The last time metro Phoenix office vacancy was 16.1% was in 2007. It took us 12 years to get back to the same vacancy. It was a long, tough road back, but we are finally there. However, this time around, there are some big differences comparing 2007 and 2019:
1-Average rents (not Class A rents which are higher) were over $1.50/sf higher 12 years ago.
2-Operating Expenses in 2019 are $1.56/sf higher, so the net to owners is over $3.00/sf lower than in 2007.
3-Average building sales pricing is over $200/sf which is higher than in 2007. If you have the same price/sf and lower net rents, that means the only difference is cap rates are lower.
4-Here is something very good for market health. In 2007 there was almost 9 million sf delivering or under construction vs today at less than 3 million. We are NOT overbuilding this cycle as our absorption should match up close to deliveries and buildings under construction.
5-Forecasting vacancy – We should slip into the 15% vacancy range but we won’t go lower in 2020. Also, we will not go back up to 17% unless absorption stops on a dime.
6-We are at the top of the cycle and it looks like we will stay here in 2020.
7-Finally, at this point, I can’t really see past the election. There is a diametrically opposed vision for America from the different parties and that will drive the economy and office market in two different directions.
If you want to discuss the Phoenix Office Market more in depth, give me a call! I love this stuff.
Craig
602.954.3762
ccoppola@leearizona.com
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