Market Stats

Phoenix Metropolitan Area Market Information First Quarter 2013

According to the 2010 Census, Arizona is now the 16th largest state with a population of 6,392,017. Maricopa County, based upon the 2010 Census, is the 4th largest County in the United States with a population of 3,817,117 after having experienced a 24% growth in population between 2000 and 2009. The median age in Arizona is 35.9 years and 17% of the state’s population is 62 or older. Average household size is 2.63 persons. Total non-farm employment in the Phoenix-Mesa-Scottsdale MSA over 1,869,000 employees as of the end of February, 2012. This is equates to an unemployment rate for the Phoenix-Mesa-Scottsdale MSA as of February, 2012 of 7.8% as compared to a US unemployment rate of 8.3%. Job growth has been very weak but nonfarm employment increased by over 36,000 jobs in 2012. Net inbound migration has also been weak but is expected to increase as employment growth accelerates. Even though the short-term prospects for Arizona and the Phoenix-Mesa-Scottsdale still face challenges, the medium term and long-terms indicators are very positive. It should be noted that Forbes Magazine (7/6/11 issue) projected that Phoenix is ranked #9 on the list of “The Next Boom Towns in the U.S” based upon a study completed in cooperation with Praxis Strategy Group. This #9 ranking out of the 52 largest metro areas in the country was based upon a net increase in jobs since 2000, robust demographics, warm weather, pro-business environments and a large supply of affordable housing. All of these factors bode well for the Phoenix Metroplitan Area in the years ahead.

One of the biggest components of the Phoenix-Mesa-Scottsdale MSA has traditionally been new home construction and commercial real estate development. Those segments of the local economy have suffered major setbacks in the past few years and it will take 2 – 3 years for these drivers of the economy to stabilize and begin experiencing real growth. New single-family home permits exceeded 58,000 in 2005 and have decreased dramatically to 6,794 new, single-family home permits issued in 2011. Projections for the number of new single-family permits to be issued in 2012 have been recently revised downward to approximately 7,000 permits. The single-family resale market is also still struggling but most forecasters and economists believe we almost “bottomed out” by the end of 2011 and the residential resale market will continue to make slow, steady progess in 2012. Median resale price in 2011 was $125,000 and average resale price in 2011 was $168,000 according to the Arizona Regional Multiple Listing Service. Median sale price in 2011 was $125,000 compared to $138,000 in 2010. The high-point for median sale price was 2007 when the median sale price was $260,000. It is believed that this dramatic decrease in median sale price is more a reflection of the number of foreclosed properties being resold than any other factor. Home sale velocity has dramatically increased from the low-point of 54,823 sales in 2007 to 101,436 sales in 2011. 4,747 single-family homes sold in Maricopa County in January, 2012 at a median sale price of $134,900. In March, 2012, 6,454 single-family homes sold at a median sale price of $145,000. Inventories of listed properties have been decreasing since January, 2012 which is causing upward pressure on sale prices and well-priced homes are generating multiple offers within hours of being placed on the MLS. One of the positive effects of the housing collapse and wave of foreclosures in the Phoenix Metropolitan Area is that the median price of homes in this market is significantly lower than competing cities such as Los Angeles, San Diego and Las Vegas.

The real solution to the housing industry’s problems is that the inventory of foreclosed properties must be “cleared” before the market can make a serious recovery which seems to be occuring since the beginning of 2012. Notices of Trustees Sales decreased throughout 2011 and there were 35,855 foreclosures in the Metro Area in 2011 versus 41,625 foreclosures in 2010. One of the biggest “positives” to our current residential market featuring depressed/low sale prices is the impact on affordability for Phoenix buyers. According to the National Association of Home Builders, Phoenix enjoys one of the highest rates of affordability in the Southwest. Based upon the percentage of new and existing homes sold during 2011, a high percentage of families in Phoenix that earn the area’s median income can afford to purchase a home. These statistics portend very well for Phoenix going forward as the economy improves, employment gains are realized and the area experiences net inbound migration.

