Before the onset of the COVID-19 pandemic, the Phoenix-area commercial real estate market was strong and prepared to weather the storm, better than other markets across the U.S.
Here is a snapshot of Phoenix’s commercial real estate industry in the year to come.
Industrial is the dominant and darling sector in CRE (commercial real estate) in the Greater Phoenix area. According to CoStar, absorption was more than 17-million-square-feet and vacancy rates less than 7%. I fully expect this sector to continue its hot streak well into 2021.
In 2020, E-commerce was a dominant factor, however, there are additional driving factors.
In addition to E-commerce, land and development costs, Arizona’s business-friendly environment and rent that is 35-40% below the average rent in Los Angeles and Orange County are a few of the additional driving factors. I expect that we will continue to see this trend accelerate through the end of the year.
Along with the industrial sector, apartments are another hot spot in the Valley. With robust population growth over the years and lack of single-family inventory, these factors contributed to this anomaly remaining strong through 2020.
In 2021, I believe that we will see some moderation from the aggressive development and investment in apartments that we have seen, but with the new supply coming on the market in the next 12 months, it may raise concerns about oversupply in certain submarkets of the Phoenix-area. I think we should expect our multi-family sector to remain strong and level off a bit from the past two years.
With COVID-19 came a shift to a work-from-home environment. We can expect the office sector to feel long-term effects of the pandemic. Many companies have reduced their office footprint as they factored in how the work-from-home model impacts employee performance. Another element that has surfaced is the “health” of office buildings, raising the question of “will owners/landlords need to implement touchless tech, hi-tech air filtration systems, anti-microbial materials and other resource?”
Our suburban office market actually performed quite well with smaller offices (hub and spoke models), meaning less commute times which is beneficial to employees. Overall, I think that we can expect a rebound in the office sector in the second half of 2021.
Along with the hospitality industry, the retail industry got hit the hardest by the pandemic. With E-commerce impacting brick and mortar businesses prior to the onset of COVID-19, many businesses were shuttered and will not reopen. That said, many retailers like grocers, drive-throughs and home improvement have shined through the last year and will continue to do so.
As we know, Arizona’s hospitality industry continues to feel the impact of the past year. But with the Valley of the Sun being a longtime winter destination and with time, the retail and hospitality businesses that survive this storm will thrive in the long haul.
All in all, I’m optimistic about the CRE market in Phoenix. The Sunbelt is the fastest-growing part of the country, with an estimated 19 million additional residents expected in the next 10 years.