Phoenix Commercial Real Estate Sales Volume Drops 63% in 2023

Article originally posted on CoStar on March 7, 2024

Annual commercial real estate sales activity fell to a nine-year low in 2023 as higher borrowing costs and downshifting property performance hampered deal flow.

About $8.9 billion worth of Phoenix apartment, retail, office and industrial assets traded hands last year, marking a 63% decline from 2022 and a nearly 70% decline from 2021’s record level. It was the softest year for investment volume since 2014, which reached $7.3 billion.

Limited availability of acquisition financing and a lack of interest rate stability were the main factors that buyers pointed to as barriers to transactions. Loan providers have tightened their lending standards, often requiring bigger down payments, wider spreads over benchmark rates, and increased scrutiny of both underwriting assumptions and borrower strength. When coupled with fluctuations in the 10-year treasury, buyers are facing a much less accommodating financing environment today than in the years immediately following the onset of the pandemic, and many have struggled to get deals signed.

Sales volume, occupancy and rent growth have weakened for most segments, though some have held up better than others.

The apartment sector, which suffered the worst decline among all segments last year at negative 72%, has been contending with the most aggressive construction pipeline in four decades. The addition of more than 33,500 net new units in 2022 and 2023 has caused vacancy to rise to the highest level since 2010 and kept annual rent growth negative since the fourth quarter of 2022.

Office sales saw the next steepest drop, falling 57% last year. Pandemic-catalyzed shifts in underlying demand continued to drive uncertainty in the Phoenix office market. Users have placed more focus on the effective use of space, causing many to downsize or eliminate footprints. As a result, the total amount of vacant office space has increased by 50% since 2019, and sublease availabilities have surged.

Retail, meanwhile, notched an annual decrease of 52%. Counter to trends seen among other property types, underlying factors for the broader retail sector strengthened as limited supply pressure and healthy consumption patterns kept retail vacancy at the lowest level in at least 17 years. The lack of available space has allowed landlords to maintain strong pricing power when negotiating lease terms, causing rent growth to reach a record high.

The industrial sector held up the best across the four main property types with annual sales volume down 47%. Compared with the pre-pandemic five-year average, however, investment was up 30%. The surge in construction activity over the past three years for large, modern industrial properties dramatically expanded the market’s offering of institutional-grade assets, attracting capital from REITs, private equity groups and other major investors. The upswing in supply, however, also has begun to negatively affect property performance with vacancy spiking in the back half of the year and lower near-term rent growth prospects.

There is some cautious optimism that sales activity could improve in 2024. The Federal Reserve has indicated it has reached the end of its tightening cycle and may begin to take a more accommodating policy stance this year, which could provide relief to borrowers. In addition, the economic outlook has improved with inflation abating, gross domestic product growth remaining positive and spending keeping steady, causing some forecasters to increase the likelihood of avoiding a recession, though a general slowdown is still in the cards.