R.O.I. Real State – Commercial Newsletter- June 2020

While the challenges are numerous, the Valley has significant advantages over other metro areas, which will lead to a stronger and quicker recovery—since the current recession was not economically driven and the Greater Phoenix Area has a much more diversified economic base than we did during the Great Recession.

All things considered, the owner-occupant market is holding up reasonably well in most sectors of Phoenix commercial real estate. Investor properties, however, are in a state of flux, with many unknowns. The trends the R.O.I. Properties team is monitoring closely include the effects of remote work on subleasing and cohabiting for office properties, the winners and the losers in the new “normal” for retail and restaurants, occupancy levels at hotels and short-term rental properties, demand for Class A multifamily housing, and forbearance and default rates for commercial loans. 

Whew. No shortage of matters that require deep study, with continual change!

Here’s a quick look:

Office sector: Year to date, 1,425,262 SF of office product has been added to the market. So far in the second quarter, 245,000 SF of office space has been started, which is down from the roughly 940,000 SF started in quarter one of this year. Vacancy rates are holding steady at around 12% for the year. Office construction hasn’t absorbed the shock of the pandemic yet; change is likely on the way.

Industrial sector: More than 7.7 million SF of industrial space started in the year’s first quarter, with another 1 million SF started so far in quarter two. According to CoStar, 6.6 million SF has been completed year to date. Vacancy rates remain around 7.2%, just slightly up from the 6.9% reported last year.

Retail sector: Retail construction starts are the lowest the Phoenix market has seen in 10 years, according to CoStar. Quarter one saw 118,000 SF in starts and quarter two has seen 100,000 SF. More than 686,000 SF of retail product has been completed so far this year. Vacancy rates have ticked up to 7.2%, but are likely much higher than reported, as businesses are moving quickly to stop the bleeding, after PPP funds dry up.

Multifamily sector: So far in 2020, more than 5,000 multifamily units have been started in the Phoenix metro and another 3,600 have been completed. CoStar reports that multifamily construction will remain elevated until 2021. At 6.8%, vacancy rates have risen from the 6.1% reported in 2019.  There are over 15,853 units under construction at the present time, all of which are considered to be highly-amentized Class A projects.