Having been active as a commercial real estate professional in the Phoenix Metropolitan area for well over 20 years, I’ve witnessed the ebb and flow of our market through multiple economic cycles. Today, I’m seeing a landscape that’s both familiar and unfamiliar, which in turn presents its own unique challenges and opportunities for investors, developers, and tenants alike.
The Phoenix Metro area has long been known for its robust growth. Our market has shown remarkable resilience in the face of recent global Pandemic, economic uncertainties, wars overseas, and federal monetary policy changes recently. Given all of that, Phoenix has continued to outperform many other major metropolitan areas across the United States.
Industrial Sector Boomed and Cooling?
If you have had a chance to drive the new Loop 303 from I10 to I17, you need too! The explosive growth in the industrial sector along this corridor is absolutely amazing. There has been close to 60M Sq. Ft. delivered in the past couple of years. A huge driver is TSMC, the now $60B investment in the North Valley. E-commerce continues its rapid expansion and continues to fuel demand for warehouse and distribution spaces. The pace of this delivery has started to slow so that the inventory can be absorbed.
Beyond TSMC, we’re seeing a rise in smaller, last-mile distribution centers closer to urban cores, catering to the growing expectation for same-day or next-day deliveries. This trend is likely to continue as e-commerce further integrates into our daily lives. The vacant big box retail center may turn into that next warehouse or distribution center.
Office Is Experiencing Its Own E-Commerce Moment
Remember when everyone said that retail is dead, and that e-commerce was going to make retail properties obsolete? Today, everyone is talking about how WFA (Work From Anywhere) has killed the office building and environment. Retail survived after it incorporated technology. Office will do the same. As much as I have enjoyed the ability to jump on a quick Zoom/Meet call with a client, it is still not the same as being able to meet F2F (Face-to-Face).
Hybrid office use one of several solutions owners of office buildings are implementing. Enhanced amenities are increasing. Over 20 years ago, gym spaces in offices were considered a waste of space; now, they have been renovated and actually used by the tenants. Being close to retail/restaurant amenities will also be a major attractor for the successful office buildings.
However, on the other side of the offices with the amenities is the older, less functional office buildings. Repurposing these buildings to other uses will be part of a solution. Another solution will ultimately be those buildings being demolished to make way for a better use in the area in which it is located.
Retail Is Finally The Belle at the Ball
Post pandemic and lockdowns, we have seen retail properties experience one of the best revivals! Our market is currently hovering around an all time low in vacancy of 4%. Rents have risen and tenant demand continues to outpace supply. We are shifting back to the experiential retail, the trend that was tacking off pre-pandemic that was halted in its tracks. Medtail, medical use in retail continues to become prevalent as medical groups realize that they want to be closer to their customer as well to provide limited medical services.
As Phoenix continues to grow outward, we’re seeing opportunities for new retail developments in expanding suburban areas. A great example is the success that SimonCRE is having at Village at Prasada in Surprise. Retail is going to continue to follow the rooftops.
Multifamily Woahs
Even with Phoenix’s population growth, there was almost 30K units coming online at once. At the same time, rising interest rates with rising home prices made it hard for people to afford homes. You would think this would have been a perfect time for these apartments to shine. Some have done very well, given specific locations. Other properties have struggled because of the cost to operate the apartments have increased exponentially with inflation or they were built in an area without the major employment close by. Not every renter wants to be in an urban location and walking distance to an office that they no longer must go to for work.
Touching on Build-to-Rent (BTR) that has taken hold in Phoenix market really isn’t all that unique. It is similar to some of our inventory that was already low density apartments, which during the early 2000s were prime candidates for condo conversions. Could that be a potential exit strategy for the BTR developers and owners in the future?
Challenges Opportunities Looking Ahead
Overall, Phoenix is in a great spot. There are over 10, that is right, 10 Billion dollar projects currently underway, or being delivered soon. Not too long ago, the Marina Heights development in Tempe, a measly $500M development, was making all sorts of national news at the time; and that was only one large project.
The negative to that many Billion dollar projects has been the increased cost of construction, in addition to the inflation we have experienced. Labor has and continues to be an issue in the construction industry. The construction labor issue can really find its roots to SB1070 and the Great Recession. We are making great strides with the Trades School expansion, but more effort needs to be put into a long term sustainable supply of labor in the trades.