The retail market includes about 160,000,000 square feet of retail space in the Phoenix-Mesa-Scottsdale MSA. The overall vacancy rate at the end of the First Quarter, 2012 was essentially unchanged from the Fourth Quarter, 2011 and was approximately 12% with Regional Malls having the lowest vacancy rates and Strip Centers experiencing the highest vacancy rates. Lease rates are still decreasing and range from the low teens to the mid-$20’s on a NNN basis. Grocery-anchored Centers are offering inline space between the mid-teens to the mid-$20’s on a NNN basis, dependent upon location of the Center, reputation and market share of the grocery anchor and quality and condition of the Center. Power/Community Centers are struggling with big box spaces that have become vacant due to bankruptcies/mergers/store closings ( i.e. Circuit City, Mervyn’s, Ultimate Electronics, Border’s, etc.) and it will take an improved economy before a significant number of these vacancies are leased to qualified tenants. It was also announced in the First Quarter, 2012 that Best Buy will close at least two stoe in the Phoenix Area.A few national retailers such as Harbor Tools, Hobby Lobby, RoomStore, Mountainside Fitness, and Ross Dress for Less have leased a few big box spaces but supply still far exceeds demand. It is estimated that there are over 300 vacant retail spaces over 10,000 sf in the marketplace and it is going to take a concerted effort, an improving economy and time for these vacant spaces to be leased. The most active smaller, inline tenants are national and regional companies, paricularly those restaurant and/or QSR’s that are leasing spaces that were previously occupied by a restaurant user and are in almost “turn-key” condition. National franchise tenants are fairly active but financing is a real challenge even for financially stable franchisees. Unanchored Strip Centers are experiencing higher than average vacancy rates since many of the tenants in those Centers are “mom and pop” tenants that have closed due to the recession and/or a lack of financing. Grocery-anchored Centers have weathered the storm better than other types of retail properties and most well located, grocery-anchored Centers are enjoying average occupancy rates of approximately 90%. The retail market seems to be stabilizing although rent rates are flat. There are still attractive options available for quality retail tenants and Landlords are offering fairly aggressive concessions to secure quality tenants.
The office market is still struggling and needs significant job creation and an improved economy before vacancy rates will begin to stabilize and decrease. The office market encompasses approximately 80,000,000 square feet and the overall vacancy rate at the end of the First Quarter, 2012 was about 28% and showed no measureable improvement over the Fourth Quarter of 2011. 2011 was notable in that it was the first year since 2007 that the office market experienced positive absorption. First Quarter, 2012 net absorption exceeded 100,000 sf. On another positive note for the 2011 office market, national corporate tenants leased significant vacant Class A spaces and decreased the overall Class A vacancy rate. In addition, even though the amount of available sub-lease office space has significantly decreased, there is still over 1,100,000 square of sub-lease space in the market. This sub-lease office space is a “drag” on the market and has a tendency to depress overall asking rents. The general trend has been that the most qualified and largest tenants have upgraded their premises by relocating from Class C and Class B buildings to Class A buildings. Landlords are offering very aggressive concessions to quality office tenants and they will continue to do so through the end of 2012. Lowest vacancy rates are found in the Downtown South submarket ranging from 9% – 16% dependent upon building class and highest vacancy rates are found in the Glendale submarket with the vacancy rate exceeding 40% for Class Buildings and almost 58% for Class B & C Buildings. Full-service lease rates range from the low to mid-teens on a full-service basis for Class C buildings to the low to mid-20’s on a full-service basis for Class A buildings, dependent on building location, size, condition and amenities. The overall vacancy rate will probably increase in 2012 but, hopefully, the office market will “bottom out” by the end of the year and begin to stabilize in 2013. Until such time as both the national and local economy recover and we experience signicant job growth, the office market will continue to struggle. Consequently, asking rents will continue to decrease during 2012 which will allow office tenants expanding/relocating their premises to secure an attractive lease deal at historically low prices.
The industrial market, which includes in excess of 270,000,000 square feet, appears to have stabilized and saw the beginning of the recovery phase in 2011. The overall vacancy rate was just above 12% at the end of the First Quarter, 2012 and has decreased from over 16% in the last two years. Highest vacancy rates are found in the Northeast submarket at above 13% and lowest vacancy rates are located in the Airport submarket at about 13.5%. Highest vacancy rates by product type are in the RD/Flex Building category with an overall vacancy rate of over 18%. Asking rents seem to have stabilized at approximately .55 per square foot per month on a NNN basis for General Industrial and less than .35 per square per month on a NNN basis for Warehouse/Distribution Buildings. Net absorption of industrial space in 2011 approached 8,000,000+/- sf. Due to large, national, regional and local firms planning on leasing large Warehouse/Distributions in the near future, the industrial market should experience significant positive absorption during 2012. Rents have been “flat” the last few years but due to increasing demand and a marginally improving economy, vacancy rates should continue to decrease in 2012 and rents may experience a small, positive increase in 2012.
The bright spot in the investment property market 2011 was multi-family housing and this segment includes almost 260,000 apartment units. Class A and to, a lesser extent, Class B were the hottest type of investment properties sold in 2011. The bulk of these properties were large properties sold to larger, sophisticated investors taking advantage of the lower prices of distressed properties. Class C apartment sales were active but larger, institutional buyers are still most interested inpursuing Class A and Class B properties. By way of example, five apartment complexes representing a total of just over 2,400 units sold for an aggregate sale price exceeding $274,000,000. Many buyers are including in their decision-making process the fact that there is and will continue to be a large pool of potential renters that were formerly homeowners who have been foreclosed out of their homes and now need to rent. The overall vacancy rate decreased to about 8.5% by the end of 2011. Many apartment buyers believe a decreasing vacancy rate and an improving economy and employment picture will result in real rent increases and a substantial increase in value of the apartment properties they have purchased in the near term.

