Phoenix commercial real estate sales volume hits six-quarter high

Article originally posted on CoStar on September 25, 2024

First-half investment rebounds compared to 2023 across the board

Following five consecutive quarters of tepid sales, Phoenix commercial real estate investment volume accelerated in the second quarter.

About $3.1 billion worth of multifamily, retail, office and industrial properties traded hands from April 2024 to June 2024, a more than 70% increase from the opening three months of the year and the strongest quarter for sales since late 2022.

The second quarter’s pickup follows nearly two years of sluggish sales, during which higher borrowing costs and downshifting property performance compressed deal flow.

When combined with the first quarter, sales volume from the opening six months of 2024 outpaces the same period in 2023 by 22% and only lags the pre-pandemic five-year average by 10%.

Gains in the first half of 2024 have been broad-based, with all four main property types showing improvement compared to the same period in 2023. Nevertheless, sales across all sectors also still lag the unprecedented peak seen in 2022 by 40% to 75%.

Multifamily led the way, climbing 34% year over year to $1.9 billion in the first and second quarters combined. New construction deals composed the bulk of trading in this sector, as the historic wave of supply over the past few years provided investors with plenty of opportunities to acquire recently built properties from merchant developers.

Office saw the second-strongest improvement with $780 million selling in the first half of 2024, a 23% increase from 2023. Medical office buildings have had comparatively sturdy property performance, keeping this subtype a more consistent source of transactions. Additionally, value-add and opportunistic buyers targeted Class A offices with stressed operations that could be acquired at an attractive basis and meaningful discount to prior pricing.

The industrial sector has been arguably the most consistent and is the only property type to see sales outpace the pre-pandemic five-year average. About $1.4 billion traded in the opening six months of the year, a 21% gain from 2023 and more than double the first-half average from 2015 to 2019.

The surge in construction for large, modern industrial buildings has dramatically expanded the Valley’s offering of institutional-quality properties, reshaping Phoenix’s inventory and buyer pool. Private equity firms, investment managers and other major buyers regularly acquired newly built, big-bomber buildings, several of which went for over $50 million.

Sales volume for retail real estate was up just 1% year over year to $785 million in the first half of 2024. While retail had the most modest improvement, it also did not see the same level of pullback from pre-COVID norms as some other sectors. The results in the first half of 2024 are only 15% lower than the average from 2015 to 2019, compared to a decrease of 25% and 38% for multifamily and office, respectively.

Moving forward, preliminary numbers for the third quarter indicate another quarter of improvement could be in store. Sales volume thus far in the July 2024 to September 2024 period is already 1% higher than the second quarter, with a week to go. Additionally, the Federal Reserve’s 50-basis-point reduction in its overnight lending rate could provide interest-rate relief for market participants and encourage investment over the near term.