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PHOENIX-Three consecutive quarters of negative net industrial absorption are a “wake-up call to everyone,” says Jason Klonoski, Cushman & Wakefield of Arizona Inc.’s director of the industrial properties division.

It’s been nearly a decade since a sting like this has been felt in many regions of the country and Phoenix is no different. One quarter of negative net absorption is one thing, but three pushes a red flag up the pole on lending practices and construction while sounding a call for belt-tightening practices.

Klonoski predicts to GlobeSt.com that the third quarter could be the end of the losing streak in the Phoenix region. Some of the market, he believes, will return this quarter and significant gains will surface by Q1 2002 or shortly thereafter.

Year-to-date, the Valley has lost 2.2 million sf of industrial space absorption. The 9.1% vacancy would be welcome in many parts of the US, but it’s a hard hit in this region. “Just a short while ago it was 6.6%,” Klonoski says. “Psychologically, it’s affecting the landlords.” In the high-tech space arena, the barometer rose to 12.6% vacancy Valleywide while warehouse-distribution’s vacancy hit 10.3%. Office service space posted 11.6% vacancy overall and manufacturing, 5.4%.

The spike is being blamed on bankruptcies such as MicroAge, a Revlon shutdown of a major facility and a downsizing of a couple hundred thousand sf at Bank One. Warehouse-distribution space “represents the largest segment of negative net absorption” in the Valley this year, according to the C&W third-quarter industrial analysis.

The losses aren’t Valleywide and varies according to product type. The Southeast Valley’s manufacturing vacancy is a mere 3.2% while office-service space in Tempe is 5.2%. On the other side of the spectrum, the South Mountain area has a 36.2% vacancy in office-service product while Sky Harbor-Central Phoenix has 28.1%. Blame it on delivery of new product and slower-than-expected lease-ups in the Cotton Center, says the report.

Construction is comparable to 2000′s 7.1 million sf of deliveries, according to the analysts. This year, 2.1 million sf of industrial space has come on line and another 5.3 million sf in 81 buildings are under construction. “The good news is that construction is slowing. Lenders have reined in their money,” says Klonoski. And, a number of projects were tabled until a turn-around is evidenced.

Existing market conditions are more a byproduct of over-leasing than overbuilding, Klonoski assesses. North Tempe and Southwest Phoenix submarkets posted the largest losses, each accounting for more than one million sf year-to-date. About 3% to 4% of the southwest’s vacancy involves short-term space that is practically “unleasable” so it’s just sitting idle and waiting for rollover. “We likely will see more consolidations on that side of town,” Klonoski predicts. It’s not all bad in the Valley since some submarkets are operating in the black, specifically far southwest Phoenix and Chandler, posting positive absorptions of 889,496 sf and 397,674 sf respectively.

New direct space is in a losing battle with sublease space because most building owners need “to achieve a certain rent because they paid top-of-the-market land prices,” Klonoski says. Concessions have gone as high as 10 months free rent for a six- or seven-year lease and TIs for credit-worthy tenants are well above the norm of the $30 per sf cap. Some markets, he says, slashed rates by 10% from last year’s highs. Consequently, lesser credit tenants are beginning to stack up as likely prospects for some building owners. It’s an option to running the risk of protracted vacancy in a market where “very few good credit tenants are out looking for space,” he says.

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