Kerry Fehr-Snyder
The Arizona Republic
Slow selling homes aren't the only thing dragging down the Valley's once-vibrant real estate market.
The commercial real estate market ended 2007 with more vacant space than before, although the picture in the Southeast Valley isn't as dim as it seems.
Office, industrial and retail vacancy rates rose in the last three months of the year, according to commercial real estate services firm CB Richard Ellis.
But in many cases, the increases came as a result of more inventory and a lag time in filling commercial space.
In the Southeast Valley, a new shopping center and Intel's new factory, Fab 32, opened, adding to that inventory. The San Tan Village Regional Mall added 775,000 square feet of shopping, and the $3 billion Intel factory added another 1 million square feet of industrial space.
The increased vacancy rates don't worry Bryan Taute, a vice president of CB Richard Ellis who specializes in office leasing.
"We just had more product come online . . . and it takes 12 to 18 months to lease up that product. I still think that's a pretty healthy vacancy," Taute said. "Fourteen percent in an emerging market is still a pretty low vacancy rate."
Overall, the vacancy rate for office space in the Valley was 13.9 percent in the fourth quarter, up from 11.1 percent for the same period a year ago.
The residential real estate slump affects the commercial real estate market, Taute said, because it means the area's overall growth rate is slowing.
"There is a correlation, especially in growth areas, whereas the areas around the mall and the mature areas will do fine," Taute said. "The areas that will be slower to lease up are in the far southeast, such as the San Tan area, which is relying on the growth of the housing to make those locations work."
Taute said a coming recession or one under way would make tenants tenuous about leasing space.
"This year (2008) is going to be kind of a turbulent year," he said.
The office market wasn't the only one to show an increase in vacancy rates.
Industrial real estate vacancy rates in the Southeast Valley rose slightly, to 5.97 percent from 5.92 percent, for the fourth quarters of 2007 and 2006, respectively.
Overall in the Valley, the vacancy rate ended 2007 at 8.39 percent, up from 6.65 percent a year ago.
It's too early to know whether the industrial market is following the course of the residential real estate market, said Pete Wentis, an industrial real estate specialist with CB Richard Ellis. A trend, he said, can't be seen or predicted over one quarter and instead takes several periods to play out.
"There's some positive in these numbers," he said. "The market from a commercial and industrial perspective is still pretty active. It's just we have to put a reference point on it. It's just not at the dynamic pace it was four or five years ago.
"We've gotten spoiled here with the growth."
Unlike the office and retail markets, the industrial market also depends on which industry is considered.
Residential real estate related industrial companies, such as those that make flooring, are struggling, while biotech, semiconductor and communications industries are faring better.
"It's such a diverse market and includes so many different types of industries," he said. "One segment may be struggling and another (may be) going gangbusters."
The retail vacancy rate, on the other hand, tends to be more generic.
Like the other commercial real estate sectors, the retail market vacancy rate rose at the end of the year after posting three consecutive quarters of rising rates. For the year in the Valley, the retail vacancy rate ended at 6.15 percent. That's up from a 5.14 percent vacancy rate a year ago.
In the Southeast Valley, retail vacancy rates ended 2007 either higher or lower than the overall Valley rate. The vacancy rates were 6.96 percent in Apache Junction; 6.65 percent in Mesa/Chandler/Gilbert; 3.77 percent in Tempe/Ahwatukee; and 11.63 percent in Maricopa.
Rick Murphy, a senior vice president with CB Richard Ellis who studies the retail market, said the market remains healthy even with the increasing vacancy rates.
"There's so much demand out there, that's still a healthy rate," he said.
Like other segments of the market, retail has enjoyed historically low vacancy rates as part of the Valley's seemingly boundless growth. In 2000, vacancy rates hovered around 5 percent - "that's basically like full employment," Murphy said.
In the mid-1980s, the rate rose to about 12 percent with an economic downturn but then recovered. Although Murphy predicts the vacancy rate will continue to rise, he doesn't predict a market crash.
"Obviously, the market has slowed a little bit, but we still saw a record (1.4 million square feet of retail space) added in the fourth quarter and 11.6 million square feet for all of 2007," he said.
The up-tick in vacancy rates have prompted developers to postpone new retail projects while tenants delaying moving in for 12 to 18 months.
"They're not pulling out," he said. "In '08, people will be more cautious but they're still committed."
Large chains such as Wal-Mart and Jo-Ann's Stores are still interested in building new stores, he said.
"Retail has kind of has been the shining star the last couple of years," Murphy said.
