For the fifth year in a row, the Phoenix metro area ranked as the fastest-growing city in the United States, according to the US Census Bureau. Phoenix’s appeal as a business-friendly destination has spurred local investment and attracted headquarters, acquisitions, and development from California’s pricy coastal markets. Here’s an overview of how the four commercial real estate sectors performed in 2021:
Industrial Sector. Industrial has been a standout in recent years due to online commerce and strong demand for “last mile” delivery. The pandemic further fueled demand for warehouse and distribution space in Phoenix after a record year in 2020. An estimated 18 to 20 million square feet of industrial space was leased, led by the West Valley. Amazon alone inked 13 leases from January 2020 through June 2021, and last week announced a 63,000-SF expansion at its existing 100 Mill facility in Tempe. As might be expected, Amazon-leased facilities command high prices, including a recent $71.5 million purchase in Glendale.
Retail Sector. Boosted by pent-up demand, retail leasing is approximately back to pre-pandemic activity levels. Vacancies ticked up slightly in the first half of the year, but robust absorption in Q3 2021 and the demolition of over 1 million SF brought vacancy rates to pre-pandemic levels as well. Looking ahead, the retail market will have divided potential, which means investors need to take a targeted approach. Discount, grocery, drive-thru, and service-based retailers will continue to expand, while other retailing segments will continue being challenged by e-commerce and evolving consumer expectations and preferences.
Multifamily Sector. Multifamily performed well through much of the pandemic, and vacancies have compressed below 5% in all three property types. Record apartment demand has been compounded by historically low single-family housing inventory, resulting in the country’s highest rent-growth rates, in excess of 20%. After a robust sales year, December is finishing strong, with the 1,222-unit Vaseo apartment community selling for $325 million on the 15th and a 5-property, 1,448-unit portfolio selling for $414.5 million on the 21st.
Office Sector. Office space recorded its weakest performance since the Great Recession. Vacancy rates and available space are up; in addition, a significant percentage of leases are coming due in the next few months, which could increase direct and sublease space. On the optimistic side, leasing activity has increased; asking direct lease rates and average gross rates have risen in all three property classes this year; and Q3 investment sales notched the second-best quarterly volume in the past three years. In early December, Block 23 in downtown recorded the year’s top sale at $150 million. Still, the prospects for this market remain uncertain while businesses formulate work-from-home/hybrid strategies and reduce their footprints to save on expenses.
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