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PHOENIX-Market experts predict the Valley’s slowing office market won’t turn around for perhaps three years. A year ago, it was racing at breakneck speed.

The Valley clearly is in the throes of a major downturn in its office and industrial markets, but it’s not completely come to a stop, according to a consensus of real estate professionals gathered for the Arizona NAIOP Chapter’s Trend Watch 2001. “We were going 100 miles an hour and now it’s like we are in a school zone,” says Pat Feeney Jr., a CB Richard Ellis senior vice president. “We aren’t in park, but user activity has dropped off.”

At midyear, vacancy stood at 12.8%, its highest point since 1994 and nearly 3% higher than at the start of this year. “We are just a little supply heavy in office,” Christopher Toci, associate director in the Phoenix office of Cushman & Wakefield of Arizona Inc., tells GlobeSt.com. “It’s just a near-term overhang. It’s not gloom and doom. We just need to get caught back up on the demand side.”

More than 15.7 million sf of new office space was built in the Valley since fourth quarter 1996, spiking overall inventory nearly 28%. The past two years’ absorption pace prompted the development of dozens of spec projects, most of which are due to deliver at a time when demand has all but disappeared. In 1999 and 2000, more than 7.5 million sf of office space was leased, more than any other two consecutive years. “We are adding supply and we are shrinking on the demand side,” Toci says. More than two million sf of new office space has come to market this year and another three million sf is under construction.

In the industrial market, the impact of the slowing economy is being felt just as much as in the office sector. Vacancy climbed to 8.9% at midyear, up from 7.4% at the start of 2001.

Net absorption in the industrial market, which was at an all-time high in 2000 with more than 10.7 million sf, was just 1.3 million sf at midyear. It’s poised to be as low as it’s been since the early 1990s.

As with the office market, the runaway demand prompted a number of projects that are just now coming on line. More than 6.2 million sf of industrial space was created in 2000 and 3.5 million sf has opened so far this year. And, nearly another three million sf is under construction.

Don’t expect to see any new construction come out of the ground for office or industrial, unless it has signed tenants, for some time, Toci says. “Spec development just won’t happen until these vacancy rates come back down again,” he says.

Some market experts are predicting that the market won’t recover until the end of 2002 and some say there won’t be any signs of an upswing until early 2004. Toci is predicting it will definitely be two years before there’s a rebound.

Even with the slowdown, Toci says property owners won’t begin to sell their portfolios at fire-sale prices. With interest rates for commercial loans lower than they’ve been in years, most building owners are content to refinance debt and wait until the market rebounds rather than sell for diminished prices.

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