Positive and Steady. That’s how I would describe the Metro Phoenix Office market’s performance for 2017. The market posted its 7th straight year of positive net absorption (net gain in office jobs) finishing at 1.83 million SF. For reference, our 25-year average is 2.5 million SF, and 2016 net absorption reached 2.9 million SF.
Across the US, there are many investors who think the market is nearing the end of the cycle. We may be, but it’s interesting to note that overall vacancy is currently 19.7%, and Metro Phoenix tightened to 12% just before the Great Recession. So like a lot of other voices in the market speculating, we believe the Metro Phoenix market has some significant runway to it.
Within the 19.7% overall vacancy is a wide range of vacancies between submarkets. This means that there are nuances and opportunities, for landlords and tenants, throughout the Valley.
Below is a link to our Lee & Associates Arizona 4th Quarter Office Report and as usual, I’ve included my top 3 takeaways:
The Big Winners Are – Instead of one dominating area, there were three submarkets (Camelback Rd Corridor, South Scottsdale and Chandler) that absorbed the most amount of space for all of 2017. They all posted between 250k and 300k SF of space leased.
Tenants Want Quality Buildings – 1.4 million SF of speculative office is under construction with good activity. Developers remain encouraged this space will get leased quickly since 60% of all net absorption in 2017 occurred in Class A properties.
Job Growth was Organic – A handful of leases over 100,000 SF (8 to be exact) were signed in 2017; with the biggest deal in Q4 totaling only 58,000 SF. With no giant transactions, this means a lot of our growth came from existing Metro Phoenix companies growing modestly.
My team and I represent office tenants and landlords throughout Metro Phoenix and the US – and we do some international work as well. Please contact me if we can help you. More info can be found at www.coppolacheney.com
PS – Click here to read a great article on technology in the brokerage business featuring Jeff Rinkov, CEO of Lee & Associates.
Click here to read the full report
Click here to enlarge
Every year we look back and reflect on the deals, relationships, and memories we made over the past 12 months. We had another excellent year in 2017, and as we look back on the numbers we’re incredibly grateful for amazing clients and friends like you.
Now that we’re a few weeks into 2018, we’re excited for new opportunities heading our way. Thank you for being a part of our future.
P.S. As you may know, Dan Sullivan has been my coach and mentor for 25 years. He is one of the primary reasons for my continued success and almost ALL of the concepts we teach and use in our company. Here is a link to the recently-released movie about his life called “Gamechangers”. Watch it and learn. The man is genius.
Here are a few stats:
- HNWI’s (High Net Worth Investors) wealth is projected to surpass $100 trillion by 2025.
- HNWI are now paying much more attention to income-producing properties vs. what they have invested in previously (stocks and bonds).
- Single tenant NNN properties are the investment of choice for these investors. Stable returns, no management, and owning a piece of property are all reasons why this segment of the market has taken off.
Below is an article from the end of last year that explains this trend in greater detail. Capital markets is not our core business. We represent office tenants. You can still call or email me for more on the state of the capital market and NNN leased properties, as I have a personal interest in these trends.
Coppola-Cheney helps our clients navigate the commercial real estate industry. I am proud to have the 2018 President of the Arizona Chapter of the National Association of Industrial and Office Properties (NAIOP) as my partner. Congratulations, Andrew.
Part 1: How HNWI Invest in CRE
Dec 14, 2016
The world’s wealthiest individuals keep getting richer. That bodes well for commercial real estate, which continues to hold a place in the allocation strategy for high-net-worth and ultra-high-net-worth individuals and family offices.
Global high-net-worth investor wealth is projected to nearly triple in size from 2006 to 2025 to surpass $100 trillion by 2025, according to data from Capgemini. The population of high-net-worth investors grew 4.9 percent in 2015, the most recent year for which data is available, while their wealth grew 4.0 percent.
Capgemini’s World Wealth Report 2016, meanwhile, found that real estate and construction ranked as the fifth highest sector among sectors expected to drive wealth growth through 2015.
Exclusive research from NREI’s survey on high-net-worth investors (HNWI) shows that these players still hold real estate in high regard, although reaching them, educating them about the intricacies of investing in the sector and meeting their sometimes aggressive return expectations all pose challenges for commercial real estate pros.
How they invest
HNWI made approximately $3.2 billion in acquisitions in the first half of 2016, compared to about $4.2 billion in the first half of 2015 and about $2.8 billion in the first half of 2014, according to data provided by New York City-based research firm Real Capital Analytics (RCA).
A majority of respondents to NREI’s survey estimated that most HNWI allocate somewhere between 6 percent and 25 percent of their portfolios to real estate. Overall, 63 percent of respondents answered that HNWI are in that range. A minority (22 percent) answered that HNWI have even greater allocations (26 percent or more of their portfolio).
