Phoenix Commercial Real Estate he average price for office buildings sold in the greater Phoenix area fell in the first one-half of 2009 as investors paid $110 per square foot of improvements. This com- pares fo an average of $206 per foot for all of 2008 and $197 per foot in 2007. If current values hold steady for the balance of the year, which seems likely, this would end a five-year advance in prices within the local office market. Meanwhile, the number of transac- tions taking place continued to ebb with only 35 proper- ties sold in the first six months of this year. This is a 40% drop from the level of the like period in 2008, Since 2009 seems destined to see the slowest pace of office sales activity in over 30 years, there is some ques- tion as to whether the transactions currently being recorded are truly capable of providing a value estimate for a typical property. Though itis safe to say under the present economic conditions there has been a general decline in demand, it is difficult to translate this directly into estimate worth of an asset when so few buildings sell, As with other categories of real estate there are many factors that influence market values, and even in, the worst of times there are some buildings performing, better than others. It could well be that some owners of rojects which are operating with a reasonably positive 7 a Tlow might think now is not the best Time to maxi- mize the return on their investment by selling into a down market. The first casualties at the time of a slow- down are those buildings which were ill-conceived or over-financed or both. One of the reliably repeated mistakes in office develop- ment is the construction of large so-called Class A build- ings in areas that are only suitable for light industrial use or small garden offices. The term Class A here is a mis- nomer because one of the criteria for a Class A property PUBLISHED QUARTERLY BY KAMMRATH & ASSOCIATES COMMERCIAL REAL ESTATE ANALYSTS Office Prices Head Lower AVERAGE PRICE OF OFFICE BUILDINGS SOLD GREATER PHOENIX AREA 2004 2005 2006 2007 2008, 2 é s 8 ‘gna isa superior location. Projects of this type have uniform- ly failed in the past and are failing today. Those build- ings in the hands of financially strong owners will sim- ply under perform most of their useft lives while many others will be foreclosed and resold for cents on the dol- lar. In either case, an appropriate designation for these properties in the hinterlands would be Class T (Turkey). Another temptation during prosperous economic times, as prevailed until recently in the Phoenix are doa niche within a major market. Such was the case with office condominiums. Though there certainly was some pent up clemand for properties of this type at the beginning of this decade, the concept has been overbuilt to the extreme. Ina five-year period from 2004 through 2008 about 7,000,000 square feet of office condos came on-line, This represented fully 39% of all office space constructed in that time frame and was an amount greater than the entire previous inventory of this kind of property, Did the demand for office condos more than double within just five years? Not likely. This special- ized segment will continue to suffer long after the main- ‘stream office market recovers from the current economic downtum.Commercial Sales Activity Still in Doldroms xtending a trend of four years running, the number of commercial real estate transactions taking place in the greater Phoenix area continues to decline. Through the first six months of 2009, sales among the four major classifications of investment prop- erty are standing at less than one-half the total posted in 2008 which was likewise a compara ly dismal year for commercial sales. Although there are signs this year may well represent the nadir in terms of sales activity, it is a certainty market prices will fail rather dramatically well into the future. Unfortunately, even after it became obvious demand was falling, millions of square feet of commercial real estate space came on-line crediting a substantial oversupply. While many may blame greedy develop- ers and incompetent bankers, the primary reason for this seemingly anomalous situation has to do with the length of time involved from inception to completion of large projects. In many cases this can encompass years. During this period of time itis difficult to reverse the course of a specific development. With the Arizona economy performing well below. the national norm, it is not likely a turnaround is in the works at any time soon. This is having a negative impact on occupancy and rental rates within all types of commercial properties. However, just as has happened in the single family home market, it is probable that the number of transactions will begin to rise soon in consort with a steady increase in the number of foreclosur Metro Phoenix Commercial Real Estate Digest 2nd Qtr 2009 | 2nd Qtr 2008 | YTD2009 | YTD 2008 | Full Yr2008 | Full Yr 2007 | Full Yr 2006 Apartments Transactons 16 2 2 2 a 28 332 Dota Youre s7.rig000 | 17,867,500 | 131667,695 | at77ig920 | s09.472.408 | garssva4s7 | 4917:515696 Price Per Unit 51733 85051 57,009 85,051 e796t 85573 83.990 Price Per Sq Ft 5604 10288 6054 105 55 10298 98.65 102.96 Industrial Bldgs Transactions 6 s 28 3 186 Dolar Volume erscasss | 210233209 | 106,14 500.361096 | 950,120,134 Price Pr SqFt 109 6869 745i 7278 7376 Office Bldgs Transacons a 6 26 st 18 zr a1 Dolar Volume zraoioss | s4zrigoo | 63sae279 | as1asaesa | rsa77m647 | 2a2sozasra | 2797,732,360 Price Per SqFt ‘1.09 16822 ‘1045 23974 20571 196 64 17448 Shopping Ctrs Transactons 4 20 6 3 51 ‘16 206 Dol Volume to,se0.000 | 141054000 } 48,000000 | zzasaoos | 4ooeze36 | sxseri.ass | 1.325083.906 Price Per SqFt 10168 ‘1.00 9268 16772 18048 14360 13668, Total Transactions st an ‘00 25 204 318 1.138 Dolar Volume ren eazers | 551,420,189 | aa7as1a40 | tesarerers | 2a25ass.ee4 | aas0.4ta6a6 | 97e.o79.ox2 NOTES: Apariments—buidings of 10 units or larger. Industral—buldings of 10,000 SF or larger. 1 Kanne & Ase Ofice—administrative and medical buiings. Shopping Centers—buitins of 10,000 SF or largerRetail Tenant Mix Evolves The amount of shopping center space per resident in the Phoenix area has remained comparatively constant over the past 30 years. This ratio has averaged about 34 square feet of, improvements per person. In years when the retail space per resident rose substantially above the norm, there typically followed a period of elevated vacancy and a subsequent decline in new construction. Likewise, when the ratio went below the average, occupancy and rental rates increased which encouraged new building activity. Although the amount of space appears reliably consistent and predictable, there have been some major changes in the types of stores to be found at local shopping centers. Some changes within the Phoenix shopping center environment have occurred for obvious reasons and others are not as apparent. Anumber of small merchant categories have seen a dramatic decline in representation. These include flower shops, gift stores and greeting card retailers. The explanation for the reduction in the number of these types of entities is simply that much of the merchandise formerly sold at these establishments is now available at a department within larger stores, such as supermarkets. In the case of flower shops, there were 102 such retailers in shopping centers 25 years ago or one location for every 18,000 persons living in the Phoenix. area at that time, Today, there are only 78 similar stores or one for each 51,000 residents, So, while it is definitely more difficult to find a store which specializes in flowers today, it is also true that there are more stores where flow- ers are available for sale as a sideline offering. Another retail category which has lost repre- sentation within local shopping centers, but for reasons which are less clear, is the department store. At first glance many people believe that the old-line merchants, such as Montgomery Ward, Sears and Macy’s, have merely been supplanted by discounters like Wal-Mart and Target. While certainly this has occurred to some extent, the fact remains there are fewer retailers of this type, including discounters, in relation to the population in place. Aggregating all department stores, there is presently one retailer of this type for every 23,000 residents in the Phoenix area. This com- pares to a ratio of 17,000 persons per location in 1985. Put another way, 25 years ago there was one department store for every 3.5 shopping, centers and today there is one such retailer for _every 6 existing shopping centers. It could be this has happened for a variety of complex rea sons or it could be as simple as consumer pref- erence not embracing discounters to the same degree as some previous retailers Grocery stores in the Phoenix area are one essential group of merchants which seemed to have sustained a pattern contrary to national trends, For decades, across America there had been a decline in the total number of food stores accom- panied by a corresponding increase in the number of persons per location. This occurred because the size of a typical supermarket continued to expand. Though there were fewer locations, most cities were served by about the same amount of square footage within stores of this type. In Phoenix, this ind of store grew in size as they did elsewhere, but the ratio of stores held remarkably steady since the 1960s with one supermarket for every 10,000 _residents. However, it now appears that this seem- ing anomaly is reversing itself. Since 2006, grocery stores have steadily lost representation in the local area. The current economic downturn will likely accelerate this trend. OFFICE BUILDINGS Average Price Per Sq. Foot Syrs ago (2004) $114.90 10yrs ago (1999) $97.31 15 yrs.ago (1994) $68.50 2yrs ago (1989) $84.63 25yrs ago (1984) $93.54