Western Real Estate Business

AUG 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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M A R K E T H I G H L I G H T: P H O E N I X www.REBusinessOnline.com Western Real Estate Business • August 2018 • 23 PHOENIX FINDS ITS RETAIL FLAVOR It used to be so easy for develop- ers and retailers to grow rapidly in Arizona, particularly in Metro Phoenix. The municipalities were generally pro-growth, while retail developers were typically ahead of the growth curve for commercial zoning by as many as three to four quadrants at many intersections because they knew the residential sector would follow. Westcor (sub- sequently bought by Macerich) was the most intelligent, setting up joint ventures with large property owners to build regional malls — and they actually waited until the department stores felt the timing was right. The enclosed malls became the retail hub with ancillary retail sur- rounding it, creating a mecca for restaurants, fast food, financial in- stitutions and auto centers. Most de- velopers actually survived three re- cessions over a 20-year period until a major collapse hit the entire coun- try in 2008. Homebuilders couldn't sell their inventory, financing was not available and the retail that was supposed to be supported by occu- pied homes no longer was. There was also an oversupply of retail and too many regional malls. In fact, the new malls killed off the traditional malls as Metrocenter succumbed to Arrowhead, Fiesta Mall fell to Chan- dler Fashion Center and ElCon lost to Park Place in Tucson. It has taken Phoenix about seven years to overcome the residential foreclosures and the large retail va- cancies. But the area has, and Phoe- nix is now thriving. The region has experienced a 12.9 percent popula- tion increase in that period of time, making it one of the fastest-growing cities in the country. We now have a metro population of 4.74 million people and growing. RL Brown's statistics show we will have about 23,000 single-family per- mits issued in 2018 and about 10,500 multifamily units under construc- tion. The metro area has 231 million square feet of existing retail with a little less than 1 million square feet being built this year. The vacancy rate was roughly 9.6 percent be- fore the Toys/Babies R US closures. The average per-square-foot rent is $18.05. Consolidation is still occurring as mergers and acquisitions from RE- ITs have an impact on retail owner- ship and disposition. This year has brought about Brookfield's acquisi- tion of Rouse and GGP; DDR has formed a new value REIT with a number of their centers making up that inventory; Cushman & Wake- field has filed an IPO; NKF acquired Berkley Point; and there was the proposed purchase of RKF. This mergers and acquisitions activity is not slowing down. Retail vulnerability still exists and will continue to create additional problems with "go dark" and "ex- clusive provisions" in major tenant leases. Major tenants that control so much of what can happen with repurposing retail projects need to have an open mind as to how a center can create more traffic, rath- er than watch the centers fail with continued dark stores. If they can protect their parking, visibility and access with maybe just a little addi- tional competition, entertainment, hotels or auto dealerships might in- crease their sales. Mike Polachek Executive Vice President, SRS As the economic cycle continues, the Phoenix industrial market is benefit- ing from rent growth (finally), premi- ums in investment yields comparable to primary markets, industry diver- sification, affordable housing and an abundance of labor. Here is some additional color: in- dustrial rents are up almost 10 percent from this time last year. Cap rates are anywhere from 50 to 150 basis points higher than Southern California. Metro Phoenix non-farm employment levels are past their 2007 peak, but construc- tion employment alone is reminiscent of 1998 levels. The region's extremely strong and consistent absorption num- bers have led many to believe Phoe- nix is not just a housing town. Lastly, more than 67 percent of people who earn the median income can afford the average-priced home. Major com- panies like Chewy.com (largest build- to-suit lease in the history of Phoenix), Nestle Waters, OHL, Niagara Bottling, Huhtamaki, Blue Buffalo and various other logistics companies have also made major announcements of loca- tions, which were heavily driven by labor availability. Major bulk land sales are back up for both users and developers. Notable deals include CyrusOne purchasing more than 68 acres for a data center in Mesa; Prologis closing on 50 acres in the Sky Harbor Airport submar- ket; and Sunbelt Investment Holdings taking more than 300 acres at PV303. Land prices continue to escalate as user and developer demand increases every day. The Metro Phoenix industrial va- cancy rate was 7.1 percent in the sec- ond quarter of 2018. This is down 70 basis points from the first quarter of 2018. As the market absorbed 2.6 mil- lion square feet in the second quarter of 2018 and 4.2 million total year-to- date, Phoenix is on track to outper- form and blow past the 20-year typical annual absorption average of 5.1 mil- lion square feet. This may be the fifth year in a row Phoenix gets close to, or above, 8 million square feet of positive net absorption. Developers delivered 1.8 million square feet of new product in 10 build- ings, with 40 percent pre-leased. Cush- man & Wakefield is currently track- ing 21 industrial properties under construction for a total of 5.2 million square feet. About 18 of these prop- erties are projected to be delivered in 2018, and three in 2019. Of that space, 28 percent is pre-leased. Significant sales include ViaWest and Investcorp teaming up to purchase 10 Chandler for $60 million. Then there's Cohen Asset Management, which is taking down the 400,000-square-foot Home Depot Distribution Center and the 437,000-square-foot Living Spaces building in separate deals for $31.2 million and $36.3 million, respectively. Allstate was advised by CBRE Global Investors in the purchase of LBA Tem- pe Logistics Center, while Industrial Property Trust acquired the new Ama- zon Chandler Last Mile Distribution Center, which was sold by Globe Corp. It is seemingly harder and harder to find functional industrial real estate purchase in Phoenix. Commercial real estate sales volume in Phoenix was more than $11 billion last year. Of that amount, industrial decreased by 19 percent not because of demand, but due to lack of supply. RENT GROWTH, AFFORDABLE HOUSING, LABOR DEFINE PHOENIX'S INDUSTRIAL MARKET Will Strong Executive Managing Director, Cushman & Wakefield Ozburn-Hessey Logistics (OHL) leased 295,695 square feet at the 10 West Logistics Center, located at 6200 West Van Buren St.

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