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8.2% 9.1% Vacancy Rates 9.6% 20 Largest Markets 10.7% 11.0% 12.0% 12.4% 4 13.0% 13.1% 13.4% 13 4% 13.4% 13.7% 13.9% 15.2% 15 3% 15.3% 16.6% 17.0% 17.4% 8 % 18.7% 22.1%
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The state of office space depends on your perspective
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Best of Times, Worst of Times
TECHCONNECTMAG.COM THE INTERNATIONAL ISSUE
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WRITING BY :: JAMES ROBINSON
fter looking at the evidence, we believe it will become obvious that Phoenix and Tucson are very likely at or very near a bottom in terms of rates and concessions offered by landlords. Perhaps more important, we may also be in one of the best times for those considering new space, as there are currently multiple options available in most size ranges. The first reason to believe the office markets may be at or near bottom is to consider the current facts from the supply perspective. One measure of supply in the office market is the vacancy rate: The higher it is, the greater the supply. If it is rising, you would expect to see a reduction in asking rents. If it is falling, there is likely to be a trend for rising rates. The vacancy rates for the Phoenix market overall is 21.1 percent. That is broken down further to a vacancy rate of 24 percent for Class A and 21.7 percent for Class B space. In Tucson, the vacancy rates are 12.4 percent, comprised of 13.5 percent for Class A and 13.4 percent for Class B. Of course, looking at a snapshot of vacancy rates does not give as clear a picture as looking at trends. The vacancy rates in Phoenix had leveled off for roughly the
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last six quarters, and for the first time since 2006, we are starting to see actual net absorption across all building classes. Although one quarter of net absorption does not make a trend, that, coupled with the extended period of basically flat vacancy rates, tends to imply we are through the worst in terms of climbing vacancy rates. In Tucson, the picture is slightly different. To begin with, the vacancy rates are much healthier. Though they have been increasing from mid-2007, they also seem to have leveled out in the past two to three quarters. We believe it is useful to consider office space as little more than a warehouse for white-collar jobs. The aggregate number of square feet per white-collar employee seems to be close to 250 square feet. So for every 1,000 square feet of office space, it is useful to assume we need four white-collar jobs. Assuming this is the case, we should get a sense for how the demand side of the office economy is faring by looking at the creation or destruction of such jobs. If that trend is moving forward, it seems likely we will have a need for more office space.
THE WORST IS OVER At the current rates of growth, it will be years before we have a healthy office
We believe it is safe to assume we are either at or very near the bottom of this market. market. But what the statistics do seem to demonstrate is it is unlikely things will get much worse. In looking at the data, we believe it is safe to assume we are either at or very near the bottom of this market. Vacancy rates have stabilized. There is no new construction of any scale in progress. It seems we may have a breakeven in whitecollar job growth and the trend is looking like we may actually begin to have small amounts of growth in this area. Buildings appear to be working through the issue related to financing, though there is still much to be done on that front. None of this should be mistaken to imply that things are good. We are at the bottom of a very bad economy. Our vacancy rate is the worst in the United States, as can be seen in the figures. As you would expect in this kind of economy, rental rates are at their lowest point in years, and concessions are at their highest. We believe the market will continue in this vein for at least 12 to 18 months before there are significant signs of improvement. So, is it the best of times or the worst of times? That depends on whether you are a landlord or a tenant. James Robinson is founder and president of Phoenix Realty Advisors (www.phoenixrealtyadvisors.com), a commercial real estate brokerage that focuses on tenant representation and buyer brokerage of office properties.
+ GET CONNECTED Phoenix Realty Advisors: www.phoenixrealtyadvisors.com