HNWI have a variety of options for investing in the sector. A majority of respondents (54 percent) say those placements come in the form of investments in private real estate equity funds. Other popular options include direct investment in either multi-tenant or single-tenant netlease assets, according to 45 percent and 36 percent of respondents respectively. Options that are less common, according to respondents, include club deals and crowdfunding (each at 13 percent) and investment in non-traded REITs (16 percent).
But according to some survey respondents, such investors are placing high demands on fund operators.
They “have forced private real estate investment funds like ours to show exceedingly high projected returns before considering a new investment,” one respondent wrote.
“One profile of investors prefers single-tenant properties with long-term credit leases and/or multi-tenant legacy infill product in dense locations, such as in West L.A., to hold long-term. These investors know returns are low on these types of assets, but are pursuing a generational strategy for preservation of capital,” says Don MacLallen, senior managing partner at Faris Lee Investments, which represents HNWI when they search for retail properties. “Another profile of investors is looking at higher cash flow properties with intrinsic low rent from low price per square foot. [They] want to get higher yield by taking advantage of low interest rates. These cash flow investors are looking into secondary locations.”
Part 2: How to Reach HNWI
One of the biggest challenges from the real estate side of the equation is getting access to high-net-worth investors (HNWI) looking to make allocations to the sector.
“Access is through intermediaries who often are reluctant to invest with newer sponsors,” one respondent wrote. “Also, the huge amount of capital being invested with a small number of big name firms (Blackstone, Starwood, etc.) makes it difficult to compete.”
Another respondent talked of the “layers of advisors” that you have to work through, most of whom are “not fully conversant in the intricacies of commercial real estate.”
Another obstacle is that it can be difficult to find investments that fit what HNWI are looking for. They often want low-risk, high-yield plays, which are difficult to come by given the intensely competitive investment landscape for real estate assets.
Respondents also pointed to the need to educate HNWI on some of the nuances of playing in the commercial real estate space, getting them to understand the basics of real estate investment, rates of return and illiquidity.
“They understand (or at least think they do) equity investments, but many do not have the experience or patience to understand complex real estate transactions,” one respondent wrote. “For example, [they don’t understand] why they can’t take their money out six months after they invested.”
Another respondent wrote that real estate professionals working with HNWI must ensure there is “a comprehensive strategy and understanding of both what the real estate is intending to do, and how it knits with the overall portfolio.”
“Many HNW investors have acquired their real estate assets … on an opportunistic basis, with little regard to how it meets their family objectives,” the respondent noted.
The plus side to working with HNWI, however, is also substantial. For one, they represent a large and growing pool of capital. Moreover, given that investment decisions are made by an individual or a small group in a family office, there can be greater speed and certainty of deal completion when deal objectives are clear.
Part 3: What Do HNWI Want from CRE?
The biggest objective respondents identified for high-net-worth investors (HNWI) in buying real estate was preservation of wealth. On a scale of 5, wealth preservation scored 4.5 in the survey. But other options were close behind. Those included income production (4.0), asset value growth (3.9), tax purposes (3.6) and estate planning (3.5).
While many respondents said that these factors have not changed in the past 12 months, others said they have seen some shifts.
Several respondents argued some HNWI have put a greater emphasis on income production. One respondent argued that “income has become more important as other investment yields remain low and as cap rate compression starts to slow down.” Another said that worries of a coming “flat decade” for equities, along with low bond yields, have led to increased interest in real estate’s income-producing potential.
That echoes what some expert observers are seeing as well.
“We continue to predict real estate is starting to be much more about income,” says Yolande Barnes, director of world research for Savills. “Part of this is a function of the difficulty getting yield from other investments like bonds. Most HNWI have already invested into store of wealth asset investment. Now they are paying much more attention to income-producing properties.”
Yet, conversely, other respondents said that volatility, uncertainty and a sense that the real estate cycle has peaked has led to wealth preservation rising in importance as a goal for real estate investment. It’s “become a more important goal as the cycle has peaked and Trump was elected, resulting in increased uncertainty,” one respondent wrote.
Other objectives respondents identified for HNWI included 1031 exchanges, wealth augmentation and having self-control of investments, unlike with stocks and bonds.
One respondent said the objectives ultimately vary with the investors themselves.
“I work for a HNW individual who is all about maximizing returns and is willing to embrace the risk,” they wrote. But “our biggest outside investor, also HNW, is backing off of his risk profile and focusing more on preservation of wealth.”
Another respondent argued that the uncertainty introduced by the election of Donald J. Trump had likely changed the dynamic. “Preservation of capital has probably moved to the top of the list,” they wrote. Another echoed that statement writing, “The election has caused some urgency to seek brick-and-mortar security.”
Every year, we share the most innovative offices from around the world (and a few from our own clients). Below is our list from 2017.
First, you get a few of the best clients we were fortunate enough to work with this past year. We can hold our own here in the Valley of the Sun. Below our clients are the international companies from Inc. Magazine. It’s amazing to see the creativity that goes into building out all of these spaces.
