2012 Real Estate Forecast Metropolitan Phoenix Arizona. On behalf of all our real estate professionals, I would like to thank you, our Clients and Colleagues, for your support and trust. Our relationship with you is the thing we value most and will never take for granted. For 2012 our promise is to help you meet your real estate goals now and in the future, taking advantage of every available opportunity. As a firm we are about to start our 40th year in business in Phoenix with what I believe is the best team in the industry. While we continued to face economic challenges in 2011, there is no doubt that we saw growth and stability in nearly every sector of the Arizona commercial real estate market. Multi-Family, Industrial and Capital Markets led the way with strong sale and absorption numbers. We believe that while the growth in Office, Retail and Land has been slower to return, there are definite signs of life in the market. As we look ahead to 2012 we anticipate continued improvement and hope that the year-end news of four straight months of job growth and improvement in the residential housing market are all signs that we are moving forward in our recovery. We are beginning the New Year in our elegant, remodeled office space. We survived the purging, packing and construction and the end result is we have a first class space that reflects the caliber of people inside of it. You are invited to come by anytime and see the new office. 2012 will bring one more transformation as we complete our rebranding efforts by dropping the BRE Commercial portion of our name. Along with our Western counterparts in Southern California, Northern California and Denver, we will be known as Cassidy Turley, leveraging the outstanding reputation and expertise of the company we are so proud to be a part of.
2012 Real Estate Forecast Metropolitan Phoenix • Arizona 2375 East Camelback Road, Suite 300 | 602.954.9000 | www.cassidyturley.com Capital Markets | Corporate Services | Project & Development Services | Project Leasing | Property Management | Tenant Representation Letter from the President & Managing Partner Dear Valued Clients and Colleagues, On behalf of all our real estate professionals, I would like to thank you, our Clients and Colleagues, for your support and trust. Our relationship with you is the thing we value most and will never take for granted. For 2012 our promise is to help you meet your real estate goals now and in the future, taking advantage of every available opportunity. As a firm we are about to start our 40th year in business in Phoenix with what I believe is the best team in the industry. While we continued to face economic challenges in 2011, there is no doubt that we saw growth and stability in nearly every sector of the Arizona commercial real estate market. Multi-Family, Industrial and Capital Markets led the way with strong sale and absorption numbers. We believe that while the growth in Office, Retail and Land has been slower to return, there are definite signs of life in the market. As we look ahead to 2012 we anticipate continued improvement and hope that the year-end news of four straight months of job growth and improvement in the residential housing market are all signs that we are moving forward in our recovery. We are beginning the New Year in our elegant, remodeled office space. We survived the purging, packing and construction and the end result is we have a first class space that reflects the caliber of people inside of it. You are invited to come by anytime and see the new office. 2012 will bring one more transformation as we complete our rebranding efforts by dropping the BRE Commercial portion of our name. Along with our Western counterparts in Southern California, Northern California and Denver, we will be known as Cassidy Turley, leveraging the outstanding reputation and expertise of the company we are so proud to be a part of. During challenging economic times we all look for insight and answers. Our promise to you is that we will continue to enhance the resources and services we provide to you. We are pleased to present you with the 2012 Real Estate Forecast and as you review the enclosed information, we hope you will continue to think of Cassidy Turley to fulfill all of your commercial real estate service needs. Sincerely, Bryon R. Carney President & Managing Partner Cassidy Turley Arizona 2 | cassidyturley.com Table of Contents U.S. Macro Forecast .......................... 4 Capital Markets Report ....................... 8 Industrial Report ............................... 9 Land Report ...................................... 10 Multi-Family Report ........................... 11 Office Report ..................................... 12 Retail Report ..................................... 13 Company Overview & Key Facts ........... 14 Sources & Contributors....................... 15 3 | cassidyturley.com U.S. Macro Forecast Forecast U.S. Macro November 2011 November 2011 Slow and Bumpy, and Occasionally Scary Kevin J. Thorpe, Chief Economist Click to view U.S. Macro Forecast The U.S. has avoided another recession, but economic conditions couldn’t feel more uncomfortable – at the moment. The third quarter GDP numbers were actually quite solid. Real GDP grew at an annualized rate of 2.5%, more than double the average growth rate registered in the first half of 2011. Best of all, demand from both consumers and businesses picked up in Q3. A measure called real final sales – which is GDP minus the change in inventories – grew at a 3.6% rate. That is triple the rate of growth compared to the first two quarters of the year. Although regional details have not yet been released, recent employment data give us a sense of which markets are driving