Other than in the multi-family category, the investment property market is not back to pre-recession levels but sales activity did increase significantly in 2011. Investment sales in 2011 increased by over 60% when compared to 2010. The sale of retail properties increased in 2011 as more value-added, distressed and REO properties were acquired. There have been some sales of office and industrial properties but the major transactions have been large, institutional-type and/or trophy properties. Again, the most typical purchasers of these assets have been institutional and/or REITS or users.

There is still a substantial gap between “ask” and “bid” capitalization rates and many buyers are waiting on what they believe will be a significant increase in asking cap rates before they invest their capital in a purchase transaction. Many investors also do not believe we have yet “hit bottom” in the investment property category and they are not willing to invest their capital until they perceive that we have done so. It is expected that more properties ( specifically shopping centers and office buildings ) will be placed on the market in 2012 as “pretend and extend” properties become available for sale and sales volume is expected to increase in all property sectors during 2012.

Some of the most active buyers have been large, institutional-type investors that have purchased properties with cash. The financing market is still very challenging and lenders are “cherry-picking” properties and only offering financing on the very best properties. Consequently, the average investor must have the ability to purchase with cash or have available some viable method of financing.

The investment property market for 2012 should experience higher sales volume as more, smaller investment properties are placed on the market but until we experience higher job creation and net inbound migration and financing becomes more available, investment property deals will remain challenging.

Sources:  Loopnet, Arizona Regional Multiple Listing Service, 2010 US Census, US Bureau of Labor Statistics, National Association of Home Builders, Arizona Department of Commerce, Central Arizona Asociation of Home Builders, ASU Realty Studies, Phoenix Business Journal, Central Arizona Association of Home Builders, CoStar,  University of Arizona Eller College of Management, Blue Chip Economic Forecast, ASU-Economic Outlook Center, WP Carey School of Business, St. Louis Federal Reserve, Arizona Republic, Forbes Magazine, Praxis Strategy Group