What to Expect in the Greater Phoenix Commercial Real Estate Industry in 2021

by Rick Padelford

The buzzword for 2020 across all industries, including commercial real estate, was “pivot.” Fortunately, the fundamentals of the Phoenix-area commercial real estate market were strong before the onset of the COVID-19 pandemic, so we were prepared to weather the storm better than other markets across the U.S.

Here is a snapshot of Phoenix’s commercial real estate industry in the year to come.

Industrial

Industrial is the dominant and darling sector in CRE in the Greater Phoenix area. According to CoStar, absorption was more than 17 million square feet and vacancy rates less than 7%. I fully expect this sector to continue its hot streak well into 2021.

In 2020, e-commerce was a dominant factor. However, land and development costs, Arizona’s business-friendly environment and rent 35–40% below the average rent in Los Angeles and Orange County are a few of the additional driving factors. I expect we will continue to see this trend accelerate through the end of the year. 

Multifamily

Apartments are another hot spot in the Valley. Robust population growth over the years and lack of single-family inventory are factors that contributed to this anomaly remaining strong through 2020.

I believe 2021 will show some moderation from the aggressive development and investment in apartments that we have seen, but the new supply coming on the market in the next 12 months may raise concerns about oversupply in certain submarkets of the Phoenix area. I think we should expect our multifamily sector to remain strong and level off a bit from the past two years.

Office

With COVID-19 came a shift to a work-from-home environment. We can expect the office sector to feel long-term effects of the pandemic. Many companies have reduced their office footprint as they factored in how the work-from-home model impacts employee performance.

Another element that has surfaced is the “health” of office buildings, raising the question “Will owners and landlords need to implement touchless tech, hi-tech air filtration systems, anti-microbial materials and other resources?”

Our suburban office market actually performed quite well with smaller offices (hub and spoke models), meaning less commute times, which is beneficial to employees. Overall, I think we can expect a rebound in the office sector in the second half of 2021.

Retail

Along with the hospitality industry, the retail industry got hit the hardest by the pandemic. With e-commerce impacting brick-and-mortar businesses prior to the onset of COVID-19, many businesses were shuttered and will not reopen. That said, retailers like grocers, drive-throughs and home improvement have shined through the last year and will continue to do so.

As we know, Arizona’s hospitality industry continues to feel the impact of the past year. But, with the Valley of the Sun being a longtime winter destination and with time, the retail and hospitality businesses that survive this storm will thrive in the long haul.

All in all, I’m optimistic about the CRE market in Phoenix. The Sunbelt is the fastest-growing part of the country, with an estimated 19 million additional residents expected in the next 10 years.

Although I’ve not seen the final for 2020, I anticipate in-migration will be up around 100,000 in Maricopa County — that’s practically another city! With the continued excellent work of organization such as the Arizona Commerce Authority, GPEC and municipal economic development teams, we are in great hands for future job growth, which translates to more opportunities in commercial real estate.

Rick Padelford, CCIM, Realty Executives Commercial, Arizona REALTOR®, has more than 25 years’ experience in the Phoenix market and beyond.

 

 

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