The Arizona commercial real estate sector can be somewhat unpredictable; a reality that was only enhanced by COVID-19 and its after-effects. The good news is that post-pandemic, we see most things in life getting back to ‘normal’. While the commercial real estate market is still experiencing some turbulence in many areas across the U.S., due to continued growth in Arizona, there is positive news to report.
After-effects of COVID
While there is news of CEOs demanding employees return to the office, we continue to see companies embracing new policies that support hybrid or work-from-home schedules. As quite a few companies stick with a hybrid work model and employees push to work from outside the office confines, demand for office space is decreasing and changing.
Vacancy rates are up, but so are rental rates in Greater Phoenix. Subleases are also increasing, as companies return to the office but need something different than before. Many are taking advantage of unused space now available. As a result, we are seeing demand for smaller offices and companies reconfiguring or repurposing the space they have. One bright spot is a strong demand for medical offices.
Another area in the commercial real estate sector that the after-effects of COVID continue to impact is retail. There is a decrease in foot traffic due to the increase in online shopping and WFH. Pre-COVID, we saw consumers embracing e-commerce, and COVID only increased online shopping habits and converted more in-person shoppers to shop online. As a result, demand for general retail store space is decreasing, but demand for grocery, fitness and restaurant space remains strong.
The Arizona Difference
The commercial real estate industry in Arizona differs from the rest of the country largely due to its synergy between the various commercial projects. For example, industrial projects bringing along additional commercial projects such as office buildings and multi-family housing. Arizona’s population and job growth continue to drive commercial demand. It is also highly desirable for warehousing and logistics operations. We are also seeing growth in manufacturing and big investments being made in the semiconductor industry.
Arizona is business-friendly and lacks the threat of natural disasters, which make the area attractive to both commercial and residential growth.
In the past 20 years, cities have curtailed roadblocks to commercial real estate development. Cities are now much more eager to support and move along commercial real estate projects. One way Arizona sets itself apart in that aspect is through self-certification. The city of Phoenix started self-certification on certain projects, which means projects can be self-certified by licensed professionals instead of every plan and permit having to go through city staff for approval. While this process hasn’t eliminated the red tape, it provides a path to speed things up and encourages collaboration between developers and municipalities.
Not only are new projects and jobs bringing people to Arizona, but rising costs and living conditions in other states are driving people to the state. States like California are experiencing an abundance of challenges including high cost to business operations beyond the high price tag on commercial real estate. Arizona is an attractive alternative for relocation. Moving from California to Arizona gives employers the ability to offer employees a livable wage, taxes and licensing for businesses is generally lower in Arizona and commercial space and land is still available in many areas. In addition, while Arizona’s climate is hot during four months of the year the weather the remainder of the year is quite nice and it does not have the threat of natural disasters that other states do.
There isn’t a CRE crystal ball, but if there was, it would show a bright future for Arizona’s commercial real estate market. Arizona remains a great place to live and work with job opportunities in many industries. While the commercial real estate industry is struggling to recover in other areas, it is thriving and growing in Arizona.
Landmark Title has an experienced team of professionals with expertise in handling complex commercial real estate transactions. If you’re considering a commercial real estate purchase, contact us today to speak with one of our team members about how we can help.