No slowdown in sight for commercial development
Jim Poulin/The Business JournalLand across the West Valley has been snapped up by developers and built up with industrial facilities, including this Trammell Crow Co. distribution center at 75th Avenue and Buckeye Road.
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Even though expensive materials and rising tenant rents will lower profit margins for developers this year, there won't be a slowdown in the buildup of upscale shopping, health care facilities and high-end offices in the Valley.
Peggy Kirch, executive vice president for commercial development at SunCor Development Co., said it's inevitable that rents will go up, but steady and/or lower interest rates -- which have stabilized recently -- could balance escalating construction costs.
And, state population and employment growth is expected to continue to drive the local market and lead the nation.
Bo Calbert, president of the Southwest region of McCarthy Building Cos. Inc., said 2007 will be an "up year just by the projects that are in the mill right now in design and planning."
"(Construction) looks strong for the next five years, office buildings have a strong demand for Class A product in the right locations, and you're seeing less interest in the Class B-type products," he said. "So, I would expect that will drive the rents up on that product and create a demand there."
Vacant industrial land is being swept up in the West Valley to take advantage of the freeway system and relative closeness to California ports. The city of Phoenix's Opportunity Corridor, with close proximity to Sky Harbor International Airport, also is a prime location for construction.
Tony Lydon, senior vice president Grubb & Ellis/BRE Commercial LLC, said the Valley has become a regional distribution center in the past 24 to 36 months, and he's currently tracking 11 million square feet of industrial user demand.
"We're in a supply/constraint environment," Lydon said.
According to the Grubb & Ellis 2006 third-quarter industrial market trends report, vacancy rates dropped to 6.6 percent, down from 10.9 percent in the third quarter of 2004, and 8.1 percent for the same period in 2005. Further, the report projects that more than 3.5 million new square feet will be delivered by the end of 2007.
Space not only is increasingly tight in the industrial sector, but in retail as well.
The past four years has seen retail rents in the Valley continue to rise while vacancy rates have tumbled to a historical low of about 5 percent, said Vestar Development Chief Executive Lee Hanley.
Many in the commercial real estate industry question whether this trend can continue. Hanley said municipalities need to think twice before imposing too many rules and restrictions on big-box developments.
"These initiatives, while attractive at the surface, reject economic and market driven realities," he said. "Municipalities that enact these types of rules further alienate and make more difficult the forces that are looking for a regional approach to economic development, tax sharing and rejection of the 'fiscalization' of zoning where one municipality gains an advantage over another."
While much of what's in place now in the commercial arena will get stronger, Calbert said the cost of putting infill projects in the market may dissuade growth in that area.
"I worry that without a correction to bring cost down, these may slow down," Calbert said.
On the bright side, studies show that green building, which encompasses the use of natural light, efficient cooling and heating systems and other environmental protections, make for healthier, happier and more productive employees, Kirch said. Government projects already dictate using green building practices, and more and more developers are embracing them as well, she said.
McCarthy Building Cos. Inc.: www.mccarthy.com
SunCor Development Co.: www.suncoraz.com
Vestar: www.vestar.com
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