As we settle into the second half of 2024, it’s time to review the overall economy, our current commercial real estate market and what we can expect in the second half of the year. Let’s start with a few of the market indicators that we have our eye on:
Labor – Even though employment continues to grow at a healthy pace, it has grown more slowly in recent months and concentrated in only a few industries. Additionally, wage increases has decelerated to the lowest levels in three years. The unemployment rate has risen from 3.5% to 4.1% in less than a year and could be one of the clearest signs yet that a recession may be near.
Inflation – Core inflation continues to slow and is now at the lowest level in three years which makes the prospect of the Fed cutting rates starting in the fall of 2024 more likely. I wouldn’t expect too many rate cuts this year but even small cuts to the rate may be enough to signal to the market that the worst of inflation is behind us.
Consumer Spending – Americans are saving less these days and credit card debt is hitting record highs, but consumers are still spending at a steady pace. If this trend continues it will bode very well for the overall economy and could indicate that any recession or downturn may be mild in nature. The big question is will consumers continue to spend or will there be a shift in spending habits. This one factor is a big deal!
Election – You may have heard that we have an election coming up. This election is going to be tight, the country is polarized and uncertainty abounds. When consumers and businesses are uncertain about the future, they are more inclined to put investments and hiring on hold. Expect a slowdown in the coming months as November approaches. (***Side note – I wrote this an hour before the assassination attempt on Former President Trump. Polarized now seems like an understatement***)
So how are these economic conditions affecting the commercial real estate market? Here is an asset breakdown:
Multi-family – Americans continue to move to Phoenix and demand for apartments has remained strong.19,000 new apartments have been built in the last year and another 33,000 units are under construction making Phoenix one of the most active multi-family development markets in the country. Those additional units will increase the vacancy in the short-term leading to slightly lower rent rates and more concessions from property managers. Long term this sector will remain strong due to continued population growth, positive job creation, a continuing diversification of the Phoenix economy and the lack of housing. The sale of multi-family properties is down more than 75% in the last twelve months but that is more indicative of higher interest rates and a tighter lending environment and not a lack of interest from investors.
Industrial – The vacancy rate for industrial space in Metro Phoenix continues to climb mostly due to the 43 million SF of space that is newly built in the last twelve months alone. Even though demand remains steady, it has not been enough to absorb all the new space introduced into the market. The higher vacancy rate has contributed to slower rent growth which is expected to continue because there is another 40 million SF under construction and expected to be delivered into 2025. Believe it or not, the expectation is that most of this space will be absorbed in the next two to three years as Phoenix continues its expansion in the industrial sector.
Retail – This is arguably the healthiest of the commercial asset classes in the Phoenix area. Inventories have remained tight because there has been modest construction of new retail properties in the last several years combined with a growing population all of which has led to rising lease rates. If consumer spending does slow, then expect this asset class to feel the pain but if and until that happens, expect retail to continue its pattern of low vacancy and consistent rent growth.
Office – This sector has had the greatest losses over the last few years with over 4 million SF of office space vacated since the onset of the pandemic. Unfortunately, uncertainty remains and performance in this asset class may get worse before it gets better. If you are an office buyer or tenant, however, this can be considered an opportunity to take advantage of the abundant vacancy while it lasts.
Even though the market has slowed, and I predict will slow further, Phoenix remains more active than most parts of the country and we are as busy today as ever. In every market there are opportunities and ways to get creative if need be to overcome obstacles.
As always, if you have questions about your business and investment goals, I am happy to meet and help you build a strategy for your long-term success.
Hani Aldulaimi, CCIM
Managing Director
