Strong property fundamentals and investor interest dampened by interest rate pressure
Phoenix, May 17, 2018 – The Greater Phoenix investment real estate market started 2018 a bit slower than first quarter 2017, according to Colliers International’s Investment Research Report. Sales velocity in most sectors slowed while property fundamentals and investor demand remained very healthy. The greatest uncertainty in the market involves how interest rates will impact activity.
Sales activity traditionally slows during first quarter, as compared to the more hectic pace of closings at year-end. However, first quarter 2018 fell behind the pace of first quarter 2017.
Sales of office buildings slowed approximately 11 percent from fourth quarter 2017 to first quarter 2018. The most dramatic decline was experienced in the category of properties ranging from $10 million to $25 million. The median price for office buildings sold in the first quarter fell to $139 per square foot, following a year-long 2017 median price of $151 per square foot.
Medical office condo sales have been fairly consistent and we experienced an eight percent uptick in activity during the first quarter. Peoria and Scottsdale accounted for nearly half of the medical office condo sales during first quarter. The median price was $176 per square foot in first quarter, which is a $2 per square foot drop from 2017.
Sales of traditional, non-condo medical buildings dropped by 40 percent during first quarter, but activity has picked up in the early stages of second quarter. The median price of these properties fell to $136 per square foot during first quarter, down from $157 per square foot in 2017.
Sales of industrial buildings also cooled during first quarter, slowing by 17 percent from the end of last year. First quarter performance was just 2 percent behind the same time period of 2017. The median price rose 17 percent from 2017 to $97 per square foot during first quarter 2018. Cap rates dropped into the mid-6 percent range at the end of 2017, and inched higher to an average of 6.8 percent during first quarter 2018.
Sales of shopping centers dropped by 30 percent from fourth quarter 2017 to first quarter 2018. Investors are proving to be more selective when evaluating shopping centers, which is likely one of the reasons sales velocity has slowed. Despite a decline in volume, sales prices for retail properties rose during first quarter to a median price of $193 per square foot. This is a rise of more than 60 percent over the median price for all of 2017.
Pricing of properties has been mixed this year, with prices rising in retail and industrial while office and medical office categories experienced price dips. The fundamentals of the market should support price increases, but interest rates are rising and that could cause cap rates to rise.
Cap rates averaged high-6 percent to low-7 percent across Greater Phoenix commercial properties during first quarter. Cap rates are near cyclical lows because of strong investor demand for Phoenix assets. The yield on the 10-year Treasury rose 30 basis points during the first quarter and more escalations are expected during the remainder of 2018.
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Colliers International Group Inc. (NASDAQ: CIGI) (TSX: CIGI) is an industry-leading real estate services company with a global brand operating in 69 countries and a workforce of more than 12,000 skilled professionals serving clients in the world’s most important markets. Colliers is the fastest-growing publicly listed global real estate services company, with 2017 corporate revenues of $2.3 billion ($2.7 billion including affiliates). With an enterprising culture and significant employee ownership and control, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project management; workplace solutions; appraisal, valuation and tax consulting; customized research; and thought leadership consulting.
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Colliers International in Greater Phoenix has served clients locally and globally for more than 35 years.