Remember when housing was the new paradigm with the limitless upside? Now commercial office space is the new "new paradigm" for Phoenix.
Last September, the Real Estate Journal reported that the Cooling Housing Market in Phoenix Doesn’t Dampen the Commercial Sector:
Phoenix’s rapidly cooling housing market hasn’t damped the region’s commercial real-estate market. From a new football stadium for the Arizona Cardinals with a design inspired by a desert cactus to more than 16 million square feet of offices, warehouses and retail stores slated to be built in the region this year, the area’s commercial sectors are expanding at a brisk pace amid rising rents and falling vacancy rates.
Some 5.3 million square feet of office buildings are scheduled to be built in the region this year, about double the amount delivered in 2005, according to Property & Portfolio Research Inc., a Boston-based research firm. Meanwhile, some 7.4 million square feet of new retail space is to be delivered this year, up 26% from last year.
The commercial growth has been fueled by a continuing surge in population and employment, says Marshall J. Vest, an economist at the Eller College of Management at the University of Arizona. New arrivals first purchase homes, and now are helping to drive demand for places to shop and work, sending rents higher and triggering more commercial projects that previously didn’t make sense economically, Mr. Vest says. Over the next five years, office, retail, warehouse and apartment rents are all expected to grow at above-average rates, PPR says.
Apparently, unlike the residential side of the industry, commercial was to remain "bullet-proof."
Fast forward to April 2007. In Wednesday’s Arizona Republic:
Cushman & Wakefield’s top office expert in the Valley is a bit cautious about 2007.
Although the commercial office market continues on a good run, Larry Downey thinks it will be difficult to repeat the stellar performance of 2006.
"It’ll slow down a bit, not a lot, in 2007," said Downey, executive director of office properties for Cushman & Wakefield of Arizona.
The first-quarter data is signaling a slowdown, according to Cushman & Wakefield data, as just 366,000 square feet of office space was absorbed so far this year. That’s like filling up about 75 percent of the One Renaissance Square building.
During the same time in 2006, 1 million square feet was absorbed, or more than two of the Renaissance buildings. The high absorption marked the start of a record year in 2006, when companies filled up an additional 3.5 million square feet of office space. Valley companies typically occupy about 1.5 million or so square feet annually, he said.
Rents won’t be falling, though, even with a slew of new construction under way.
So let’s see…..supply way up, demand way down [63% YOY], but rents won’t fall. A totally new paradigm fueled by the strong growth and economy of the Phoenix metro area. Why is this sounding so familiar, and no more believable than the last time around?