Gilbert's industrial real estate takes hit - East Valley Tribune: News

Gilbert's industrial real estate takes hit

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Posted: Thursday, July 23, 2009 6:20 pm | Updated: 1:21 am, Sat Oct 8, 2011.

Gilbert's industrial real estate market had the Valley's fifth-highest increase in vacancies during the second quarter, behind the south Phoenix, Phoenix-Sky Harbor International Airport area, Tempe and Grand Avenue submarkets.

Commercial real estate continues slide

The Gilbert news accompanied another sour note found in Grubb & Ellis/BRE Commercial's Industrial Trends Report for the second quarter.

"The scary thing is ... the highest vacancy ever recorded in metro Phoenix for industrial (space) was 14.6 percent," said Alison Melnychenko, public relations director with the brokerage and real estate services firm. "That was back in 1993. We're already at 14.5 for the second quarter of this year. Unfortunately we do believe we will top that 14.6 percent before the year's over."

The health of the commercial real estate market, including the office and retail markets, is partly measured in terms of absorption numbers. That's the amount of space that was leased or purchased during a given period of time. Those numbers can run into the negative when more space is being vacated or constructed than is being purchased or leased.

Vacancies stem from more than company closures or relocations. Numbers can also get worse when new real estate hits the market with few takers.

The report shows the Gilbert area experienced a negative absorption rate of more than 109,000 square feet in the second quarter. Meanwhile, the year-to-date absorption rate for 2009 in Gilbert was negative 231,170 square feet, according to Grubb & Ellis, slightly higher than average.

Garrett Schoenberger, a broker at Grubb & Ellis, cautioned against reading too much into the numbers. He said the town only saw a small handful of very large tenants vacate their space.

"Sometimes net absorption numbers can be skewed pretty heavily," he said. "Say one tenant that's in a 100,000-square-foot building (leaves). Just right there, that's negative 100,000 (square feet of space) on your absorption numbers. Or say you have three tenants, and they're in a 30,000-square-foot general industrial building, and they all move out."

Schoenberger said those scenarios are very common and mean negative absorption numbers are not always an indicator of a problem in the market.

Schoenberger said he saw a little pickup in leasing in the end of the first quarter and beginning of the second quarter, but that died off.

"The middle of the summer is usually the slowest historically no matter what," he said.

Bob Kammrath, a Phoenix-based real estate consultant, said neighboring cities and towns surrounding a central metro core like Phoenix tend to devote too much land for industrial uses, and developers overbuild. That's because companies often desire more central locations, he said.

"Ever since I've been in Arizona, and that's been since the '60s, there has always been - always been - far more land zoned for industrial use than could ever, ever, ever be built out as industrial," he said. "In fact, thousands and thousands of acres of industrial-zoned land has been zoned residential just because of that.

Gilbert's a good example. What they need to do is shrink the amount of industrial land and realize what they are - they're a suburb."

Dan Henderson, Gilbert's business development manager, disagreed.

"My pipeline of activity suggests otherwise," he said referring to his area's $900 million worth of capital investment in some stage of fruition.

"A number of those projects are absolutely on hold," he said. "However, those projects that are in the pipeline that are on hold as a result of the recession will obviously become active at some point."

He added that Gilbert is 76 square miles and "only 16 percent of that 76 square miles can you physically place a job."

"Sixteen percent of 76 square miles is not a lot," he said.

Henderson said he still sees a lot of opportunity in the market. He pointed out the net negative absorption seen in the 2001-02 time frame.

"Then in 2003, we saw absorption just skyrocket as a result of the opportunity of having existing product on the market," he said.

He also said some bills from the state Legislature designed to foster growth in the renewable energy sector will benefit the area.

Arizona's leasing rates are very competitive compared with other states in the Southwest and getting better, Henderson said.

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