August 2023 – Knowing the Numbers in Commercial Real Estate

If you want to succeed in any business, then it’s important to know your numbers. In my chosen field of commercial real estate, we have no shortage of opportunities to analyze data, statistics, graphs and charts. The market is constantly changing and it’s crucial to stay apprised of all the factors affecting the industry.

One of the questions I am asked daily is “How is Commercial Real Estate Doing?” The answer is never straightforward, and I am commonly giving the most predictable of answers: “It Depends!”

If you are a landlord or seller, your experience in the market is far different than if you are a tenant or buyer. If you are a cash investor then you may be looking forward to the next couple years, but if you are an office building owner with a loan coming due next year, you may be experiencing some sleepless nights. Retail spaces are at record low vacancy rates in Arizona. Office dynamics are just the opposite. Industrial and multi-family are both proving to be resilient but not bulletproof. Commercial real estate is a broad field and depending on your perspective, the market can be good, bad or somewhere in the middle.

We represent clients in all asset classes, conditions, markets, and price points, not to mention that each client has their own individual goals and motivations. For us to serve our clients at the highest level, it’s a must to study and understand the market on a consistent basis.

Look below at the numbers that we compile and track to help us understand what is happening in the market so that we can make informed decisions and better serve our clients. (Data courtesy of Costar)

Office Market

The Phoenix office market is currently facing an extended phase of demand disruption. This is highlighted by a negative net absorption of around 1 million square feet in the second quarter of 2023. As a result, the total negative absorption over the past year has reached 2.9 million square feet across 12 quarters. This decrease in demand has led to an escalation in vacancy rates, rising from 11.4% before the pandemic to the current rate of 15.6%, marking the highest level since 2015. Looking ahead, it is anticipated that vacancy rates will continue to rise over the next few quarters due to subdued demand and the potential onset of an economic recession impacting the sector.

SUB-MARKET	TOTAL SF AVAILABLE	VACANCY RATE	MARKET RENT	NET ABSORPTION SF	UNDER CONSTRUCT SF
TOTAL:	195M	15.6%	$29.20	42K	1.2M
4 & 5 STAR	69M	23.6%	$34.95	121K	649K
3 STAR	87M	13.5%	$27.46	-75K	537K
1 & 2 STAR	40M	6.6%	$23.01	-3K	0

Industrial Market

The Phoenix industrial market is gradually returning to a more balanced state, moving away from the rapid expansion observed in the years following the initial pandemic impact. Vacancy rates have risen from their record low of 4.1% in the middle of 2022 to 4.4% in the second quarter of 2023, and additional increases are anticipated for the latter part of the year. While leasing activities have displayed some signs of easing since the peak in the first quarter of 2022, the primary driver behind the recent rise in vacancy is the significant increase in construction projects across the metro area. This surge in construction is beginning to outpace the current level of demand.

SUB-MARKET	TOTAL SF AVAILABLE	VACANCY RATE	MARKET RENT	NET ABSORPTION SF	UNDER CONSTRUCT SF
TOTAL:	424M	6.1%	$12.78	1.5M	48M
LOGISTICS	305M	7.0%	$12.31	1.7M	43M
SPECIALIZED	95M	2.9%	$12.80	-150K	6M
FLEX	34M	7.6%	$17.44	-64K	322K

Multi-Family Market

The Phoenix multi-family real estate sector is currently undergoing a phase of disruption. The demand for apartments has shifted down from the remarkable levels witnessed in the initial two years following the pandemic’s onset, due to elevated inflation and economic uncertainties, which have hindered the formation of new renting households. Simultaneously, a substantial influx of new units from ongoing construction projects are being introduced into the market each quarter, surpassing the existing demand. This disparity has led to an increase in vacancy rates and a decline in rental growth. Forecasts suggest that the multi-family market fundamentals will continue to weaken in the upcoming period, given the ongoing situation where supply continues to outstrip demand. This scenario could be exacerbated by the potential occurrence of a recession.

SUB-MARKET	TOTAL SF AVAILABLE	VACANCY RATE	MARKET RENT	NET ABSORPTION UNITS	UNDER CONSTRUCT UNITS
TOTAL:	372K	9.9%	$1,575	1,194	35K
4 & 5 STAR	173K	10.8%	$1,812	1,093	24K
3 STAR	140K	9.7%	$1,434	160	10K
1 & 2 STAR	60K	7.8%	$1,100	-59	783

Retail Market

The Phoenix retail market continued to outperform in 23Q2 as strong demographics, resilient consumer spending, and steady job creation supported demand at local retailers. Thanks to these tailwinds, The Valley recorded its eighth-consecutive quarter of positive net absorption, compressing vacancy to an all-time low of 4.7%. Quick-service restaurants, grocery stores, medical tenants, and fitness users have been the primary source of growth.

SUB-MARKET	TOTAL SF AVAILABLE	VACANCY RATE	MARKET RENT	NET ABSORPTION SF	UNDER CONSTRUCT SF
TOTAL:	241M	4.7%	$23.78	5K	2.3M
POWER CENTER	32M	3.4%	$26.32	22K	63K
NEIGHBORHOOD CENTER	91M	5.9%	$22.88	-4K	310K
GENERAL RETAIL	84M	3.0%	$22.96	-40K	1.6M

As always, if you have questions about your business and investing goals, I am happy to meet and help you build a strategy for your long-term success.

Hani Aldulaimi, CCIM
Managing Director

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