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SCOTTSDALE, AZ-Rents are down, vacancy rates are up and new construction is outpacing the demand, yet the future of Phoenix’s industrial and commercial real estate market looks bright as job growth fills the void created by today’s stagnant economy. That’s the prediction from local real estate leaders at yesterday’s Trend Watch 2002 conference.

“I do believe we’ve bottomed out,” Michael Haenel, senior vice president of Grubb & Ellis Co.’s Phoenix industrial group told about 300 brokers and developers at the National Association of Industrial and Office Properties conference.

Haenel said growth in the electronic, transportation and machinery sectors should keep Phoenix’s economy robust over the next two years, much as it has in the past when the region ranked first or second in job growth every year since 1993.

But the area’s rapid growth also has sparked a speculative building boom that is outpacing the demand, causing a drop in rental rates and an increase in vacancies. In the last 25 months, Haenel said, rents have dropped between 10% and 25% in most submarkets while the vacancy rate has surged into double digits for the first time in 10 years.

Yet, the next two years are expected to bring a turnaround in those figures as more companies, attracted by the region’s quality of life, cheap housing costs and plentiful land, move into the area. “Tenant demand is expected to hit the radar screen,” he said of the future.

While 2001 brought an overbuilding of commercial and industrial properties due to demand, the next two years should see construction decline and vacancy rates drop, predicted R. Craig Coppola, founding principal of Lee & Associates Arizona.

North Scottsdale is one of the few submarkets to post to the positive in absorption, accruing 2.3 million sf since 1998 while its peers throughout the Valley drop. Valley-wide, there is more than two million sf of sublease space available.

Particularly hard hit has been the Camelback Corridor, which has had a negative absorption rate for the past two years. Most of the submarket’s demand, Coppola noted, has gone to North Scottsdale. In the metro’s Deer Valley section, 45% of the available space remains vacant. Even more dismal, he noted, is the absorption rate in the mid-town section of Phoenix, which hasn’t seen positive absorption in more than four years.

“It is a cannibalistic marketplace,” Coppola said of the city’s mid-town. “This is a marketplace that’s still going to be a tough one.”

Yet while absorption rates remain mixed, Coppola said class A office space has seen an increase in leasing of 112% over the last 4 1/2 years. “There’s a flight to quality,” Coppola said, noting that tenants have taken advantage of competitive rental rates to upgrade their facilities.

While class A space will continue to be hot, he predicted difficult times ahead for class B and C owners as the market continues to exert a downward pressure on rental rates. Yet as construction slows over the next two years and jobs increase, Phoenix could enjoy a tighter real estate market than it has in the past.

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