Phoenix-area brokers report an increase in leasing activity for 2010

While sales of office, industrial and retail properties remained anemic in 2010, brokers reported an explosion of leasing activity as businesses made a mad rush to lock in long-term lease rates at market-bottom prices.

In all, Phoenix-area businesses in 2010 signed new leases on a net 5.9 million square feet of office space, said Craig Henig, senior managing director of commercial-real-estate firm CB Richard Ellis in Phoenix.

All that movement rivals the amount of activity during the local real-estate market's peak years of 2005 and 2006, Henig said, but it didn't cause a significant gain in leased space overall.

The total pickup of about 234,000 square feet made 2010 a turning point after two years of net decreases, he said, but it also shows that the vast majority of activity came from local moves that did not involve any expansion.

By year's end, the office-vacancy rate reached a recent high of almost 28 percent, said Bryon Carney, president and managing partner of Cassidy Turley BRE Commercial in Phoenix.

Henig's estimate was slightly lower at 26.2 percent, but both noted an increase from the end of 2009, when the vacancy rate was less than 25 percent.

The high year-end vacancy rate likely means a long spell without construction activity as the market works to absorb the available space, Carney said.

Relative winners in the office market in 2010 were downtown Phoenix, the Camelback Corridor, Scottsdale and Tempe. Suburban office properties on the edges of the Valley continued to struggle.

Henig said market watchers should expect to see sales of commercial properties increase in 2011 and 2012, as more lenders and loan servicers make the choice to place repossessed or struggling properties on the market.

About 95 percent of the commercial-real-estate sales in 2010 were short sale- or foreclosure-driven, he said, a trend that's expected to continue for at least two more years.

"I also think we're going to see more high-profile projects come to market," Henig said, adding that the listing of big commercial properties is likely to be a steady stream and not a flood.

"I don't think we're going to see an RTC-like purging of properties all at once."

Industrial strength

The industrial sector of the real-estate market had by far the biggest gain in occupied space in 2010, with businesses taking occupancy of an additional 3 million square feet, Carney said.

He said large corporate users of industrial space will continue to drive the market in 2011 and account for the majority of new jobs.

Economic-development groups and real-estate firms will continue their push to attract companies seeking a cost-effective gateway to the West Coast, local analysts said. And local companies are taking advantage of lower costs to purchase or lease new, larger properties.

Vacancy rates, which had been above 15 percent during the first quarter of 2010, were down to about 14 percent at year's end and are expected to be closer to 13 percent by the end of 2011, Carney said.

"Landlords should start to see relief as tenant activity continues to pick up," he said.

Retail hits bottom?

The retail sector probably had it the worst in 2010, while the multifamily-housing sector attracted the greatest number of property sales, the analysts and brokers said.

Several grocery-store closings and other retail failures drove down lease prices and led to increased vacancies.

"We believe 2010 was the bottom for (retail) rental rates," Carney said.

However, there were a few bright spots, too.

One recent deal involving retail property involved the site of the former Hard Rock Café and adjacent properties at 26th Street and Camelback Road, which sold in late December for $10.5 million to Alliance Residential Co.

Retail openings and expansions included national grocery chain WinCo, which has announced plans to open five Phoenix-area locations, and Colorado-based grocer Good Foods, which plans to open three or four Valley stores.

Quick service, casual-dining chains also have been expanding in the Phoenix area, including hamburger chains Five Guys, SmashBurger and Habit Burger, Carney said.

Apartment-sales transaction volume in 2010 was three times what it had been in 2009, as investors eager to put their money to work competed for a limited pool of available properties, said Chris Jantz, vice president of research at Cassidy Turley BRE Commercial.

The brokers said they expected apartment vacancy rates to continue dropping throughout 2011 as single-family-home foreclosures continue and relatively few new homes are built.

Renters should see apartment lease rates stay relatively flat, Jantz said, although rental communities are likely to offer fewer concessions such as periods of free or discounted rent.

That's especially true in the stronger submarkets, which include north Scottsdale, Fountain Hills and Ahwatukee Foothills, he said.

by J. Craig Anderson The Arizona Republic Jan. 7, 2011 12:00 AM




Phoenix-area brokers report an increase in leasing activity for 2010