growth. The top ten markets in terms of job creation in the third quarter include: Houston, TX, New York, NY, Warren, MI, Washington DC, Tampa, FL, San Jose, CA, Phoenix, AZ, San Francisco, CA, Riverside, CA, and Oakland, CA. Still Deleveraging Suppressing Economic Growth Household Debt-to-GDP Real GDP, % chg 100% 5% Well below 4% potential GDP 80% 3% 60% Historical Average 2% 40% 1% 0% 20% -1% 2000 2002 2004 2006 2008 2010 2012 0% -2% -3% 19 2 19 1 19 4 19 3 19 2 19 1 19 4 19 3 19 2 20 1 20 4 20 3 2 Q Q Q Q Q Q Q Q Q Q Q Q Q 54 59 63 68 73 78 82 87 92 97 01 06 11 -4% 19 Source: Federal Reserve Source: BEA, Cassidy Turley Although the odds of a near-term recession have been greatly reduced, the economic challenges are far from over. In mapping out the trajectory over the next few years, it is worth remembering that this remains a deleveraging recovery. That means the debt-overhang – caused by the 10-15 year credit-asset bubble – will continue to weigh down consumption for many years. According to the Federal Reserve, household debt to GDP was 89% in the second quarter of 2011. While that is better than the 100% in 2009, it is at least 20% above where it needs to be before we can expect steady-strong consumer spending patterns to replace erratic-weak ones. Moreover, under current law and spending policies, the Federal government will soon become a significant drag on the U.S. economy. Depending on what lawmakers agree to between now and the end of 2011, the impact of Federal fiscal policy will likely be a cut in real GDP growth of nearly 1% in 2012. Thus, even if the U.S. economic recovery were to follow a healthy script from this point forward, economic growth will still remain largely suppressed. Real GDP will grow at an average rate of 2% in 2012, with greater odds that the growth rate will be closer to 1% than it is to 3%. Dark Cloud - European Debt Crisis Since the debt-overhang minimizes growth prospects, the U.S. economy remains extremely vulnerable to external shocks. The European sovereign debt crisis remains the biggest threat. The debt problems in Europe have been well documented, but the fear is that this crisis could reverberate back to the U.S in a number of ways. First, the U.S. does a fair amount of trade with Europe: $20 billion in goods are traded each month with France and Germany alone. If those nations’ economies sink further, U.S. imports and exports will be impacted. Second, U.S. banks have around $100 billion (0.7% of GDP) in direct exposure to foreign debt (and an unquantifiable amount of indirect exposure) – so if the whole financial system in Europe were to collapse, U.S. banks would take a sizable hit. Third, and probably most important, consumer confidence continues to be negatively impacted by the situation in Europe. The latest reading of the Consumer Confidence Index from The Conference Board was 39.8 – consistent with recessionary levels. cassidyturley.com 4 |cassidyturley.com | 1 U.S. Macro Forecast Forecast U.S. Macro November 2011 November 2011 Dark Cloud: Europe Making U.S. Nervous 10-Yr Sovereign Debt Yields 150 24 125 20 100 16 October reading 75 12 50 8 Low point during 39.8 25 recession 4 25.3 0 0 Fe -00 Fe -02 Fe -04 Fe 06 Fe -08 Fe -10 Oc -01 Oc -03 Oc -05 Oc -07 Oc -09 Oc -11 Ju -01 Ju -03 Ju -05 Ju -07 Ju -09 1 Jan- May- Sep- Jan- Jun- Oct- Mar- Jul- Nov- Mar- Sep- t-1 n- n n n n n b b b b b b t t t t t 00 08 08 09 09 09 10 10 10 11 11 Ju Germany Portugal Italy Ireland Greece Spain U.K Consumer Confidence Index Source: Moody’s Source: The Conference Board At the G-20 summit in Cannes in late-October, euro-zone leaders announced a plan to address the ongoing debt crisis. The main elements of the plan include a substantial restructuring of Greek debt (where Greek private sector bond holders take a 50% haircut), a bigger bailout fund, and recapitalizing European banks. But the situation is hardly resolved and government policy remains virtually a wild card at this stage. As of now, our assumption is that a “comprehensive plan” will eventually be worked out in Europe and a severe downturn will be avoided. But this assumption may amount to a “leap of faith” and any sudden change could dramatically alter the economic outlook. Commercial Real Estate Outlook Commercial real estate has already demonstrated for a solid 18 months that it can perform reasonably well in the throes of a deleveraging recovery. In fact, since April of 2010, the U.S. office sector has absorbed 61.6 million square feet (msf), the industrial sector has absorbed 91.5 msf, and the apartment sector has absorbed 324,000 units. For the office and industrial sectors, the current pace of demand is not far off from pre-recession (2005 and 2006) levels, and the apartment sector is registering the strongest levels of demand since the technology boom of the later 1990s. Retail is the one commercial sector that continues to lag behind. Demand for retail space did turn positive in the first quarter of 2011 (+704,000 msf), but rising gas prices in the early summer took its toll on consumer spending. The retail sector shed more space than it absorbed in Q2 and Q3 of this year. With retail sales having shown flashes of an uptrend in August and September, it is reasonable to expect that the retail sector will begin absorbing space again in early 2012. Demand Since 2010 Q2 Demand Forecast - 2012 Net Absorption Net Absorption 80 150,000 100 400,000 125,000 80 60 300,000 100,000 # of Units 60 # of Units Mill. SF Mill. SF 200,000 40 75,000 40 50,000 100,000 20 20 25,000 0 0 0 0 Office Industrial Retail Multifamily Office Industrial Retail Multifamily (right axis) (right axis) Source: Cassidy Turley Source: Cassidy Turley Investment sales remain healthy, but the pace