Pick your favorite. I love Kudelski (our client—but I’ve been in the space), and the Airbnb space in Dublin. Scroll down, it’s worth your time.
PS — In addition to the coolest offices of 2017, we had a client (Oaktree Capital and Cypress Properties) turn loose 4 architects to build out 4 spaces without direction or budget. We called it Project Future (check out this background video). These 4 spaces turned out fabulous and the 600 people who toured them on opening night loved the show. Click here to see the spaces and the party.
Greater Phoenix Economic Council
And of course, our home, Lee & Associates
15 OFFICES THAT WILL MAKE YOU INSANELY JEALOUS
1. One with nature
If you can’t work outdoors, bring the outdoors inside. Swedish gaming company King used real lichen and trees built out of plywood to create a hideaway that feels like a Scandinavian forest.
IMAGE: KING; DESIGN: ADOLFSSON & PARTNERS; PHOTOGRAPHY: JOACHIM BELAIEFF
2. Nod to yesteryear
Airy and filled with natural light, WeWork’s flagship China office is built into what used to be an opium factory. The space uses the building’s original staircase and steel beams, painted green for a more natural feel.
IMAGE: DESIGN: WEWORK & LINEHOUSE; PHOTO: WEWORK
3. Color by number
Dutch architecture firm MVRDV designed a wing of its headquarters to resemble a doll house. The rooms are color-coded by purpose, from the red TV lounge to the dark blue meeting room.
IMAGE: PHOTOGRAPHY: OSSIP VAN DUIVENBODE
4. Through the years
The offices of genealogy company Ancestry pay tribute to the firm’s employees–and their roots. Portraits of long-tenured workers are hung next to photos of family members from generations ago.
IMAGE: DESIGN: RAPT STUDIO; PHOTO: JEREMY BITTERMANN
5. Over the rainbow
Media agency Canvas outfitted its office with dichroic glass, which reflects light at different angles. The glass changes color depending on the time of day and the angle at which you view it.
IMAGE: CANVAS WORLDWIDE; DESIGN: A+I; PHOTO: MICHAEL WELLS
6. Get nutty
Vice’s Toronto office has a bar designed to feel like a throwback saloon. Made of walnut, it’s stocked with coffee and tea, plus bourbon and whiskey for after hours.
IMAGE: ADRIEN WILLIAMS
7. A colorful history
British startup Money.co.uk converted a Victorian castle into its new home. The new digs combine old-fashioned decor with kitschy elements and pops of color for a truly unique feel.
IMAGE: DESIGN: INTERACTION; PHOTO: CHRIS TERRY
8. Stepping up
Airbnb’s Dublin office is the first one the company has designed from scratch. It’s broken into 29 distinct “neighborhoods,” and the staircase at the center serves as a lounge and meeting area.
IMAGE: DESIGN: HENEGHAN PENG ARCHITECTS; PHOTO: DONAL MURPHY
PwC’s new Switzerland office gives employees the chance to catch up on rest in the nap room. The natural color palette gives the space a calming, outdoorsy feel.
IMAGE: DESIGN: EVOLUTION DESIGN; PHOTO: PETER WUERMLI
10. Keep it green
Instead of dividers or walls, co-working space Second Home separates its cubicles with greenery. The Lisbon, Portugal-based office is home to more than 1,000 plants, which also helps improve the office’s air quality.
IMAGE: DESIGN: SELGASCANO; PHOTO: IWAN BAAN
Squarespace went with a sleek, minimalist scheme for its 98,000 sq. ft. New York office. It’s almost entirely black, white, and gray, with the only splashes of color coming from the plant life.
IMAGE: DESIGN: A+I; PHOTO: SQUARESPACE
12. The ring
Apple’s new spaceship-like headquarters give life to a vision initially laid out by Steve Jobs. The campus is home to 12,000 employees and 9,000 trees, and it relies entirely on renewable energy.
IMAGE: COURTESY APPLE
13. It’s alive
That’s not a painting: LinkedIn’s 26-story San Francisco headquarters feature a living wall next to the 17th story juice bar. It’s made of various types of moss and has both depth and texture.
IMAGE: DESIGN: IA INTERIOR ARCHITECTS; PHOTOGRAPHY: ERIC LAIGNEL
14. Dual purpose
Boston-based Pillpack outfitted its lounge with a refurbished Prohibition-era bar. It serves espresso during the day and turns into a DJ booth during nighttime events.
IMAGE: DESIGN: HALEY MCLANE, PHOTOGRAPHY: JARED KUZIA
15. Looking forward
Google broke ground on its new London headquarters in late 2017. The 1,066-foot “landscraper” will contain offices, swimming pools, and basketball courts, and will be almost as long as the Empire State Building is tall.
IMAGE: COURTESY GOOGLE