,300 new units coming online, up from the 6,300 units in the previous year. New supply was concentrated in growing employment centers and amenity-rich submarkets. Over the year, mid- and high-rise projects were concentrated in Tempe, downtown Phoenix, and Midtown while the East Valley received much needed garden-style product.
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Demand for multifamily has outpaced new supply for eight years (with the exception of 2016), pushing down the vacancy rate from a recessionary peak of 11.6% to a low of 4.5% in 2018.
Source: Axiometrics, Q4 2018.
Residential development has mirrored or trended below household growth since 2010, resulting in pent-up demand for multifamily housing and supporting rent growth.
FIGURE 5: Multifamily Rent Growth Gains Momentum Late in Cycle
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OUTLOOK: Strong demand for space and a conservative construction pipeline have pushed down vacancy rates among all property types. Occupiers will search the market for quality and well-located space as developers attempt to keep pace with new demand. Limited speculative construction may mean users need to consider build-to-suit space or widen their search criteria in certain submarkets.
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Multifamily demand is fueled by robust employment growth and moderate new supply. Additionally, relatively low levels of single-family construction (due to low availability of construction labor and rising cost of materials) is resulting in additional demand for rentals. Renters are particularly attracted to employment centers and areas with a mix of amenities including Tempe, Scottsdale, Downtown Phoenix and the Southeast Valley.
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Retail demand was driven by grocery, fitness and discount retailers who followed new rooftops in the Southeast Valley and Northwest Valley. Many of these retailers built new, rather than absorbing vacant and outdated space. These retailers will find additional quality spaces due to several national big-box moveouts, including Sears, K-Mart and
Toys "R” Us.
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Industrial occupiers concentrated their search in the West Valley and Airport area where there is available land and access to a large labor pool. The West Valley is especially attractive to tenants doing business in California as they can move goods within a one-day drive and benefit from Phoenix’s low cost of doing business.
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Office occupiers sought high-quality space along the Loop 101 (from North Scottsdale to Chandler) and Loop 202 (from Tempe to downtown Phoenix) where they have access to talent and are in proximity to affordable and executive housing. Insurance, technology, healthcare, and financial tenants have been the most active. Due to limited availability of sizeable spaces (+100,000 sq. ft.), larger occupiers must look to build-to-suit or speculative construction.
Source: U.S. Bureau of Labor Statistics, Moody's Analytics Forecast, 2018.
*Forecast
Strong office-using and industrial-using job growth bolstered demand for their respective property types. Furthermore, the creation of new jobs and rising wages is boosting household formation and benefiting retail and multifamily in the metro.
FIGURE 6: METRO EMPLOYMENT FUELING DEMAND ACROSS PROPERTY TYPES
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OUTLOOK: Rising interest rates, hedging costs, and comparatively low cap rates in primary markets will shift institutional and international investors’ focus to dynamic secondary markets, including Phoenix, in search of returns.
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Properties that are well located with strong occupancy and are priced to sell will turn over quickly; however, assets not priced appropriately are negatively impacted by the gap between seller and buyer expectations and will persist until adjusted.
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There is still strong interest in value-add opportunities; however, these deals are hard to find. Instead, value-add buyers are beginning to shift towards core-plus assets due to the amount of capital in the market to be placed.
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The Phoenix market’s influx of out-of-state and international buyers looked for higher returns. Though cap rates vary widely depending on multiple factors, in general, the cap rate spread between Phoenix and California can range between 100-200 bps for comparable properties across all asset types.
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In 2018, all property sectors were within a small margin or exceeded the number of sales and volume in the previous year. By sales volume, multifamily and office ranked as the preferred asset among the property types, followed by industrial and retail.
Source: CBRE Research, 2018.
Healthy fundamentals, relative affordability, and comparatively higher yields motivated active local buyers and attracted new investors to Phoenix, setting new price per sq. ft. records.
FIGURE 7: SHARE OF TOTAL SALES VOLUME BY PROPERTY TYPE
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OUTLOOK: An abundance of capital is expected to flow into Phoenix in 2019 with expectations to meet or exceed the amount of capital available in 2018. The recent reduction in the U.S. Treasury gives buyers and owners incentive to lock in interest rates ahead of further increases.
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The Federal Reserve raised its benchmark interest rate in December 2018 but dialed back projections for more hikes in 2019 from three to two. Even with the rise, interest rates remain below historical levels and investors will look for local yields that are more attractive than the bond market.
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Industrial (specifically distribution warehouse) and multifamily (all classes) remained the most attractive asset types among lenders, followed by office and retail.
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Despite plenty of capital to lend, standards tightened for new builds. Lenders required significant pre-leasing, though the amount varies depending on asset type, location and quality of tenants.
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Significant capital allocations to real estate resulted in increased liquidity in the market in 2018. The most active lenders in the market were agency lenders, life insurance companies, CMBS, debt funds and banks.
Source: CBRE Econometric Advisors, Board of Governors of the Federal Reserve System (US).
Amid rising interest rates, lenders tightened standards, yet there is still an abundance of capital and liquidity in the market. The spread between Phoenix cap rates and the 10-year treasury (compared with primary markets) will be attractive to lenders attempting to reach desired returns.
FIGURE 8: PHOENIX CAP RATES STABILIZE; SPREAD BETWEEN 10-YEAR TREASURY YIELD NARROWS
Source: CBRE Research, Q4 2018.
Note: Net absorption from 2015-2017 includes the 2.1M sq. ft. State Farm campus build-to-suit.
Source: CBRE Research, Q4 2018.
Senior Research Analyst
+1 602 735 5554
jessica.morin@cbre.com
Jessica Morin
Director Research & Analysis
+1 213 613 3770
petra.durnin@cbre.com
Petra Durnin
Senior Managing Director
+1 602 735 5500
paul.komadina@cbre.com
Paul Komadina
© 2019 CBRE, Inc. Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.
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please visit the Global Research Gateway at www.cbre.com/research.
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