Pete O'Neil

Investment sales have rebounded in Phoenix after a slow start to the year. According to the latest research from Colliers International, second quarter office investment sales were up 40% over the first quarter, while industrial sales increased 12%. The two sectors led commercial investment activity in Phoenix, with the second quarter sales boosting activity for the first half of the year to match year-over-year sales volumes in the first half of 2017. Investment sales have grown steadily in the last few years as the Phoenix market continues to improve.

“The office and industrial markets have really strengthened. Industrial had been on an improvement cycle for several years, and it is really hitting a stride now with vacancy in the low- to mid-7% range. That is a very tight and efficient market, and there is a lot of demand,” Pete O'Neil, research director at Colliers International, tells GlobeSt.com. “So, Phoenix is popping up on the radar for a lot of investors, and that has really fueled activity and pricing. On the office side, a lot of national investors won't look at a market when the vacancy rate is too high, but the office market has stabilized to a point where the vacancy is around 15%. Office and industrial have both shown the level of improvement to where more people are evaluating opportunities that they might have previously passed. We have had some really good momentum in the market, which translates into investment activity.”

While transaction volumes dropped in the first quarter, it wasn't a sign of waning interest or investment activity. O'Neil says that a decrease in sales volume is typical for the start of the year. “It is not uncommon for the first quarter to slow down. People often like to get deals done before the end of the year, and that can often take demand away from the first quarter,” he adds. “So, that is not uncommon. Also, the pipeline fills a little bit in the first quarter, which fuels demand for the second quarter.”

If anything, pricing indicators point to strong activity through the end of the year. Office prices increased to $195 per square foot during the quarter, bringing the half-year average to $166 per square foot. Industrial pricing remains strong, but growth leveled off in the first half of the year. “We have seen pricing trend high for the last several years, but that is more a function of the market improving than competition. In recent years, there is a combination of both,” says O'Neil. “We haven't seen cap rates compress, but we have seen them stay pretty level even with interest rates rising in the first half of the year. The fact that we haven't seen cap rates rise with interest rates is probably a sign that there is a little more competition.”

While office and industrial activity led the market, shopping center investment sales declined in the second quarter, down 25% over quarter one. Despite the decrease in sales volume, sales pricing increased and more strip centers traded hands, which O'Neil says is a good sign of market health. “There is a little bit of a mixed trend with shopping centers,” he explains. “We were at $120 per square foot for the last few years, and now we are up to $160 per square foot. That is a good sign. In the second quarter, it was smaller strip centers trading hands, and that might be a sign that the market is improving. As our housing market strengthens, it is going to be good for our retail assets, and I think that we will probably see more activity.”