The Arizona Republic
Slow selling homes aren't the only thing dragging down the Valley's once-vibrant real estate market.
The commercial real estate market ended 2007 with more vacant space than before, although the picture in the Southeast Valley isn't as dim as it seems.
Office, industrial and retail vacancy rates rose in the last three months of the year, according to commercial real estate services firm CB Richard Ellis.
But in many cases, the increases came as a result of more inventory and a lag time in filling commercial space.
In the Southeast Valley, a new shopping center and Intel's new factory, Fab 32, opened, adding to that inventory. The San Tan Village Regional Mall added 775,000 square feet of shopping, and the $3 billion Intel factory added another 1 million square feet of industrial space.
The increased vacancy rates don't worry Bryan Taute, a vice president of CB Richard Ellis who specializes in office leasing.
"We just had more product come online . . . and it takes 12 to 18 months to lease up that product. I still think that's a pretty healthy vacancy," Taute said. "Fourteen percent in an emerging market is still a pretty low vacancy rate."
Overall, the vacancy rate for office space in the Valley was 13.9 percent in the fourth quarter, up from 11.1 percent for the same period a year ago.
The residential real estate slump affects the commercial real estate market, Taute said, because it means the area's overall growth rate is slowing.
"There is a correlation, especially in growth areas, whereas the areas around the mall and the mature areas will do fine," Taute said. "The areas that will be slower to lease up are in the far southeast, such as the San Tan area, which is relying on the growth of the housing to make those locations work."
Taute said a coming recession or one under way would make tenants tenuous about leasing space.
"This year (2008) is going to be kind of a turbulent year," he said.
The office market wasn't the only one to show an increase in vacancy rates.
Industrial real estate vacancy rates in the Southeast Valley rose slightly, to 5.97 percent from 5.92 percent, for the fourth quarters of 2007 and 2006, respectively.
Overall in the Valley, the vacancy rate ended 2007 at 8.39 percent, up from 6.65 percent a year ago.
It's too early to know whether the industrial market is following the course of the residential real estate market, said Pete Wentis, an industrial real estate specialist with CB Richard Ellis. A trend, he said, can't be seen or predicted over one quarter and instead takes several periods to play out.
"There's some positive in these numbers," he said. "The market from a commercial and industrial perspective is still pretty active. It's just we have to put a reference point on it. It's just not at the dynamic pace it was four or five years ago.
"We've gotten spoiled here with the growth."
Unlike the office and retail markets, the industrial market also depends on which industry is considered.
Residential real estate related industrial companies, such as those that make flooring, are struggling, while biotech, semiconductor and communications industries are faring better.
"It's such a diverse market and includes so many different types of industries," he said. "One segment may be struggling and another (may be) going gangbusters."
The retail vacancy rate, on the other hand, tends to be more generic.
Like the other commercial real estate sectors, the retail market vacancy rate rose at the end of the year after posting three consecutive quarters of rising rates. For the year in the Valley, the retail vacancy rate ended at 6.15 percent. That's up from a 5.14 percent vacancy rate a year ago.
In the Southeast Valley, retail vacancy rates ended 2007 either higher or lower than the overall Valley rate. The vacancy rates were 6.96 percent in Apache Junction; 6.65 percent in Mesa/Chandler/Gilbert; 3.77 percent in Tempe/Ahwatukee; and 11.63 percent in Maricopa.
Rick Murphy, a senior vice president with CB Richard Ellis who studies the retail market, said the market remains healthy even with the increasing vacancy rates.
"There's so much demand out there, that's still a healthy rate," he said.
Like other segments of the market, retail has enjoyed historically low vacancy rates as part of the Valley's seemingly boundless growth. In 2000, vacancy rates hovered around 5 percent - "that's basically like full employment," Murphy said.
In the mid-1980s, the rate rose to about 12 percent with an economic downturn but then recovered. Although Murphy predicts the vacancy rate will continue to rise, he doesn't predict a market crash.
"Obviously, the market has slowed a little bit, but we still saw a record (1.4 million square feet of retail space) added in the fourth quarter and 11.6 million square feet for all of 2007," he said.
The up-tick in vacancy rates have prompted developers to postpone new retail projects while tenants delaying moving in for 12 to 18 months.
"They're not pulling out," he said. "In '08, people will be more cautious but they're still committed."
Large chains such as Wal-Mart and Jo-Ann's Stores are still interested in building new stores, he said.
"Retail has kind of has been the shining star the last couple of years," Murphy said.
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