As the Valley of Sun enters the hot summer months, some sectors of commercial real estate nationally are experiencing cooling, there are areas in the Phoenix commercial real estate sector that remain strong. In order to better understand and assess where Phoenix fits in the 2024 commercial real estate forecast, it’s imperative to examine the trends as well as the economic, geopolitical and business drivers.
A recent forecast from CBRE suggests that the popularization of the hybrid work model will continue to limit the growth of office demands nationwide. However, as investors reallocate monies from this sector, the demand for alternatives, such as new data center development, will increase and attract more institutional investment.
How foreign direct investment is making an impact
The Phoenix-metro area continues to attract big tech players and the semiconductor industry is no stranger to the desert. The biggest and most historic investment comes from TSMC, who first announced its plans in 2020 with a shared investment of $12 billion. Just two years later, the company announced the building of a second fabrication facility, increasing its total investment to $40 billion. Then in April of 2024, it was announced that upwards of $6.6 billion in direct funding under the CHIPS and Science Act would fulfill a goal of bringing the most advanced chip manufacturing in the world to Greater Phoenix.
In addition, TSMC has plans to build a third facility, increasing its investment to more than $65 billion, creating about 6,000 new jobs and giving the construction industry a massive bump too. This is the largest foreign direct investment in Arizona’s history.
Office vacancies and Phoenix’s rate of unemployment
A recent article from AZ Big Media reported that the overall office vacancy rate in Phoenix metro rose to 27.2% and recorded negative absorption with more than 1.1 million square feet for all building classes in Q3 2023, estimating close to 4 million by year-end 2023. Despite the increase in vacancy, Q1-2024 continued to see increases in rental rates and sales from investors remains strong. This is largely a result of the decrease in construction of new buildings.
As we enter Q2-2024, potential investors will be watching vacancy rates and monitoring continued increases in new residents and business starts. One thing is certain, office vacancies is in no way related to the city’s rate of unemployment. Phoenix’s low unemployment rate makes the area a desirable hub for investors. The current rate is 2.30%, lower than last year’s 3.00% and notably lower than the long-term average of 5.41%. The Phoenix metro area is going through a major growth spurt, adding new residents with sophisticated skill sets.
Environmental sustainability
The City of Phoenix has ambitious goals for improving its approach to waste management and water stewardship. While sustainability might be viewed as a “trend,” it’s essential to the future of a growing metropolis, especially one located in a desert. It is also an economic and geopolitical business driver. The City of Phoenix has goals to reach 50 percent waste diversion by 2030 and zero waste by 2050. The plans to achieve these goals include the development of a circular economy, maximizing recycling efforts and reuse, where possible, to divert resources away from the landfill. In its effort to proactively address water issues, Phoenix built infrastructure systems and incorporated use of groundwater to use on only two-thirds of its allocation from the Colorado River. This city also recycles almost 90% of wastewater for irrigation and colling power plants.
Residential and business growth positions Phoenix well in the 2024 commercial real estate forecast. Going forward, the commercial real estate forecast looks extremely healthy overall for Phoenix and its surrounding metro areas. Landmark Title’s team of professionals have worked in the industry for decades and navigated the highs and lows of the market successfully and helped our clients throughout.
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