Commercial Real Estate Market

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CBRE has released a year-end report that shows positive news for the Valley’s office, industrial and retail real estate markets. Craig Henig, CBRE’s Senior Managing Director and Arizona Market Leader, talks about the report.

Ted Simons: There are signs of improvement in the office, industrial and retail real estate markets, with vacancy rates dropping in all three sectors. That's according to a recent report released by CBRE brokerage services. Here to tell us more about The report is Craig Henig, senior managing director and Arizona market leader for CBRE. Good to have you here. Thank you for joining us.
Craig Henig: Thank you for having me again.
Ted Simons: I want to get to the office, retail, industrial individually in a second here. For an overall view, what are you seeing out there?
Craig Henig: Overall, we have seen a year-over-year improvement versus 2011 due to the pickup in the economy. Also the -- the recession that has helped unfortunately some of the people with vacancies be able to make more economic deals for companies that are searching for a long-term opportunity, because in most companies, their labor and their occupancy costs are their largest costs. So, they're looking and they're locking in today.
Ted Simons: Interesting. Let's start with the office market here. Vacancy rates down there. How much and why?
Craig Henig: The vacancy rates have declined over 150 bases points year-over-year. And that is due to a lot of locations that weren't available originally for some of the office users, and, again, it back to companies being able to afford to take down some of that space. Where in some cases, space might have been $40 per square foot, today you can lease that space probably around $32 per square foot.
Ted Simons: Did the idea of the asking lease rates being down, is that necessarily an unhealthy thing, or, again, it could be healthy if it means getting some of the places filled?
Craig Henig: It is healthy for the user. Landlords filling some of the spaces and taking lower returns. Another trend, less of the real estate being foreclosed. A lot of lenders have already blended and extended their loans with the owners or their new owners and their bases have been reset and they're able to make more economic deals.
Ted Simons: These lease rates, asking lease rates down for 11 straight quarters.
Craig Henig: They are. We are starting to see a little improvement in certain sub-markets and certain properties.
Ted Simons: And as far as the available space on the market, is that impacting what you are talking about here?
Craig Henig: Yes, available space definitely impacts -- we segregated by class A, B, C. Class A best leasing net absorption and lowest vacancy out of the rate.
Ted Simons: And class A would be something along the lines of Tempe town lake --
Craig Henig: Hayden Ferry projects, north Scottsdale market, downtown Phoenix, and some properties in the southeast valley as well.
Ted Simons: Does that say perhaps that people are -- if you are in the market, you are in the market and you are serious and you want the best, or what -- what --
Craig Henig: It is showing us that -- I will tell you deals were taking a lot longer to get done. However, companies again are doing their business planning and looking at their -- at their budgets and they're looking at the opportunities now to lock in. Because these rates are -- they're not in our historical lows, but they're pretty low and we hopefully won't see these rates for a long time to come.
Ted Simons: As far as retail is concerned, the report shows positive absorption. First of all, explain absorption?
Craig Henig: You have gross absorption, which is activity, people moving from space to space. So, if I move my company to another building and left a vacancy, that is not helping the net absorption. So, if I'm taking my business and expanding it to another location, but not closing my current location, I'm absorbing -- net absorption, I'm absorbing a vacancy in the market. We have net new, net absorption and also expansion.
Ted Simons: As far as positive absorption, it sounds like the first positive year after being down for a while in terms of retail space.
Year over year we have improved our net absorption to a positive two million square foot swing. Where in 2011, vacancy rate for retail was a negative 152,000 square feet. This year it was a million seven positive.
Ted Simons: What is happening out there? Is that a simple sign of an uptick in the economy?
Craig Henig: I think, again, it is an opportunity for a lot of discounted retailers coming into the market, a lot of landlords are looking at their options and leasing the space just to -- some of them to buy time until the market comes back. I think the locations at other retailers couldn't -- couldn't lease in that one time for those rates are finding the opportunity to get into those markets.
Ted Simons: Does that mean that the strip mall that everyone sees on many every corner half full, used to be vibrant and now is a quarter full, does that mean we're seeing a turn-around there?
Craig Henig: You are. You are seeing a turn-around, because the space is more affordable for some of the smaller businesses. We refer to them as mom and pops. And another dynamic is people are starting to pay up for properties. Because they cannot get better returns from the banks or the stock market or even the bond market.
Ted Simons: Big-box spaces, how is that doing?
Craig Henig: Big-box spaces, we have seen some adaptive reuse. A lot of discounted retailers are coming in. Goodwills, the dollar stores. We're also seeing a new dynamic where we have fitness clubs taking a lot of the space.
Ted Simons: Interesting.
Craig Henig: You are seeing go-cart tracks come in. You are seeing churches. Different uses come into centers that would usually have different retail uses.
Ted Simons: Are we seeing more of that than in the past, that kind of variation?
Craig Henig: We are seeing a lot more. Bigger variation --
Ted Simons: Big box, before we leave that, is there a trend or tendency to cut these things down to size?
Craig Henig: That's a great question. Some of -- some you can demise them. Some of them are. Someone would take 80,000 square feet -- now the owner is demising those buildings to two, 40,000-foot spaces and putting two users in there.
Ted Simons: And getting things done.
Craig Henig: Getting things done.
Ted Simons: Industrial market, distribution centers it seems like the demand is up.
Craig Henig: Demand is there. Ironically net absorption again year-over-year was about the same. 2011, 7 million square feet that we absorbed primarily about 4.5 million of that to maybe 5 million was Amazon. This year, this past year, we did the same amount of absorption or leasing, and there were smaller companies, probably in the 200,000 square foot range. Diverse companies coming from third-party logistics, pharmaceutical, food companies, and E-commerce.
Ted Simons: That has to be healthier for the economy. Nice to have an Amazon there, distribution center that takes up so much square footage, but if something should happen to Amazon, we're sunk.
Craig Henig: Fortunately, the buildings that they have leased, they put a lot of money into those. I think they can be reused or released by another company that would love to have all of that.
Ted Simons: Nice to see diversification.
Craig Henig:Absolutely.
Ted Simons: Relatively positive for 2012, what are you seeing for 2013?
Craig Henig: I think now we're past the election. I think we have some sense of what is going to happen with the taxes, fiscal cliff, still waiting for the deficit and debt ceiling issues. I think corporate America is feeling better about spending, and diversifying and expanding. So we're thinking 2013 will be a positive year for leasing, as well as investment sales.
Ted Simons: Arizona more positive than other regions?
Craig Henig:Arizona, we expect to be in the top 10 of job growth and also population.
Ted Simons: That means these spaces will be filled.
Craig Henig: Especially in the office sector. It is really about jobs. Okay. When you have jobs, you have people that are shopping in retail and more retail you need warehouses to store the goods.
Ted Simons: Amazing how that all works together. Supply chain.
Craig Henig: That is good news. Thank you for joining us.

Craig Henig:CBRE Senior Managing Director, Arizona Market Leader;

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