Is Office Catching Up to Multifamily?
Since the end of the recession, multifamily's been the growth engine in real estate, with office and industrial lagging. That's the way it still is in Phoenix, though the long-term outlook for office and industrial is good, according to our speakers at the 2nd annual Phoenix State of the Market this week.
1. Demand For Apartments Still Outpacing Supply
Snapped: Mark-Taylor VP-development Chris Brozina, Walker & Dunlop SVP Brandon Harrington. Our speakers explained that when a market's been booming so long, it's natural to ask: when will the boom stop? For the Phoenix apartment market, the answer is not yet. Fundamentals have exceeded their pre-recession peaks in every metric: occupancy, rent growth, minimal concessions—yet they're still improving. As long as employment growth continues, that's going to be the case. Despite the rapid pace of development, with 7,000 units coming on line this year compared with 1,500 in 2012, supply hasn't caught up with demand.
2. Multifamily's Getting Denser
Alliance managing director Ian Swiergol, Colliers International EVP Cindy Cooke, and MEB Management Service EVP Mark Schilling, who moderated the multifamily panel. The most recent apartment development cycle, beginning in 2011, has been different from previous cycles in one startling way, the speakers explain. Apartment development is now denser than it used to be. All of the multifamily stock built before 2011 totaled about 16 units per acre; properties built since then and in the pipeline now are about 47 units per acre. There's still less dense, suburban-style development, but urban infill in walkable areas is driving the trend, because that's what Millennials want.
3. Office Fundamentals Good, Not Great
Douglas Wilson Cos CEO Doug Wilson and LBA Realty VP Bob Hubbard. The Phoenix office market isn't weak, our office-industrial panelists noted, but it hasn't been as robust as the markets (previously) driven by the energy boom or (still) driven by the tech sector, such as in Texas or Seattle or San Francisco. Local companies are now planning consolidation and expansion, so increased office leasing velocity is ahead for Phoenix, as long as employment grows. The submarkets that stand to do best are Tempe, Southeast Valley and Downtown. So far there's no impetus for spec space. Most of the recent big occupancies (such as GM and GoDaddy) have been in build-to-suit space.
4. Creative Office in Demand
Wentworth Property Co principal Jim Wentworth, Hines senior managing director Mark Cover, and CBRE EVP Jerry Roberts, who moderated the office/industrial panel. Creative office isn't just for the coasts: the demand is here in Phoenix, and it's only going to grow, our speakers predicted. Elements of creative office are going into BTS properties, such as more open areas and other places to gather, higher density and more "lifestyle space," and older properties are feeling the pressure to retrofit as much as they can. For the first time ever, HR is being included in space leasing decisions, and office properties that don't add creative elements are going to be at a serious disadvantage in the near future.