PHOENIX-The past year proved to be a hot one on both industrial and office sides with the pace of corporate and industrial users boosting demand for all types of space, from class A office to warehouse distribution. Local experts tell GlobeSt.com that the demand, across all classes, should continue to be healthy well into 2007.

Kevin Calihan, first vice president in Phoenix for CB Richard Ellis, says this year's noteworthy trend on the office side was the huge demand. "We're going to end up absorbing more product than we delivered this year," he says. "I don't think anyone foresaw the pace at which corporate users would be taking down space."

The good news, Calihan continues, is developers are trying to keep up with demand. There is four million sf of office space under construction and anticipated for delivery next year. "A delivery of upwards of four million sf could put the market into equilibrium, where users have a couple of viable alternatives when they look for extra space," he adds.

The demand, to no one's surprise, has led to a sharp increase in rents. Mark Phillips, senior adviser for Sperry Van Ness in Phoenix, predicts upward pressure on rents will continue. And if he's right, the Camelback submarket could easily break $40 per sf in 2007. "I don't think you'll see that high an amount in North Scottsdale, but we could see upwards of $35 per sf," he says. "It's all a function of huge absorption and the amount coming on line."

Phillips points out that the industrial market has experienced huge absorption as well. "Phoenix has all of the sudden become a distribution park," he says. "There's been a tremendous amount of interest in the Southwest Valley during the past 12 to 18 months, which has driven all sorts of land speculation."

Much like office product, industrial product has also seen a sharp upward pressure on rents. The average rates moved from less than $3 per sf to north of $5 per sf.

CBRE's Mark Krison believes the major industrial story for 2006 boiled down to one word: absorption. "At the end of the third quarter, we had about 235 million sf of space out there, with approximately 15.5 million vacant, and a projected vacancy of about 6.7%," he explains. "Anything under 10% is healthy and we're 3% under normal market vacancy."

As a result, Krison says the news story for 2007 will be the product coming on line. "With 15 million sf vacant now, there's 8.5 million sf coming on board next year, leading to close to 24 million, and about a 10% vacancy," he notes.

Krison says an additional 11.5 million sf is on the development docket in 2007. "They'd better plan it and they'd better get it out of the ground," he says, citing not only the need for more space, but the demand for new space. "A lot of the companies coming in here don't want to deal with TIs from other tenants," he says.