Commercial Real Estate Musical Chairs
New chairs keep being added, but fewer people are playing.
Commercial real-estate vacancies hit nearly 25% in the Phoenix Valley area. Scottsdale and Southeast Valley vacancies are even higher. Consider Office vacancy rates in Valley hit record.
Nearly one out of every four square feet of Valley office space was vacant in the third quarter ending September 30, commercial-real-estate experts said.
That's about 28 million square feet of empty space, according to Phoenix commercial-realty brokerage Colliers International, one of several Valley firms tracking the progress of sales and the leasing of office, industrial, and retail buildings.
Within the next few months, about 2 million more square feet of office space will open, and less than 20% of it has been reported as spoken for by a future tenant.
One of the soon-to-open buildings, the 400,000-square-foot One Central Park East office tower in downtown Phoenix, has yet to announce a lease agreement despite plans to open by the end of the year.
"Actually, leasing agents are optimistic," said Broker Mindy Korth of Phoenix-based CB Richard Ellis.
Korth said One Central Park is a desirable location that ultimately will find its audience. But she agreed with other experts that the high prices paid by companies such as One Central Park developer Mesirow Financial Real Estate Inc. could make it difficult to pay the bills, based on today's lower lease rates.
More than 2,200 commercial properties in Maricopa County have received 90-day foreclosure notices since January 1, representing more than $7 billion in real-estate loans on which the borrowers have failed to make payments.
- Overall vacancies -- 24.2%
- Scottsdale vacancies -- 29.1%
- Downtown Phoenix vacancies -- 15.7%
- Southeast Valley vacancies -- 30.5%
Musical Chairs, With "Desirable Chairs" Added Each Round
Arizona leasing agents are optimistic because the "real-estate crash positions Phoenix as an attractive relocation area for companies in more expensive states, such as California."
Let's assume for a moment that businesses transfer to Arizona from California. What would that do to California jobs and California commercial real-estate prices? How many tax breaks will Phoenix give to get corporations to relocate? Will California, Illinois, New York, and other places quietly let businesses leave?
Without new business expansion, this setup is nothing more than a game of musical chairs, except no chairs are ever removed. Instead, so-called "desirable chairs" like One Central Park are added every round, not just in Phoenix, but Miami, Chicago, Portland, San Diego, and countless other places.
Do the math. Musical chairs in reverse is not a viable economic model.
"If you build it, they will come" can't possibly work unless the number of players increases faster than the number of chairs. The reverse is happening. More chairs are added each month than participants in the game.
Bundle of Joy
I have good news to report. Someone has finally seen me for the joyful optimist that I am.
In Real Estate Strikes Back Planet Yelnick notes: "Mish was a bundle of joy today, also reporting that rents have fallen for the first time in 17 years, and that new FHA rules make condos utterly worthless."
"Bundle of Joy" was the title of Thursday's Podcast on HoweStreet:
Forget all that gloom'n'doom stuff, Mish has some good news ... rents are falling!
Phil Mackesy and I discussed housing in Vancouver, falling rents in the US, and what it's like to be under the lights for three Yahoo Tech Tickers: Deflation, Gold, and the Stock Market.
Residential rents are indeed falling, as are corporate lease rates. And with this game of musical chairs, commercial real-estate lease rates are sure to continue falling for quite some time.
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