Property performance continuing to strengthen across all sectors

The Greater Phoenix investment market generated headlines at the end of 2017, highlighted by the metro area’s largest commercial real estate sale on record. With property performance continuing to strengthen across all sectors, the investment market should remain active in the year ahead.

Overview

  • Sales activity generally accelerated during the fourth quarter, with sales of shopping centers and industrial buildings leading the way.
  • The one segment of the market where sales activity did not gain momentum was the medical office sector.
  • Pricing trends were uneven during the fourth quarter. Prices rose in office and medical office buildings, but inched lower in shopping centers and industrial buildings. For the full year, prices generally trended higher.
  • Cap rates generally compressed into the low- to mid-7 percent range in 2017. Investor demand is outpacing the number of properties available for acquisition. Rents are also on the rise, allowing buyers to accept lower cap rates today in anticipation of stronger cash flows going forward.

Office

  • Sales of office buildings rose by more than 10 percent from the third quarter to the fourth quarter. Dollar volume surged in the fourth quarter, fueled by the $928-million sale of the Marina Heights project in Tempe.
  • Prices rose in 2017, highlighted by a spike in the final few months of the year. The median price in properties that sold during the fourth quarter was $184 per square foot, up more than 30 percent from the figure in the third quarter. This brought the median price for 2017 to $138 per square foot, up 6 percent from the 2016 median price.

Medical Office

  • Sales of medical office condos were flat from the third quarter to the fourth quarter. The pace of sales velocity slowed during the second half of the year, and total transaction activity in 2017 lagged 2016 levels by nearly 30 percent.
  • While fewer medical office condos are selling, prices are still trending higher. The median price during the fourth quarter spiked by approximately 50 percent, reaching $219 per square foot. For all of 2017, the median price was $181 per square foot, an 8 percent increase from 2016.
  • Sales of traditional, non-condo medical office buildings fell by more than 20 percent from the third quarter to the fourth quarter and for the year, sales slowed by nearly 30 percent compared to 2016 levels.

Industrial

  • Sales of industrial buildings closed 2017 on an upswing, rising 13 percent from the third quarter to the fourth quarter. For the year, sales velocity was up 16 percent compared to 2016 levels. More buildings sold in 2017 than in any year since 2007.
  • After a rise during the third quarter, the median price in the fourth quarter dipped back to $83 per square foot. The median price for all of 2017 was also $83 per square foot, up approximately 15 percent from the 2016 median price.

Shopping Centers

  • Sales activity of shopping centers accelerated during the fourth quarter, surging by approximately 35 percent from activity levels in the third quarter. While sales spiked at the end of the year, sales velocity in 2017 was down 4 percent from the 2016 total.
  • The median price inched lower during the fourth quarter, dipping 26 percent to $109 per square foot. The median price for all of 2017 was $114 per square foot, 6 percent lower than the median price in 2016.