Article Links:
ASREB
2024 Phoenix Metro’s Commercial Real Estate: Mid-Year Review and Looking Forward
Having been active as a commercial real estate professional in the Phoenix Metropolitan area for well over 20 years, I’ve witnessed the ebb and flow of our market through multiple economic cycles. Today, I’m seeing a landscape that’s both familiar and unfamiliar, which in turn presents its own unique challenges and opportunities for investors, developers, and tenants alike.
The Phoenix Metro area has long been known for its robust growth. Our market has shown remarkable resilience in the face of recent global Pandemic, economic uncertainties, wars overseas, and federal monetary policy changes recently. Given all of that, Phoenix has continued to outperform many other major metropolitan areas across the United States.
Industrial Sector Boomed and Cooling?
If you have had a chance to drive the new Loop 303 from I10 to I17, you need too! The explosive growth in the industrial sector along this corridor is absolutely amazing. There has been close to 60M Sq. Ft. delivered in the past couple of years. A huge driver is TSMC, the now $60B investment in the North Valley. E-commerce continues its rapid expansion and continues to fuel demand for warehouse and distribution spaces. The pace of this delivery has started to slow so that the inventory can be absorbed.
Beyond TSMC, we’re seeing a rise in smaller, last-mile distribution centers closer to urban cores, catering to the growing expectation for same-day or next-day deliveries. This trend is likely to continue as e-commerce further integrates into our daily lives. The vacant big box retail center may turn into that next warehouse or distribution center.
Office Is Experiencing Its Own E-Commerce Moment
Remember when everyone said that retail is dead, and that e-commerce was going to make retail properties obsolete? Today, everyone is talking about how WFA (Work From Anywhere) has killed the office building and environment. Retail survived after it incorporated technology. Office will do the same. As much as I have enjoyed the ability to jump on a quick Zoom/Meet call with a client, it is still not the same as being able to meet F2F (Face-to-Face).
Hybrid office use one of several solutions owners of office buildings are implementing. Enhanced amenities are increasing. Over 20 years ago, gym spaces in offices were considered a waste of space; now, they have been renovated and actually used by the tenants. Being close to retail/restaurant amenities will also be a major attractor for the successful office buildings.
However, on the other side of the offices with the amenities is the older, less functional office buildings. Repurposing these buildings to other uses will be part of a solution. Another solution will ultimately be those buildings being demolished to make way for a better use in the area in which it is located.
Retail Is Finally The Belle at the Ball
Post pandemic and lockdowns, we have seen retail properties experience one of the best revivals! Our market is currently hovering around an all time low in vacancy of 4%. Rents have risen and tenant demand continues to outpace supply. We are shifting back to the experiential retail, the trend that was tacking off pre-pandemic that was halted in its tracks. Medtail, medical use in retail continues to become prevalent as medical groups realize that they want to be closer to their customer as well to provide limited medical services.
As Phoenix continues to grow outward, we’re seeing opportunities for new retail developments in expanding suburban areas. A great example is the success that SimonCRE is having at Village at Prasada in Surprise. Retail is going to continue to follow the rooftops.
Multifamily Woahs
Even with Phoenix’s population growth, there was almost 30K units coming online at once. At the same time, rising interest rates with rising home prices made it hard for people to afford homes. You would think this would have been a perfect time for these apartments to shine. Some have done very well, given specific locations. Other properties have struggled because of the cost to operate the apartments have increased exponentially with inflation or they were built in an area without the major employment close by. Not every renter wants to be in an urban location and walking distance to an office that they no longer must go to for work.
Touching on Build-to-Rent (BTR) that has taken hold in Phoenix market really isn’t all that unique. It is similar to some of our inventory that was already low density apartments, which during the early 2000s were prime candidates for condo conversions. Could that be a potential exit strategy for the BTR developers and owners in the future?
Challenges Opportunities Looking Ahead
Overall, Phoenix is in a great spot. There are over 10, that is right, 10 Billion dollar projects currently underway, or being delivered soon. Not too long ago, the Marina Heights development in Tempe, a measly $500M development, was making all sorts of national news at the time; and that was only one large project.
The negative to that many Billion dollar projects has been the increased cost of construction, in addition to the inflation we have experienced. Labor has and continues to be an issue in the construction industry. The construction labor issue can really find its roots to SB1070 and the Great Recession. We are making great strides with the Trades School expansion, but more effort needs to be put into a long term sustainable supply of labor in the trades.
Article Links:
ASREB