of activity has slowed recently. Sales volume for all product type fell from $58.5 billion in the second quarter of 2011 to $49.8 billion in the third quarter, a drop of 15%. The decline was broad-based: office sales off 5%, industrial down 6%, retail sales down 47%, apartment units down 4%. The markets reporting the biggest drop in sales in Q3 include Washington DC and San Francisco. Because these two markets were among the leaders prior to this point, a natural slowdown from very strong levels was expected. Manhattan, Boston, Houston, Las Vegas, Philadelphia all recorded huge increases in sales volume in Q3. cassidyturley.com 5 | cassidyturley.com | 2 U.S. Macro Forecast Forecast U.S. Macro November 2011 November 2011 Nevertheless, it is clear that investment sales have lost momentum, but it is certainly explainable. Given the numerous shocks that occurred in the first half of 2011 – the debt ceiling debate, the S&P downgrade of U.S. credit, the European crisis worsening, plunging consumer confidence – it is no surprise that investor demand eased in Q3. Given the global uncertainty, lenders pulled back. In August, CMBS issuance dropped 50%, and AAA spreads over swaps jumped from 170 bps in May to 330 bps in October. Investment Sales Slow in Q3 Low Interest Rates for a Long Time $70 4.0% QE2 $60 3.5% ends S&P 3.0% Downgrade $50 Operation 2.5% Twist Billions $40 2.0% Fed $30 1.5% announces low rates $20 1.0% thru 2013 0.5% $10 0.0% $0 3/1/11 3/14/11 3/27/11 4/9/11 4/22/11 5/5/11 5/18/11 5/31/11 6/13/11 6/26/11 7/9/11 7/22/11 8/4/11 8/17/11 8/30/11 9/12/11 9/25/11 10/8/11 10/21/11 Q1 Q2 20 3 Q4 Q1 Q2 Q3 20 4 Q1 Q2 Q3 Q Q 09 09 09 09 10 10 10 10 11 11 11 20 20 20 20 20 20 20 20 20 Closed $ Volume 10-Year Treas. Source: Real Capital Analytics Source: Moody’s Assuming no additional shocks to the economy at this point, the CMBS market will reactivate in larger volume numbers, and spreads will begin to tighten in 2011Q4. CMBS issuance will reach $30 billion in 2011, and will near $40 billion in 2012, fueled in part by refinancing needs. That level of CMBS lending in 2012 is consistent with 2004 levels of investment sales. Moreover, assuming the recovery follows the recovery script as we have laid out, investor demand will continue to spread beyond the primary trophy markets – D.C., New York and San Francisco. This trend has already begun. Sales volumes in Atlanta, San Diego, Pittsburgh, Philadelphia, Las Vegas and Phoenix were at least 30% higher in the third quarter than a year ago, and in some of these markets sales growth was in triple digits. Assuming the recovery continues on the recent trajectory of the last few weeks, secondary and tertiary markets will see much stronger sales activity in 2012. If the U.S. economic recovery falters, then we will see a flight back to safety, which disproportionately benefits New York, Boston, San Francisco and DC. Interest rates will remain low into the foreseeable future. In September, the U.S. sold $21 billion of 10 year bonds at an average interest rate of 2.12%. This suggests that despite the increased risks associated with U.S. debt, there has been no drop in demand for Treasuries whatsoever. Thus, investor demand for U.S. bonds – fueled by a flight to safety in a rocky recovery – will continue to keep rates down. Moreover, on August 9th, the Federal Reserve announced it will keep interest rates exceptionally low at least through mid-2013, and on September 21st it announced Operation Twist (selling $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds). This, in combination with a strong possibility of another round of quantitative easing (QE3) in the beginning of 2012 further argues that 10-year Treasury yields will remain below 3% though 2012. The odds of another round of QE3 will rise above 50% if there is any sign of disinflation or deflationary pressures in the near term. Double-Dip discussion not over yet Although the most probable scenario is that U.S. economy will continue to expand, we have not heard the last of the double-dip rhetoric. The slow growth scenario means that the consumer is continuously holding their finger over the panic button. If anything strays from the script, then confidence plunges, spending slows, businesses slow or stop hiring, and the economic landscape turns very scary, very quickly. Despite the heightened anxiety, the property markets will generally continue on a slow recovery track in 2012. Demand for office and industrial space next year will resemble 2011 levels, the apartment sector will continue to shine, and the retail sector will see its first year of positive absorption since 2007. If it continues to be a slow and bumpy recovery, we’ll take it – we are expecting it. Let’s just try to avoid scary for a little while… cassidyturley.com 6 | cassidyturley.com | 3 U.S. Macro Forecast Forecast U.S. Macro November 2011 November 2011 Baseline Scenario: 2010 2011 2012 Annual Q4 Q1 Q2 Q3 Q4 Q1 Q2 2010 2011 2012 US Economy Real GDP (a) 2.4 0.4 1.3 2.5 2.2 1.4 2.0 3.0 1.6 2.0 Nonfarm Employment (b) 245 422 467 230 250 343 360 940* 1,323 1,420 Ofﬁce-using Employment (b) 122 148 143 57 93 120 126 307* 441 497 Unemployment Rate 9.6 8.9 9.1 9.1 9.1 9.1 9.0 9.6 9.1 9.0 Retail Sales 12.4 10.5 4.7 4.5 8.0 4.0 5.5 6.4 6.9 7.0 CPI Inﬂation (a) 1.2 2.2 3.3 3.8 2.5 2.0 2.1 1.7 3.0 2.2 CCI 57 67 62 50 42 46 54 54 55 54 Fed Funds Rate 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1 10-year Gov't Bond 2.9 3.5 3.2 2.4 2.3 2.5 2.7 3.2 2.8 2.9 ISM Manufacturing Index 57.9 61.1 56.4 51.0 53.0 55.5 54.0 57.3 55.4 55.0 West Texas Intermediate 85 94 103 90 91 92 94 79 94 98 Ofﬁce Sector Net Absorption (c) 9.3 10.4 12.2 15.0 14.1 14.9 15.6 19.7 51.7 56.5 Vacancy 16.8% 16.6% 16.4% 16.2% 16.0% 15.9% 15.7% 