A Reality Check Comes to the Commercial Market
The market reality is finally setting in on the commercial side of Greater Phoenix, sometimes in unexpected ways. On a weekday morning in mid-December, there was a mandatory fire drill in the building where R.O.I. Properties is located, one of the towers at the Esplanade on 24th Street and Camelback. Once the building had emptied out, about 100 people were lined up outside.
For perspective, the building is just over 300,000 SF. Using an average of 175 SF per person (200-400 SF for executives and 100 SF for open-office employees), a fully occupied space that size would have about 1,750 people.
While this is anecdotal and not a scientific analysis of market statistics, it serves as an indicator of how people are occupying (or not occupying) office space in reality. The return to the office remains elusive.
The challenges are compounded by the reality of leases coming up for renewal in the next 6 months, many of them anticipated to be with smaller footprints. In addition, Phoenix took the #1 rank in the country for the largest gains in sublease inventory since the third quarter of 2019. Subleases are up 424% since Q3 2019, with a total of 7.2 million SF as of the end of November representing about 3.7% of the total market. While San Francisco has more total inventory on a percentage basis (5.6%) and 7 metros have 10+ million SF on the market, Phoenix’s numbers are a lot to digest—keeping in mind, those are only the spaces that have been publicly listed.
Over the course of the past year in The Real State, we’ve often discussed the flight to quality, i.e., employers seeking out space that can lure employees back to the office. We are also seeing interest from multifamily developers in repurposing larger office properties in highly desirable locations—with the caveat that so much multifamily is already underway.
Looking across all asset classes, many institutional investors are waiting for the market to settle out before they start acquiring again, and some are selling off product and redeploying capital outside of real estate. In addition to office, we have seen several retail centers sold on a portfolio basis, as well as numerous deals in industrial and self-storage facilities. Builders have been relatively quiet as they prepare for the next cycle.
As that shift occurs, the composition of the buyer base is changing: There is potential for cash-rich, value-driven buyers to acquire properties at fair-market pricing without financing.
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