Phoenix Commercial Real Estate Market Update: 2025 Outlook Observations from the CCIM IREM Forecast

Article originally posted on HERE on January 21, 2025

As we navigate through 2025, the Phoenix commercial real estate market continues to evolve, presenting both challenges and opportunities across various sectors. Here are my notes from the CCIM-IREM Economic Forecast from Friday regarding office, multifamily, industrial, and retail segments in the Valley of the Sun.

Office Sector: Adapting to New Realities

The office market is showing signs of recovery, with buildings gradually filling up again. Landlords are getting creative, accommodating unexpected uses such as labs, training facilities, and corporate learning centers. There’s an increasing demand for communal spaces, reflecting the evolving nature of work environments.

While transaction volumes remain steady, property values have experienced a downturn. Conversations centered around a pickup in transaction velocity in the second half of 2025, driven by private equity and high-net-worth individuals. Construction costs have stabilized, but future increases may occur due to tariffs and regulations.

Key trends in the office sector include:

– A shift towards more private offices vs. open spaces
– Implementation of occupancy sensors for analytics
– Growing disparity between high-quality and lower-tier properties
– Emphasis on experiential elements in office spaces

Predictions for the office market:
– Hybrid work models expected to decline
– Occupancy rates projected to reach 80% by year-end
– Anticipated $2 billion in sales for 2025, a $500 million increase from the previous year

Multifamily Sector: Navigating Supply and Demand

The multifamily market is facing a period of adjustment after a surge in new deliveries. In 2024, Phoenix saw an unprecedented 70,000 units delivered, double the normal annual rate. For 2025, expectations are set at 24,000 new units, which could lead to a temporary oversupply given the market’s typical absorption rate of 13,000 units per year.

Despite these challenges, several factors are supporting the multifamily sector:

– Job growth, albeit slower than expected, at 1.7% year-over-year
– Continued immigration from California, potentially boosted by recent wildfires
– Favorable rent vs. buy comparisons due to high interest rates

Conversations centered on a brighter outlook for 2026-2028, with 2025 serving as a year of stabilization. The market is not considered distressed, with positive momentum expected from potential political changes and improvements in the lending environment.

Industrial Sector: A Powerhouse of Growth

Phoenix’s industrial market has undergone a remarkable transformation, cementing its position as a first-tier market.

Key highlights include:

– 120 million square feet added in the past five years, representing 40% of the total base
– Low vacancy rate of 3.4%
– Strong absorption, surpassing the Inland Empire with 13 million square feet in 2024
– 15 million square feet currently in the pipeline

The market’s strength is attracting investors from across the nation, with Phoenix now recognized as the second-fastest growiong industrial market in the U.S. While some submarkets are performing better than others, the overall outlook remains positive, with 2025 expected to be a year of stabilization.

Retail Sector: Resilience Amid Change

The retail market in Phoenix has demonstrated remarkable resilience. As of 2024, the total market comprises 249 million square feet across over 17,000 properties, boasting an impressive average vacancy rate of just 4.9%.

For properties over 10,000 square feet:
– Total space: 122 million square feet across 1,900 properties
– Average rent: Just under $26/SF/NNN
– Vacancy rate: 6.7%
– Average sale price: $255/SF

The Single-Tenant, Retail segment (under 20,000 SF) shows even stronger performance:
– Total space: 43 million square feet across 8,900 properties
– Vacancy rate: A mere 2.3%
– Average rent: Over $26/SF/NNN
– Average sale price: $440/SF

While 2024 saw a slight decrease in the number of sales compared to 2023, there was a significant increase in sales volume and average price per square foot, indicating a robust market despite some occupancy challenges.

Looking Ahead: Phoenix’s Bright Future

As we move through 2025, Phoenix’s commercial real estate market continues to demonstrate its resilience and adaptability. The city’s strong fundamentals, including solid population growth, diverse economic development, and strategic positioning, bode well for its future.

Key factors to watch:
– Moderating interest rates, with potential for further cuts
– Continued population and employment growth, albeit at a slower pace
– Increased focus on affordable housing solutions
– Ongoing economic development activities attracting new businesses

While challenges persist, particularly in terms of housing affordability and office space utilization, Phoenix remains a top choice for investors and businesses alike. The city’s ability to attract capital expenditure projects ($49.7 billion across 453 projects) and create jobs (132,000 from these projects alone) underscores its economic vitality.

As we navigate through this transitional period, Phoenix’s commercial real estate market is well-positioned for long-term growth and success. Investors and industry professionals should remain attentive to evolving trends and be prepared to adapt to the changing landscape of this dynamic market.