16.9% 16.3% 15.6% New Deliveries (c) 4.7 6.2 4.9 4.7 -- -- -- 33.6 20.9 25.5 Asking Rents $21.30 $21.35 $21.35 $21.39 $21.40 $21.45 $21.50 $21.34 $21.37 $21.53 Investment Sales (d) $19.5 $10.1 $15.0 $14.3 $15.1 $12.0 $15.8 $43.3 $54.5 $61.0 Industrial Sector Net Absorption (c) 10.4 24.7 22.4 24.7 18.0 15.5 17.4 (8.7) 89.8 69.6 Vacancy 9.7% 9.5% 9.3% 9.2% 9.1% 9.0% 8.8% 9.8% 9.3% 8.8% New Deliveries (c) 1.3 6.0 4.9 9.5 -- -- -- 15.0 27.2 26.9 Asking Rents $5.07 $5.05 $5.09 $5.13 $5.14 $5.16 $5.18 $5.13 $5.10 $5.20 Investment Sales (d) $8.5 $4.2 $7.0 $6.6 $9.0 $6.5 $7.2 $16.6 $26.8 $28.2 Retail Sector** Net Absorption (c) 0.4 0.7 (0.4) (0.0) (0.4) 0.9 2.1 (3.2) (0.2) 8.2 Vacancy 11.0% 10.9% 11.0% 11.0% 11.1% 11.2% 11.3% 11.0% 11.0% 10.9% New Deliveries (c) 0.8 0.2 1.0 0.8 -- -- -- 4.5 4.2 12.7 Asking Rents $18.99 $18.97 $18.97 $18.97 $18.95 $18.95 $18.96 $18.99 $18.97 $18.99 Investment Sales (d) $8.6 $6.2 $15.7 $8.2 $11.1 $6.3 $9.0 $19.7 $41.2 $30.2 Apartment Sector** Net Absorption (e) 58.3 44.8 42.1 35.8 44.8 32.0 30.0 228.0 167.5 120.0 Vacancy 6.6% 6.2% 5.9% 5.6% 5.3% 5.1% 5.0% 6.6% 5.8% 4.9% New Deliveries (e) 14.1 7.5 10.5 8.2 -- -- -- 97.7 38.0 88.8 Asking Rents $1,043 $1,047 $1,053 $1,059 $1,065 $1,069 $1,072 $1,043 $1,056 $1,110 Investment Sales (d) $13.3 $9.1 $13.8 $13.3 $13.0 $12.0 $9.4 $32.4 $49.2 $48.5 (a) - Annualized Growth Rate, Quarter-over-Quarter (c) - Millions square feet (e) -Thousands **Reis & RCA Historical data; Cassidy Turley Forecasts (b) - Thousands, SA, Quarterly Chg. (d) - Quarterly Sum, Billions *December 2010 over Dec 2009 cassidyturley.com 7 | cassidyturley.com | 4 Capital Markets Forecast Metropolitan Phoenix • Arizona • 2012 Investment transactions in the Key Capital Markets Transactions 2011 coastal gateway markets were robust Buyer Seller Type Property Name Size (SF) Sale Price (Millions) in 2011. These markets, such as Cole Real Estate Apollo Group, Inc Office University of 599,664 $170.0 Washington D.C., New York, Boston Investments Phoenix KBS Realty Advisors Metro Office Fountainhead 439,070 $137.0 and Los Angeles, have experienced Commercial Office Plaza strong demand to purchase a limited Sales by Property Type Properties number of core assets, with cap rates Morgan Stanley & Co. McCarthy Cook Office Viad Tower 482,108 $56.0 Inc. on many properties as low as 5 to 6 Apartment Karlin Real Estate Herberger 34% Retail Shea Scottsdale 277,253 $50.3 percent. Investors are expected to shift Industrial 38% Enterprises, Inc Shopping Center their strategies in 2012 in search of Office Crexus Investment Corp. Alliance Beverage Industrial Papago West 629,764 $33.25 Retail Distributing 13% 15% higher yields with a strong interest in Metropolitan Phoenix. year-over-year with continued distressed Average Capitalization Rates Sales by Property Type Property Type Sales by (Closed Sales) Average Capitalization Rates sales as well as institutional purchases 2011 of class A properties leased to credit 10.0% tenants. 8.0% Apartment Demand for Metropolitan Phoenix 38% 34% investment property is expected to Industrial 6.0% Office remain strong in 2012, but will consist primarily of smaller transactions below Retail 13% 15% 4.0% Apartment Industrial Office Retail 10 million dollars. Although financial 2010 2011 markets remain turbulent and the economic recovery choppy, real estate All property types experienced an as an investment class is considered to increase in sales volume year-over-year, Because of the strong leasing in large be an excellent alternative. Average Capitalization Rates causing investment sales to increase Property Sales state-of-the-art and Volume ($1 Million warehouse/distribution above) 10.0% Property Sales Volume nearly 73 percent in 2011. As lenders buildings in 2011, investment sale $12,000 ($1 Million and above) Property Sales Volume continue to sell their distressed assets transactions increased sharply in the $10,000 ($1 Million and above) Millions and owners recycle capital, investment second half in the second half of the $8,000 $12,000 8.0% $6,000 sales volume is expected to increase, year and are expected to remain strong $10,000 Millions $4,000 $8,000 albeit slightly, in 2012. In 2011, in 2012. The bulk of the industrial $2,000 $6,000 several owners took advantage of a 6.0% investment transactions occurred in the $0 $4,000 03 04 05 06 07 08 09 10 $2,000 large pool of investors by selling trophy Southwest Valley, where most of the $0 assets, with several large transactions leasing activity occurred in 2011. In 04 05 06 07 08 09 10 11 greater than 20 million dollars. 4.0% some cases, sale prices have reached or Apartment million dollars Transactions over 20Industrial Office Retail exceeded replacement cost, signaling As demand for investment real estate nearly doubled in 2011. In 2012, 2010 2011 a bullish outlook by investors. Retail in Arizona increases, 2012 will be the REIT’s and institutional owners will investment properties saw the largest year to purchase these assets. 