For many of us, the new year is a time to look back at what went well during the previous 12 months, look forward to what opportunities may arise in the next 12 and reflect on how we can improve, overall. While we as individuals are testing ourselves spiritually, the new year can also be a good time to look at other aspects of our lives, including financial and investment performance.
Commercial real estate, whether for occupancy or investment, may be a component in your investment portfolio, and the Arizona commercial real estate market has been strong and steady so far in 2014. While multifamily was the first segment to improve, industrial, office and retail are also seeing increased sales activity, improving vacancy rates, greater absorption and rising asking rents. With that in mind, let’s take a look at the current environment within the various segments of the national and state commercial real estate markets.
Multifamily Market
According to the National Association of Realtors, “The multifamily sector continues to be the top performer in commercial real estate with the lowest vacancy rates,” and that holds true in Arizona, as well. Multifamily transactions have been on the rise, and new development continues in high- demand areas where new household formation had been stunted, as well as in urban areas where younger generations choose to reside.
Office/Industrial Markets
Local and out-of-state investors have returned to the market, paying closer attention to A and B Class assets. In the metro Phoenix area, urban infill areas along the Camelback corridor and the Central Avenue corridor have been in high demand. Additionally, large employers such as State Farm and Apple have been focusing on the East Valley, which is known for a younger and “techie” employment base. Vacancy rates have continued
to improve steadily, and, as office-using employment increases, asking rents are also beginning to rise. The Greater Phoenix area as well as Casa Grande/Eloy are increasingly securing or being short-listed for large manufacturing and distribution projects/ facilities such as Tesla.
Retail Market
Transaction activity among retail assets has been up, with many small and mid-sized retail centers being gobbled up by local and out-of-state investors. Activity has spread to suburban markets such as Buckeye and the East Valley as available centers in urban areas have diminished. New retail construction has slowed, allowing for greater absorption in the beginning of 2014. With a combined increase in demand and fewer additions to the market, vacancy rates have dipped accordingly.
The Impact of the Big Picture
Successful investment in commercial real estate doesn’t exist in a vacuum but instead depends on a variety of overarching economic factors. Real gross domestic product – the output of goods and services produced by labor and property located in the United States – has remained mostly flat according to the Bureau of Economic Analysis. Nonetheless, the National Association of Realtors is projecting that gross domestic product should expand closer to 3 percent for the remainder of the year. “The improved lending for commercial loans and continuing job gains we’ve seen this spring bode well for modest progress in commercial real estate leases and purchases of properties,” says Lawrence Yun, Ph.D., the organization’s chief economist.
Moreover, consumer optimism about current economic conditions and expectations for continued improvement in the coming months has strengthened. Indeed, earlier this year consumer confidence in our state reached its highest level since January 2008 according to the Behavior Research Center of Arizona.
An improving jobs picture equals more demand, but what are the challenges that could have a negative impact on commercial real estate? Rising long-term interest rates and a lack of consistent economic growth are among the primary culprits. Conversely, an improving economy could result in higher acquisition and development costs. Finally, from an investment perspective, there simply isn’t the surplus of bargains we experienced during the worst of the downturn – so you need to be a prudent buyer and sharp negotiator.
“We have seen steady if slow progress since the commercial real estate market collapsed in second quarter 2008, and as the future unfolds, we expect that the positive returns for commercial real estate will continue,” concludes Kenneth Riggs, Jr., president and CEO of Real Estate Research Corporation. “The value increase from the trough is now about 30 percent, just slightly less than the value lost during the past 6 years. Although returns are likely to be positive in 2014, we forecast them to be a little lower than in 2013, but still a very reasonable approximate average of 8.75 percent.”
L’Shana Tova!
Beth Jo Zeitzer, esq., is the owner and designated broker of R.O.I. Properties, a full-service real estate brokerage firm focused on working with business owners, investors and property owners on the marketing and sale of commercial and residential properties including retail, office, industrial, multifamily, hospitality, land and homes. She can be reached at 602-319-1326 or bjz@roiproperties.com.
