The East Valley office market, which started to recover from its turn-of-the-century slump in 2003, continues to catch fire.
Industrial space, which languished longer, is on the fast track to recovery, with Chandler Airpark poised to become the next big industrial market.
East Valley retail developments never slowed, even during the recent recession. A 1.2 million-square-foot bounty of new East Valley shopping center space was built in 2004 — 21 percent of all the retail development Valleywide.
And another 2.8 million square feet is still under construction or just completed. Most of that is in Gilbert.
CB Richard Ellis released Thursday its annual Marketwatch analysis of the Valley’s commercial real estate scene.
The outlook, especially for East Valley developers, landlords and municipalities that depend on sales, use and property taxes to fuel their coffers, is excellent.
A growing population and shortterm forecasts of small interest rate hikes will keep all segments of commercial real estate booming, said Gregory Coxon, senior managing director at CB Richard Ellis.
Investors — from the institutional giants to the small private money lenders —are clamoring for Valley properties, Coxon said.
"People see Arizona as downright cheap — the land and the cost of doing business," he said. "When outsiders look at our market, they see tremendous growth in population and jobs. There is a pro-business environment. Everybody believes in the future of (the) Phoenix (area). Untold numbers of people from Nevada are buying property here."
And unlike the speculative building boom of the 1980s, if they build it, a business will come and fill it up.
Vacancies in Valley offices slipped to a respectable 16.4 percent by the end of 2004, said Pete Bolton, CB Richard Ellis senior marketing director.
And that’s despite 1.4 million square feet of office space constructed last year.
A good chunk of that office construction is in the Scottsdale Airpark area, including several buildings in Raintree Corporate Center, Northsight and Kierland.
For Scottsdale, which has the second largest volume of office space after downtown Phoenix, the vacancy rate is 13.8 percent. In the south East Valley, only 13.5 percent of the available office space is empty.
"Rental rates are going up, and concessions are going away," Bolton said. "At 12 percent (vacancy), it becomes a landlord’s market."
Office condos, where small businesses can own their own space, are the hot industry trend, Bolton said.
The average price per square foot for office condos — $169 at the end of 2004 — remained fairly stable across the Valley last year, but jumped by about $10 in Scottsdale and the south East Valley.
The CB Richard Ellis report says that diminishing open land in the Scottsdale area means a bonanza of building in the Salt River Pima-Maricopa Indian Community, which has already seen a rise in office construction.
And the south East Valley will see a boom in office growth along the Santan Freeway stretch of Loop 202.
Look for the Gila River Indian Community to explode when it gets Bureau of Indian Affairs approval to start commercial development, Bolton said. That could be as soon as the end of this year.
Industrial real estate — the manufacturing and warehousing backbone of commercial space — has been in a multiyear slump, but is on the route to recovery, Bolton said.
In Scottsdale Airpark, which sprang to popularity in the 1980s as a hub for industrial businesses, land is now too expensive for industrial uses, he said.
The Marketwatch report pegs Chandler Airpark as the new desirable location for an explosion of industrial office construction.
Bolton said Chandler Airpark has all the right attributes — from nearby executive housing options to the airport itself.
And it has a major advantage over Williams Gateway Airport in Mesa because business owners can purchase rather than lease the land.
Nonstop retail development, especially in the far south East Valley, and further demand by retailers who want to be there, has defied traditional real estate principles, Bolton said.
"How much longer can it go on? I just don’t think we understand our demographics anymore," Bolton said. "We are used to watching (retail) grow systematically with good commercial real estate sense to it."
The Valley, an area that would be considered overretailed by accepted industry standards, continues to absorb more. Prevailing wisdom would indicate new shops would simply dilute the shopper base.
"But retailers aren’t stupid," Bolton said. "They are the most sophisticated marketing minds in the business."
Bolton said the "village core concept," that people want to live, work and shop in their own neighborhoods, could keep fueling new shopping centers in fast-growing towns like Gilbert if housing starts continue their break-neck pace.
"The only real tire iron in the spokes could be (lack of) affordable housing," he said.
CB Richard Ellis Marketwatch also examined the multihousing market. The recent trend of converting apartments to condos is gathering steam throughout the Valley, Coxon said.
Spiraling house prices, partly because investors are buying up homes, are helping to fuel the conversion craze.
"They open up areas of town that people have been priced out of," he said.
In 2004, 10,000 apartment units were converted to condos, compared with 2000, when only about 100 units were converted, he said. That’s from a base of about 225,000 apartments.