2012 continue to seek stabilized, triple net increase of all property types in 2011 will be a great year to bring a stabilized leased, class A properties, while private with more than double the transaction asset or well located property to market investors will focus on lender sales of volume from the previous year. Office as buyer interest is strong. value-added properties. smaller, Property Sales Volume investment transactions also increased ($1 Million and above) 8 | cassidyturley.com $12,000 $10,000 ns Industrial Forecast Metropolitan Phoenix • Arizona • 2012 In 2011, the Metropolitan Phoenix Key Industrial Transactions 2011 industrial market experienced strong net Lessee/Buyer Lessor/Seller Property Submarket Size (SF) absorption, outperforming most of the Amazon.com, Inc. Buzz Oates Fowler Distribution Center Bldg 2 Southwest 1,267,110 country. In fact, it has outperformed the Enterprises Phoenix national average and ranks second out Dick's Sporting Goods Sunbelt Holdings Dick's Sporting Goods Distribution Glendale 600,000 Industrial Graphs of the top 67 markets covered in the Amazon Duke Realty Buckeye Logistics Center - Phase I Southwest 400,000 United States in terms of positive net Corporation Phoenix Vacancy Rate Home Depot USA, Inc JD Partsmaster, LLC 7200 W Buckeye Rd Southwest 400,000 quarter 2011. Total % absorption as of the third Nine Quarters Last Phoenix Vacancy Rate Nationally, the U.S. industrial sector '01 9.60% 18% Cornerstone Services, Utah State Interstate Logistics Center, Bldg. 1 Southwest 337,897 Industrial Graphs '02 has been on a hot streak. The ISM 11.00% '03 Inc 11.00% Retirement 15% Phoenix or index has been at 50 '04 above since 10.90% 12% '05 7.70% September 2009. A reading of 50 or 2012 but remain sluggish compared to 9% the reemergence of speculative '06 6.50% above indicates that the manufacturing '07 8.40% balance of the market. Some second the 6% construction. '08 13.00% Vacancy Rate sector is in expansion mode, a leading generation space with obsolete features 18% 3% '04 '06 '08 10 12F 09 15.20% Due to the financial crisis and elevated indicator for industrial space demand. 10 could experience rental rate declines as 14.20% 15% Millions 11 12.1% construction costs speculative 12F small businesses continue to struggle 12.0% 12% construction has been absent from Vacancy Rate with financing their operations and 9% the market in recent years. In many Year-End lethargic business demand. Tenants Completions vs. Absorption Vacancy Rate 6% cases, these new speculative projects 18% and owner/users Last Nine Quarters Completions Net Absorption in the market should Completions vs. Net Absorption '01 7660.0 3% -1419.7 could be significantly preleased when 15% by take action '06 locking in discounted 12F 5269.0'04 '08 10 16 '02 1369.0 completed. Build-to-suit and owner- 12% '03 Millions rental rates for the long term and sale 2675.0 2000.5 12 '04 3272.0 4019.4 built construction activity increased 9% prices for buildings, as these rates may 8 '05 3345.0 7883.7 sharply in 2011 and is expected to 6% '06 never dip to these levels again. 5234.0 6350.4 4 '07 9262.0 4046.7 remain strong in 2012. Investors and 0 3% '08 11,575 (2,189.0) developers are once again actively '04 '06 '08 10 12F -4 09 3,385.0 (2,777.0) llions 10 1,342.0 Completion vs. Net Absorption 3,500 '04 '06 '08 searching for affordable, entitled,12F 10 et Absorption 11P 1,082 Completions SF) Year-End (In Millions of vs. Net Absorption 6,000 Completions Net Absorption shovel-ready land in time for the next -1419.7 12F 2,410 5,000 16 development cycle. 1369.0 Market fundamentals have been 2000.5 12 Asking three years gradually improving the pastRental Rates 4019.4 General Industr 8 R&D/flex Warehouse/Dist. Asking Rental Rates as vacancy rates peaked in mid-2009 7883.7 Completions vs. Net Absorption '01 $6.72 $10.32 $4.20 Year-End ($SF/Yr./Triple Net) Rates Asking Rental 6350.415.2 percent. Net '02 at 16 absorption levels 4 $6.36 $10.44 $4.08 $15.00 4046.7 climbed back to'03 have pre-recession $6.72 0 $10.56 $4.44 12 '04 $6.36 $11.52 $4.08 (2,189.0) '05 $6.60 $11.76 $5.16 levels (2,777.0)8 and are expected to surpass '06 -4 $7.32 '04 '06 $12.24 '08 10 12F $6.00 $11.00 as 6 million square feet '07 the vacancy 3,500 4 $7.36 $13.42 $6.10 6,000 0 is expected to decline by year- rate '08 $7.56 Completions $12.72 Net Absorption $5.64 $7.00 09 5,000 2012. Due to increased demand, $6.76 $12.31 $4.72 end-4 10 $6.48 $11.40 $4.32 $3.00 '04 '06 '08 10 12F weighted average asking rental rates 11P $6.48 $11.40 $4.32 '04 '06 '08 10 12F 12F $6.80 $11.97 $4.54 General Industrial R&D/flex Completions are expected to rise this Net Absorption a year, albeit Because of the lack of large available Warehouse/Dist. R&D/flex modest 2.5 to 5 percent marketwide. Warehouse/Dist. industrial properties, construction $10.32 tenant space demand, under Small $4.20 Asking Rental Rates activity is expected to increase $10.44 $4.08 30,000 square feet, will improve in throughout 2012, including $15.00 $10.56 $4.44 $11.52 $4.08 Asking Rental Rates $11.76 $5.16 $11.00 $12.24 $15.00 $6.00 9 | cassidyturley.com $13.42 $6.10 $12.72 $11.00 $5.64 $7.00 Page 1 Land Forecast Metropolitan Phoenix • Arizona • 2012 With signs of a recovery in the housing retail and employment, an abundance in the near future. Since the crash of market, home builders are expected of housing, and transportation routes. the real estate market, many of these to increase land and lot purchases in sites have gone back to the lender or Interest in multi-family and industrial mid-2012, albeit modestly. 2011 will the previous owner. Due to the rise of zoned land is expected to increase go down as one of the worst years for commodity prices such as cotton, many in 2012. Demand for both finished single family permits in Metropolitan farmers have re-entered the market product types improved greatly in Phoenix. Permits are expected to be purchasing and leasing farmland. In 2011 and is expected to increase in around 7,500 at year-end 2011 with a 2012. As foreclosures remain elevated many instances, these parcels are modest increase in 2012 to 10,500. and conventional financing remains trading at a fraction of the price during On a positive note, active home listings tight, demand for apartment units has the 2003 thru 2007 periods. have been dwindling throughout 2011 increased driving occupancy and rental Despite challenging economic as foreclosures have been slowly rates up. Due to these circumstances conditions, Arizona is once again on declining since the first quarter of multi-family and industrial developers Investors radars. For owners who have 2009. Active home listings dropped are back in the market actively pursuing entitled, shovel-ready land in the below 30,000 for the first time since land sites. path of development, 2012 will be a early 2006 and both detached new During the height of the real estate good year to bring those properties to home and resale median home prices boom, farmland on the edge of the market. 