Commercial market expected to stay steady

The Valley commercial real estate market is expected to remain fairly stable next year, though builders of office projects will continue to deal with the credit crunch fallout.

Office space vacancy rates are on the rise and could reach more than 15 percent in the Valley in 2008, said Jerry Noble, vice president with commercial brokerage CB Richard Ellis.

The office market lost a big chunk of its demand as mortgage companies shut down or downsized because of the mortgage market crisis.

“This credit crunch that happened in the third quarter really took people by surprise,” Noble said. “They’ve never seen a market change so quickly.”

Office vacancies were on the decline in recent years — some of the best the local market had ever experienced — before hitting a low of about 11.5 percent at the end of 2006, Noble said.

But with the country in a state of economic uncertainty, some companies are putting off leasing new space.

Commercial builders may also sideline projects.

Developers now have to put more money down when financing projects, so there won’t be as much speculative development, said Mark Krison, a senior vice president with CB Richard Ellis. Instead of requiring 10 percent down, lenders are now demanding 30 percent or more, Krison said.

“When money was plush, the demand for equity was not as great, you could finance more,” he said.

Still, today’s office market is fairly healthy, Noble said. In the past, the Valley’s vacancy rate has risen to 20 percent with some submarkets experiencing even higher rates, he said.

The market’s growth the past couple of years was not sustainable and had to cool off, Krison said.

“We’re getting back to healthier growth,” he said.

Experts say the East Valley is especially likely to thrive in the coming years. Market hot spots include the Scottsdale and Chandler airparks, the Price Road corridor and parts of north Mesa.

The East Valley has strong demographics, freeway access and good housing, Noble said. Firms want to open offices near where their employees live, he said.

The southern portion of Loop 202 from where it meets Loop 101 to Val Vista Drive, along with other areas of Chandler and Gilbert, are also big places for growth, with millions of square feet of office space in the works, said Gregg Sherman, an office broker with Grubb & Ellis.

Overall, the office market has softened, but plenty of companies are still looking for space, he said. Arizona is expected to see continued population and job growth next year, Sherman said. But developers need to make smart decisions on when to break ground, he said.

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