2017 Commercial Real Estate Outlook
December 21, 2016
Managing Director, Colliers International
NAIOP Board Member
The Greater Phoenix commercial real estate market is forecast to record another year of steady growth in 2017. This is a sign of the evolution of Greater Phoenix from a “boom and bust” culture to a more mature, stable market. Part of this transformation has to do with the pace of new construction. In previous cycles, there were two dominant unknowns, supply and demand. In the current climate, new supply has been limited and the only significant market uncertainty is the degree of new demand growth.
At the macro level, expansion in the commercial real estate market will be driven by the demand side—employment gains and population growth. During the economic recovery, Greater Phoenix has consistently ranked among the top-10 markets in the country for job growth, averaging 50,000 net new jobs per year since 2011. Similar additions are forecast for 2017, and we are anticipating absorption levels in 2017 to be similar to figures from 2016.
At the property segment level, a few trends stand out. Apartments continue to lead the way. There are several ways of measuring property performance, but the data point that matters most when it comes to the multifamily market is vacancy. Despite a wave of new units that have come to the market since 2013, vacancy has remained near 15-year lows. As long as vacancy remains in check, strong conditions will continue in the multifamily market.
In retail, net absorption is lagging expectations. Retailers are expanding, but the growth is being concentrated in a few hot spots rather than tracking new housing developments across the Valley. While housing starts are gaining momentum, current totals are well-below the long-term average. Any sustained rebound in retail fundamentals will require renewed growth in the housing sector to drive it.
A steady pace of tenant demand growth will continue to fuel the office market. Growth is coming in two forms. First, new businesses are establishing operations in the Valley. The second source of growth is coming from companies that already have a presence here that are expanding because of the Valley’s talented workforce, large population, amenities and pro-business climate. State Farm and Northern Trust were examples of this trend in 2016, and ADP’s announcement to add 1,500 workers in the former US Airways facility in Tempe will continue the trend in the years ahead.
The medical office sector has been in flux in recent years, and there could be additional changes in the years to come. For now, the consolidations in the healthcare industry are causing larger space requirements. In recent years, the average square footage of lease deals has nearly doubled. The result has been some functional obsolescence in 1980’s-1990’s-vintage buildings that had been occupied by solo practices in previous years. It remains to be seen how the medical office market will adapt to the changing healthcare delivery system.
The industrial market has shown strong tenant demand for space. There has been a mix of tenants moving into spec space, some owner-user activity and a significant total of build-to-suit development. Similar to the retail market, a rise in activity in the local housing sector will support greater demand for local industrial properties.
Looking ahead to 2017, the advice I would give to commercial real estate professionals would be to keep an eye on the underlying demand drivers. Knowledge of the real estate—the buildings, the suites, the amenities, etc.—is your bread and butter, but understanding the dynamics that are driving your client’s real estate decisions will truly set you apart from your competition.