2012 will be a crucial year to held steady in 2011. Year Number of Permits Valley was purchased at an alarming lock up prime land parcels for the next s Price Median Sales 1988 vs. Median List Price Price 15,085 rate with plans to develop the land development cycle. 1989 11,825 350,000 1990 10,614 1991 13,677 Annual Housing Permits 300,000 250,000 1992 18,654 Annual Housing Permits 1993 22,226 Metro Phoenix 200,000 1994 26,852 150,000 1995 27,275 60,000 100,000 1996 27,742 50,000 50,000 1997 30,299 40,000 0 1998 35,385 4Q04 4Q05 4Q06 1999 4Q07 4Q08 4Q09 4Q10 4Q11 35,744 30,000 List Price Median Sales Price 2000 32,563 20,000 2001 33,932 2002 35,326 10,000 2003 Lenders sold most of the41,294 finished 0 2004 61,754 2004 2006 2008 2010 2012F lots and residential land 58,760 in 2005 parcels 2006 2008 thru 2011. 2012 is expected to 40,048 2007 29,388 experience more distressed commercial 2008 13,242 and industrial zoned land8,388 improved 2009 and Key Land Transactions 2011 2010 7,106 Buyer Seller Location Use Type Acres Sale Price (Millions) parcels changing hands. Investors are 2011 7,458 Arcus Private The Goldman Hwy 238 & 91st Ave Master Planned 10,200 $32,500,000.00 actively pursuing distressed prime 2012F 8,800 Sachs Group, Inc. Capital Solutions Development freeway interchange and hard corner Jen Partners LLC Angelo Gordon Ocotillo Rd & Recker Single Family 298 $23,000,000.00 & Co Rd/NWC & Multi-Family sites. In many cases, these are once in Gray Development MidFirst Bank Scottsdale Rd & Multi-Family/ 4.31 $15,000,000.00 a lifetime opportunities to own. Infill Group Camelback Rd/NNEC Mixed Use sites are expected to receive most of First Solar DMB Holding LP Signal Butte Rd/Elliot Industrial 133.17 $11,601,916.00 Rd/SWC the interest due to the fact that they are El Dorado First National Loop 202 & Elliot Rd/ Mixed Use 128.64 $10,790,500.00 usually located near utilities, existing Holdings Bank of Wynne NEC 10 | cassidyturley.com Apartment Prices Per SQFT $130.00 $100.00 108 Multi-Family Forecast 118 $70.00 116 63 63 $40.00 109 Metropolitan Phoenix • Arizona11 2012 05 07 09 • After five years of inactivity, multi- Historical Multi-Family Permits reaching $776.00. The jump in Column3 Column4 Year-End family development will see signs of Permits rental rates for key markets was even life in 2012. A lack of new deliveries 8000 higher with average rents of $927.00 since 2007 and quarterly declines MF Charts in Scottsdale, $882.00 in Chandler, 6000 in vacancy rates have created an $863.00 in Tempe and $857.00 in environment of need for new multi- 4000 Central Phoenix. For property owners Vacancy Rate Column1 100 + units family product in key % the increase in rents has not come 01 7.6 submarkets. 2000 02 Scottsdale, Tempe .and Chandler will 9 46% at the expense of having to give up 0 15% 03 lead the way with 9.90% for several plans 04 06 08 10 12F more, as concessions for new renters 04 8.84% thousand new Chip .77% wave of new 2038 per Eller Blue units.6This 10% continues to decline. For rents and 05 6 1 42 06 3584 per Eller construction should7accommodate the 7. 8% absorption to continue an upward Over the past year vacancy rates in 5% 07 10.18% climb and a decline and a continued 08 11 luxury need for additional.88% apartments, Metropolitan Phoenix dropped nearly 09 but because the 13.43% units are in planned 300 basis points, ending 2011 decline in concessions, there has 0% 04 06 08 10 12F 10 10.80% to be improvement in the economy, the highest demand submarkets they below 8.5 percent. Eight out of 11 11 8.40% should not result in5overbuilding. 2011 submarkets had single-digit vacancy specifically job growth. 12F 7. 0% will end the year with overall absorption rates. The Glendale/West Valley, East Apartment Prices of over 5,000 units, Average Apartment Prices per sft about two percent Phoenix and West Phoenix submarkets Per SF Apartment Prices Per SQFT Year of the Valley’s total Price Column1 partment inventory. continue to lag with vacancy rates 03 $ 61.00 $130.00 from that range from 11 to nearly 04 $ 75.00 05 $ 91.00 CoStar #s 14 percent. These markets have not $100.00 06 $ Vacancy Rate 111.00 108 seen the same levels of improvement 07 Year-End $ 121.00 118 because their supply of multi-family $70.00 08 $ 106 116 09 $ 72 63 units were delivered later in the last 15% 10 $ 66 63 development cycle and a larger supply $40.00 11 $ 71 109 05 07 09 11 10% of single family residential rental 12F homes. 