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September 2023 – Knowing the Numbers in Commercial Real Estate

Office Market

In 23Q2, the Phoenix office market exhibits approximately 1 million square feet of negative net absorption, reflecting an extended period of demand disturbance. This culminates in a total of -1.7 million over the past year. The retreat has resulted in a surge in vacancy, rising from 11.2% prior to the pandemic to 15.8% currently, marking the highest level since 2015. Moving forward, we anticipate further increases in vacancy due to subdued demand and the potential for an economic downturn affecting the sector.

SUB-MARKET TOTAL SF AVAILABLE VACANCY RATE MARKET RENT NET ABSORPTION SF UNDER CONSTRUCT SF
TOTAL: 197M 15.8% $29.24 577K 1M
4 & 5 STAR 70M 24.2% $34.86 -506K 670K
3 STAR 87M 13.2% $27.52 50K 350K
1 & 2 STAR 40M 6.9% $23.13 -3K 0

Industrial Market

The Phoenix industrial market is currently in a phase of transition, moving from the rapid growth experienced in the years immediately following the onset of the pandemic to a more typical pattern. Vacancy rates have increased from a historic low of 4.1% in mid-2022 to 4.4% in 23Q2, with further upticks anticipated in the latter part of the year. Although leasing activity has slowed down since its peak in 22Q1, the main catalyst for the recent rise in vacancy is the substantial construction pipeline in the metro area, which is starting to outpace demand.

SUB-MARKET TOTAL SF AVAILABLE VACANCY RATE MARKET RENT NET ABSORPTION SF UNDER CONSTRUCT SF
TOTAL: 435M 6.5% $13.10 3.3M 49M
LOGISTICS 309M 7.3% $12.61 3.6M 43M
SPECIALIZED 92M 3.1% $13.16 -281K 14K
FLEX 34M 7.6% $17.81 -14K 422K

Multi-Family Market

The Phoenix multi-family market is currently experiencing a phase of disruption. Apartment demand has shifted gears from the record-breaking levels observed in the two years following the pandemic’s onset to a considerably slower pace due to high inflation and economic uncertainty, which has hindered the formation of new renter households. Simultaneously, the substantial construction pipeline is delivering thousands of new units each quarter, overwhelming the existing demand. This imbalance has led to an increase in vacancy rates and a decline in rent growth. The outlook suggests a further deterioration in multi-family fundamentals as supply continues to outstrip demand, a situation that could be exacerbated by a potential recession.

SUB-MARKET TOTAL SF AVAILABLE VACANCY RATE MARKET RENT NET ABSORPTION UNITS UNDER CONSTRUCT UNITS
TOTAL: 375K 10.2% $1,564 3,329 32K
4 & 5 STAR 179K 11% $1,798 2,992 22K
3 STAR 137K 10% $1,411 465 10K
1 & 2 STAR 60K 8.1% $1,105 -128 783

Retail Market

The Phoenix retail market continues to thrive, supported by strong demographics, resilient consumer spending, and steady job creation, all of which contribute to heightened demand for local retailers. These favorable conditions have propelled the Valley to achieve its eighth consecutive quarter of positive net absorption in 23Q2, resulting in a historically low vacancy rate of 4.6%. Key contributors to this growth have been quick-service restaurants, grocery stores, medical tenants, and fitness establishments.

SUB-MARKET TOTAL SF AVAILABLE VACANCY RATE MARKET RENT NET ABSORPTION SF UNDER CONSTRUCT SF
TOTAL: 241M 4.6% $24.13 495K 2.1M
POWER CENTER 32M 3.3% $26.65 52K 74K
NEIGHBORHOOD CENTER 91M 5.9% $23.37 54K 223K
GENERAL RETAIL 85M 2.9% $23.36 232K 1.6M
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