Outlook bright for commercial real estate

Area heads into new year generally in good shape

Valley hotels are feeling a sugar rush from Super Bowl visitors. Warehouses and other industrial properties around metro Phoenix are filling with tenants who found it too costly to locate in Southern California.

Office high-rises still struggle to cope with work-at-home policies, but apartment complexes are benefiting from tight housing. Brick and mortar stores are attracting consumers tired of shopping online.

In short, commercial properties around metro Phoenix are heading into the new year in generally good shape, propelled by the area’s industrial expansion, attraction of residents from other states and solid economic growth. Rising costs, labor shortages and other pressures are still present, though.

Those were among the highlights of a recent conference in Phoenix hosted by local chapters of the Institute of Real Estate Management and CCIM, which provides a professional designation for those in the commercial real estate industry.

Danny Court, a senior economist at Elliott D. Pollack & Co., tempered the mood with predictions for a mild recession this year, arguing that a slowdown is needed to get inflation under control. But a downturn, if one arrives, might not slow the Valley’s momentum all that much, Court added.

“Even with a recession, we’re predicting 2% job growth this year,” he said.

Gradual return to work affects office properties

Market conditions are still depressed for office properties around the Phoenix area, crimped by sluggish demand as many employers allow staff members to work from home. The COVID-19

pandemic that began in early 2020 still is affecting work routines and office-space needs.

Office brokers, leasing experts and others speaking at the conference were divided on what that might mean.

“More and more, we’ll see employers asking people to come back (at least) four days a week,” said Andi St. John of CBRE. Tuesdays and Wednesdays now are the busiest days for garage parking, she added.

However, Josh Tracy of Ryan Companies didn’t see offices filling up all that much anytime soon. “It will be challenging to ask people to come back, especially five days a week,” he said. “I think we’ll see hybrid schedules for the intermediate future.”

If that’s the case, Tuesday, Wednesday and Thursday could be the busiest days in the office, and Fridays the least active, predicted Michael Marsh of Colliers International.

Super Bowl ‘sticker shock’ propelling hotels

Few industries were hit harder during the pandemic than hospitality, as travel dried up and conferences were canceled. Business gradually has recovered, with rising room rates, said Jesse Thompson, area director for sales and marketing at Hotel Valley Ho.

The hospitality business hasn’t fully returned to pre-pandemic levels but is making progress. Currently, travel lodging around metro Phoenix is getting a big boost from the Super Bowl, which will be played Feb. 12 at State Farm Stadium in Glendale.

Describing what he called Super Bowl “sticker shock,” Thompson said some rooms at his company’s properties, which include Hotel Valley Ho and Mountain Shadows Resort, are fetching prices above $1,800 to as much as $10,000 a night. The 2022 Super Bowl was played in Los Angeles and featured the Los Angeles Rams, which cut down on out-of-state attendance, Thompson noted. Not so this time around.

“This year, everyone wants to come,” he said. “There are still rooms available, but you’re going to pay a lot of money.”

Hotels.com this week was reporting average rooms rates in Scottsdale and downtown Phoenix at about $600 a night. Residents of Philadelphia and Kansas City could lead the charge, as the Eagles and Chiefs qualified for the big game with wins on Sunday.

Thompson said he expects some weakening for the hospitality sector over the second half of the year, especially if a recession takes hold.

Industrial properties shine brightest

Among the major commercial property markets around the Phoenix area, industrial appears in the best position. Much of this reflects growth and diversifying in the Arizona economy with more technology and other businesses, said Mike Haenel of Cushman and Wakefield. Nor has all that much speculative construction driven up vacancies, he said.

For at least the next year or so, “we’re going to be in great shape,” he predicted.

Though construction activity is brisk for warehouses, factories and other industrial sites, demand remains high and vacancy rates are modest, around the mid-single digits. Vacancies are even lower in Southern California, where available land is more scarce and rental rates are at more of a premium. Central Arizona is benefiting from that.

“If you’re a company coming from the East or Midwest, you can’t go to California” owing to space limitations, said Rob Martensen of Colliers International. “My phone is ringing off the hook from people wanting to come to Phoenix,” he said. “It’s super busy.”

Jeff Foster of Prologis said metro Phoenix is transitioning from what he called a secondary market for industrial space to a primary one able to attract more types of tenants. “The business will keep coming here,” he predicted.

Retail recovering, too

Stores, restaurants, theaters, gyms and other retail establishments also are faring reasonably well, with average vacancy rates around 5%.

“People want to get out, do things and have fun,” said Aaron Strole of Capital Asset Management. Retail sales have picked up, he added.

It helps that metro Phoenix continues to attract newcomers from other states and nations — people who buy groceries, dine at restaurants, exercise at gyms and do other routine activities. A net 67,000 new residents moved to metro Phoenix over a recent 15-month measurement period. That was more newcomers than any other U.S. metro area attracted.

“People are moving here,” said Rommie Mojahed of SVN Desert Commerical Advisors. “I feel we’re in a really good market right now.”

Michael Pollack of Pollack Investments predicted the coming year will be one of change and opportunity, and he too reiterated the theme of shoppers returning to stores.

“People want to touch things and feel things,” Pollack said. And even if a recession materializes, it might be a mild one, he added.

Rents up; apartments needed

Metro Phoenix continues to attract newcomers from other states and nations, and that has bolstered demand for apartment buildings while pushing up rents. Labor shortages, higher prices for many construction supplies, delays, rising land costs and more expensive loans all have made it more costly to build multifamily units.

“You need rents to cover all of that,” said Jim Crews of Cushman & Wakefield.

Rents have trended higher across the nation, but these pressures are more pronounced in the Phoenix area, which had the nation’s second-highest metro inflation rate in 2022, attributable largely to escalating housing prices and rents.

Given the difficulty many tenants are having with affordability, much new development ahead could focus on smaller units including no-bedroom studio apartments. “Studios have become very fashionable,” said Patrick O’Meara of Taylor Street.

The Phoenix area still needs 13,000 to 16,000 new apartment units a year to meet expected demand, “but we’re not reaching it,” Court said.