5% Rents in Metropolitan Phoenix bounced Investor interest in Arizona and 0% Asking Rental Rates Column1 Column2 Column3 back Column4 to 2007 levels with overall rates 04 06 08 10assA 12F Metropolitan Phoenix remains strong. Permits Last Nine Years Permits Cl at the end of third quarter 2011 Capitalization rates for multi-family 01 7201 8000 02 5351 units are at or near record lows and Page 1 03 4836 6000 04 4997 should remain at current levels through Key Multi-Family Transactions 2011 05 3250 2012. The loosening of capital markets 4000 06 Buyer 392 Per SQFT Apartment Prices2 Seller Property Name Class # Units Sale Price (Millions) resulted in more available funds, and 07 Weidner Investments $130.00 6676 Trillium Residential LLC Pinnacle Peak A 724 $76,000,000 2000 08 6365 Apartments investors put multi-family properties at 09 637 0 the top of the list for their desired asset AEW Capital $100.00 Pillar Communities,LLC GlenEagles A 330 $55,422,000 04 06 08 10 12F 10 500 11 Management, L.P. 1642 2038 per Eller Blue Chip 1642 class. The market saw a jump in the 12F Pierce Education $70.00 250 Partners, LP JLB 0 Block 1949 3584 per Eller A 225 $52,000,000 number of complexes sold, as well as Properties the price per unit/price per square foot Weidner Apartment Spruce Grove Inc Red Mountain Villas A 768 $46,000,000 $40.00 across all asset classes. Homes Apartments 05 07 09 11 Cornerstone Real GID Investment LLC Windsor at Mountain A 360 $44,550,000 Estate Advisers LLC Park Ranch 11 | cassidyturley.com Permits 8000 Office Graphs Office Forecast Vacancy Rate Metropolitan Phoenix • Arizona • 2012 30% 25% Office Graphs 20% As a result of the financial crisis from for potential build-to-suits. In 2012, tenants and a lack of strong new office 2007 to 2010, Arizona experienced small to midsize tenants with 1,000 to demand, although at a much slower 15% a major reduction in total non- 20,000 SF requirements will make up pace. Proactive landlords that met 10% '04 '06 '08 '10 '12F farm employment. Coupled with a majority of the greater Phoenix office new market conditions head-on will Vacancy Rate an oversupply of new and resale market demand. Increased interest 30% continue to have success, but may residential property, commercial real from these tenants will gradually 25% still face aggressive competition from estate suffered a tremendous blow. pick up throughout the coming year Completions were Absorption new owners of whatvs. Netpreviously 20% 4 Commercial rental and sales prices helping to absorb the remaining class A distressed assets. The reduced cost 3 plummeted and any momentum from vacancies and eventually reducing the 15% basis and more stabilization evident 2 average job growth that occurred high vacancies in class B office space. 10% will1allow these new owners to '04 '06 '08 '10 '12F 0 between 2000 and 2005 came to a potentially continue to drive average -1 grinding halt. Enter 2011, the year Completion vs. Net Absorption rental rates downward between an -2 Year-End (In Millions of SF) '04 '06 '08 '10 '12F which should have marked a decided additional 4 to 8 percent during 2012. Completions vs. Net Absorption Completions Net Absorbtion turn around to the economy nationally 4 Asking Rental Rates resulting in a rebound in Arizona’s 3 Year-End ($/SF/Yr./Full Service) Asking Rental Rates economic growth. Our forecast for 2 $32.50 2011 was poised to hit its mark but 1 0 complications with the U.S. debt $27.50 -1 ceiling and Europe’s debt crisis stalled -2 Office Graphs '04 '06 '08 '10 '12F Arizona’s economy, along with that of $22.50 Completions Net Absorbtion the nation. $17.50 '04 '06 '08 '10 '12F Asking Rental Rates Vacancy Rate Class A ClassB $32.50 Year-End Stabilization of rental rates Valleywide Vacancy Rate 30% throughout 2012 will result in tenant’s $27.50 Several smaller tenants with newer 25% having options available to them to business models, with whom landlords $22.50 either make lateral submarket moves 20% where willing to take a chance on or venture to new locations/submarkets 15% $17.50 during the economic downturn, will within core urban '08 '04 '06 areas (inside the '10 '12F continue to fill a niche and expand 10% of the 101 boundaries Class A Loop ClassB& 202). '04 '06 '08 '10 '12F in-place due to business growth. Suburban submarkets will continue to Gradual positive employment growth see change in ownership, downward and personal savings will help to push pricing pressure in order to attract Looking ahead to 2012 landlords will Completions vs. Net Absorption vacancy lower. continue to face challenges related 4 Key Office Leasing Transactions 2011 Page 1 to 3 property values, soft rental low 2 Lessee/Buyer Lessor/Seller Property Submarket Size (SF) rates and lack of substantial job Phoenix School of Law Mitsubishi Real Estate 1 N. Central Avenue Downtown South 205,130 1 New York, Inc. growth. Large blocks of premier class 0 United Healthcare Liberty Property Trust 4425 E. Cotton Center Blvd Airport Area 165,000 office space have virtually all been A -1 -2 absorbed by tenants who made a “flight Lexus Financial Services Wells Real Estate 3200 W. Ray Road Tempe South/ 133,317 '04 '06 '08 '10 '12F Funds Chandler leaving remaining to quality,”Completionsthe Net Absorbtion Fennemore Craig Florida State Board If 2394 E. Camelback Road Camelback Corridor 121,000 Administration handful of very large corporate users Fender Musical Instruments WDP 17600, LLC Page 1 17600 N. Perimeter Dr Scottsdale Airpark 119,681 in the marketplace with the option Asking Rental Rates $32.50 12 | cassidyturley.com $27.50 $22.50 Vacancy Rate 14% 12% 10% 8% Retail Forecast 6% 4% 2% '04 '06 '08 '10 '12F Metropolitan Phoenix • Arizona • 2012 Completions vs. Net Absorption Arizona will continue to parallel the will continue to drive much of the We anticipate no new major speculative Nation from the standpoint of demand small shop leasing within Metropolitan development will occur until 2014. for retail products as consumers Phoenix. Fast casual food chains Repositioning of tenants to higher focus on their own financial well such as Five Guys Burgers and Fries, quality or better located space will not being. With retail job losses equal to Raisin’ Canes, Chipotle, Jimmy John’s result in positive net growth. The direct approximately 9 percent of all jobs lost and others will continue to wrestle '10 '04 '06 '08 average rental rates for grocery anchored '12 from 2007 to 2011, weaker retailers for market