Commercial Real Estate Analysis

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Craig Henig, Senior Managing Director of the Arizona region for CBRE, discusses his company’s analysis of the Metro Phoenix commercial real estate market for the third quarter of 2011.

Ted Simons: Good evening, and welcome to "Horizon." I'm Ted Simons. There are signs of improvement in the business real estate market. Office, industrial, and retail space have shown some recent signs of absorbing excess space. Here to talk about the market is Craig Henig, Senior Managing Director of the Arizona region for CBRE, a real estate services company. It's good to have you here. What did your report look at?

Craig Henig: If you look at industrial first, you can see a significant change in our year over year absorption and vacancy rates, primarily due to our big box distribution buildings being leased. And another big sign of attracting companies such as Amazon who took the large chunks of space we had out there that were available.

Ted Simons: If we talk about industrial six straight quarterly reports say a positive absorption. And when we hear that, what does that mean?

Craig Henig: That is net space that is leased and taken off of the market. It isn't where somebody is moving to another building and leaving a vacancy, it's actually net new expansion of an existing presence in the valley, or a new company moving into town.

Ted Simons: You refer to distribution companies, Amazon and such, leading the way. Why is that, do you think?

Craig Henig: For Amazon, number one, A) the taxation that we don't put on internet companies here in Arizona compared to California. B)The affordability of housing, quality of life, and available work force.

Ted Simons: So all those factors come into play on something like this?

Craig Henig: Absolutely.

Ted Simons: Industrial lease rates, looked like they're mostly unchanged. What's going on there?

Craig Henig: In the big box sector, which Amazon has leased, you'll see a slight uptick in rates which was a change in the dynamic for the last couple of years, because we've seen historically low rates back to what we've seen 20 years ago, but with the absorption of the space, demand has helped push rates up slowly.

Ted Simons: You mentioned big box. Let's get to retail now. First quarter of positive absorption rate this year? This the first time we've seen something good happening here?

Craig Henig: In a while. We have about 321 big box spaces available right now representing about 9 million square feet. So it's a big hole. So what we're seeing is some of the people taking advantage, the companies, of these opportunities that weren't there before.

Ted Simons: So basically it sounds as though the absorption rate for this one particular quarter was pretty good, but it's still pretty rough year to year.

Craig Henig: For retail it's probably our sector that is probably feeling this crisis in the economic world the most.

Ted Simons: And asking lease rates it looks like for existing retail is up. How does that work?

Craig Henig: It is up in certain locations. It's not overall. Overall we're seeing retailers going in there and they're looking for the best economic long-term deals as possible.

Ted Simons: And some are obviously getting them, I guess.

Craig Henig: That's also due to location.

Ted Simons: Okay. So give me the good parts and the bad parts.

Craig Henig: The good parts, anything within the loop 101 is considered infill. So when you get closer in to the large regional malls, or power centers that have great locations and vacancies, they can still command the lease rates they would like with less -- fewer concession packages which you see in the fringes out in the southeast valley or out in the Goodyear and Buckeye areas.

Ted Simons: Is that changing? Everything we've talked about so far, we still have to talk about office here. But so far from everything we've discussed, are you seeing changes? Are they positive? Are they negative?

Craig Henig: We're seeing changes as far as for retail, we're seeing positive from the major retailers coming in, they're looking at different footprints, maybe downsizing because there's internet competition, maybe they don't need as much real estate, but they are absorbing some of the real estate. The mom and pop stores are still suffering because they're depending on the consumer spending which obviously right now people are deleveraging, and they're also saving.

Ted Simons: What about mom and pop stores and lease rates? What are they seeing there?

Craig Henig: Mom and pop and lease rates, the lenders and the owners are trying to work with them to extend their lease terms and bring down the lease rates so they can survive this downturn. Additionally, they also try to group amongst the big anchored retailers and if the anchors aren't there, the mom and pops suffer.

Ted Simons: Let's get to office space. Third quarter analysis for office space, the vacancy rate seems, correct me if I'm wrong, but seems to be doing better.

Craig Henig: It is. If you break them down to class A, B, and C, and --

Ted Simons: What does that mean?

Craig Henig: Class A is the best location, best access, newest technology, newer construction, more efficiency, those -- those properties we're seeing get leased up the most right now because people are taking a flight to quality, so with lease rates, historical lows, year over year, we're seeing people moving from class C space to class B space, and class B space to class A.

Ted Simons: Interesting. So they're literally moving on up.

Craig Henig: They're moving on up, and certain pockets are absorbing class A space, such as Downtown and the Scottsdale airport area.

Ted Simons: Subleasing I notice dominates. Explain that, please.

Craig Henig: Sublease is dominating. You have a lot of companies that don't need excess space, so they're putting that space back onto the market, and that competes with our direct space that's available.

Ted Simons: Does that send some kind of signal as far as the economy and the market is concerned?

Craig Henig: Essentially it boils down to we need job creation to fill the space back up.

Ted Simons: Office lease rates down for the sixth straight month, and positive absorption up over 2010, sounds relatively positive.

Craig Henig: You're seeing a lot of national large corporations taking advantage of the -- your two big expenses when you have a company are employment and you also have your occupancy. So right now you can lock in for long-term lease with aggressive concessions, your occupancy costs are going down.

Ted Simons: From everything we've talked about, office, industrial, and retail, some good, some not so good, which of these numbers, which of these categories gives you the most optimism?

Craig Henig: I would have to say industrial is leading the way. Secondly office. The class A space, as well as class B, but the class C, this is some of the older inferior buildings, inferior locations are going to suffer the most and hopefully in the near term, not the short-term, but near term they'll be redeveloped into a better and higher use.

Ted Simons: All right. Very good. Good to have you here.

Craig Henig: Thanks for having me.

Craig Henig:CBRE, Senior Managing Director;

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