In his quarterly briefing this past month, Dr. Victor Calanog, Reis’s Vice President of Research and Economics, highlighted the drop in Tucson’s Q4 2012 revenue per square foot for office space, a 0.8% decrease from Q4 2011. This compares to a national increase of 2.3% over the same period. During this time, Phoenix experienced a 1.1% increase.
TUCSON’S VACANCY RATE & LIMITED NEW CONSTRUCTION HELPING RECOVERY
Slow to recover, Tucson is still reeling from the economic downturn. This sluggishness is reflected across all sectors, and the office market is no exception. Part of the reason for the declining revenue in Tucson is the stubbornness of rent growth in the office real estate market. Quarterly effective rent growth was -0.4% in Q4 2012, ranking near the bottom of all major metros tracked by Reis. This bad news is offset by a vacancy rate of 15.5%, which is comfortably below the nationwide average of 17.1%. Limited new construction has helped to maintain a relatively low vacancy rate despite inconsistent demand.
PHOENIX JOB MARKET CONTINUES TO IMPROVE
Comparatively, Phoenix fared much better than Tucson in Q4 2012 in terms of effective rent growth: At +0.4%, the metro placed close to the midpoint of the major markets covered by Reis. Still, the recovery in office space has been tepid nationwide and Phoenix has not been immune. Particularly worrying is Phoenix’s high vacancy rate, which has historically been quite volatile. After hitting a cyclical low of 11.5% in 2006, the current figure stands at 25.8%, among the highest in the country. But while faint, there is a light at the end of the tunnel as the local job market has shown signs of life. The metro’s unemployment rate has fallen from a cyclical high of 10.6% to 6.7% as of the end of 2012. As the job market continues to improve, Phoenix landlords will benefit from firms looking to expand their space to meet burgeoning staff levels.
Q4 2012 BRIEFING PREDICTS SLOW AND STEADY YEAR FOR 2013 COMMERCIAL REAL ESTATE
Dr. Calanog concluded Reis’s Q4 2012 briefing by predicting a measured increase in national commercial real estate fundamentals throughout 2013, saying that he expected slow and steady growth for the year. We expect Tucson and Phoenix to follow a similar slow growth path for the foreseeable future.