control throughout the Completions Net Absorption centers in Metropolitan Phoenix will suffered the most while larger, better Metropolitan Phoenix. be in the mid to high $20’s per square capitalized ones adapted to weak foot while unanchored strip centers will market fundamentals by imposing Median Household Income Median Household Income see average rents in the mid teen’s per cost cutting measures which not only $65,000 square foot, both triple net. included layoffs but the retooling of their real estate needs. As a result, $50,000 Lender owned retail properties will an over abundance of available big- continue to work their way through box retail space has spurred several $35,000 the pipeline offering opportunities for non-traditional alternative uses which investors to purchase these centers at $20,000 should continue throughout 2012. New 2000 2010 2011 below market replacement costs. After Page 1 concepts, such as pet food clubs and U.S. Maricopa County struggling with what to do with many charter schools, in addition to typical of these centers, specifically those that down market expansions of low cost have sat vacant or nearly empty for the We believe late 2010 was the bottom fitness clubs, thrift stores and discount past two to three years, lenders and for more desirable, premiere class A retailers looking for low lease rates will receivers will push to get these projects properties, 2011 brought a sense of continue to open around the Valley. off their books in 2012, applying steadiness to the overall fluctuation of Retail downward pressure on prices. Rental rates and that 2012 will see class B and rates and concessions will continue to Vacancy Rate C properties bounce along the bottom Year-End favor tenants throughout 2012 with Vacancy Rate as we slowly start the recovery process. 14% overall vacancy dipping below 12 The centrally located submarkets will 12% percent by year-end. fair better than the suburban markets. 10% 8% 6% 4% Completion vs. Net Absorption vs. Net Absorption Completions Year-End (In Millions of SF) 2% '04 '06 '08 '10 '12F 8 6 Other retail openings and expansions Completions vs. Net Absorption 4 which were slated for 2011 will finally come to fruition in 2012. These 2 include national discount grocery store 0 operator WinCo Foods opening three locations for approximately +/- 300,000 -2 '04 '06 '08 '10 '12F square feet. Quick service retailers Completions Net Absorption '04 '06 '08 '10 '12 13 | cassidyturley.com Completions Net Absorption Cassidy Turley Company Information Overview Regional Offices Cassidy Turley is a leading commercial Atlanta, GA Dayton, OH Nashville, TN San Antonio, TX real estate services provider with more Austin, TX Denver, CO New Orleans, LA San Diego, CA than 3,400 professionals in more than Baltimore, MD Denver Tech Center, CO New York, NY San Francisco, CA 60 offices nationwide. The company Baton Rouge, LA Detroit, MI Oakland, CA San Jose, CA represents a wide range of clients— Bethesda, MD El Cajon, CA Oklahoma City, OK San Rafael, CA Boston, MA Fort Collins, CO Otay Mesa, CA Santa Clara,CA from small businesses to Fortune 500 Burlingname, CA Fort Worth, TX Palo Alto, CA Somerset, NJ companies, from local non-profits to Capitola, CA Grosse Pointe, MI Parsippany, NJ St. Louis, MO major institutions. The firm completed Carlsbad, CA Houston, TX Phoenix, AZ Stamford, CT transactions valued at $18 billion in Charlotte, NC Indianapolis, IN Pleasanton, CA Tampa, FL 2010, manages 455 million square Chicago, IL Kansas City, MO Raleigh, NC Teaneck, NJ feet on behalf of private, institutional Cincinnati, OH Milwaukee, WI Redwood City, CA Tysons Corner, VA Columbia, MD Minneapolis, MN Rochester, NY Walnut Creek, CA and corporate clients and supports Columbus, OH Monterey, CA Sacramento, CA Washington, DC more than 25,000 domestic corporate Dallas, TX Napa, CA Salinas, CA W. Palm Beach, FL services locations. Cassidy Turley serves owners, investors and occupiers with a full spectrum of integrated commercial Cassidy Turley Arizona real estate services—including capital • 110 Professionals (75 Agents, 35 Staff) • Headquarters: Phoenix markets, tenant representation, • 2011 Broker of the Year, Sales, as ranked • Comprehensive Client Services corporate services, project leasing, by Arizona Real Estate and Department including, Property property management, project and Development magazine Management, Research, development services, and research CAVE • Opened Arizona Office in 1973, Public Relations, Marketing, and consulting. CREEK CAREFREE became affliate office in 2003 Publishing,Mapping/GIS, and Web Development Mc Do well Mo untain PEORIA Par k Fort Mc D ow e ll Ya v a p a i White Ta nk SURPRISE PHOENIX FOUNTAIN Na t ion Mo untain Par k SCOTTSDALE HILLS GLENDALE Sun Valley Pkwy Salt River PARADISE Pima-Maricopa Indian Community VALLEY AVONDALE BUCKEYE GOODYEAR TOLLESON MESA Estre lla Mounta in Phoe nix So uth Mo unt ain TEMPE GILBERT Par k Par k CHANDLER Gila River Indian Community QUEEN CREEK Sources & Contributors Contributors Chris Jantz Vice President Research 602.224.4485 email@example.com Zach Aulick Senior Research Analyst 602.468.8521 firstname.lastname@example.org Alison Melnychenko Marketing Director 602.468.4459 email@example.com Kelli Campbell Ruziska Creative Services Director 602.468.8593 firstname.lastname@example.org Sources Arizona State University, BLS Arizona, Costar Group, Real Data, Inc., Department of Commerce Research Administration, Eller College of Management, ESRI, Institute for Supply Management, The Information Market per the Cromford Report, The University of Arizona, U.S. Census Bureau, U.S. Department of Labor 15 | cassidyturley.com
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