Overall Market Trends
Phoenix’s commercial real estate (CRE) market is experiencing a dynamic surge, driven by strong population growth, economic diversification, and infrastructure investments. The Phoenix metro area, with a population exceeding 5 million, added nearly 50,000 new residents in 2023, ranking 8th for metro area population gains, which fuels demand for commercial properties. The city’s economic transformation, particularly in technology, manufacturing, and healthcare, has increased the need for office, industrial, and retail spaces.Office Sector
The office market is showing signs of recovery after post-pandemic challenges. Vacancy rates declined to 27.8% in Q1 2025, continuing a downward trend from late 2024, though they remain high compared to pre-pandemic levels. Leasing activity is healthy, but large move-outs resulted in negative net absorption of 572,754 square feet in Q1 2025. Companies are adapting to hybrid work models, driving demand for flexible, high-quality Class A spaces in submarkets like Camelback, Tempe, and Scottsdale, which see a 21% rental rate premium and 23% lower vacancy rates. Average asking rents are rising, reaching $29 per square foot for direct leases and $23 for subleases. Landlords are upgrading amenities and layouts to attract tenants, with transaction velocity expected to increase in the second half of 2025, driven by private equity and high-net-worth investors.Industrial Sector
Phoenix is the second-fastest-growing industrial market in the U.S., with demand for warehousing and logistics space surging due to a growing population and strong retail operations. Vacancy rates have dropped to 4%, with even lower rates in high-demand areas like Black Canyon and Scottsdale Airpark. Annual rent growth reached 16.5% as of mid-2022, and sale prices per square foot hit $168, a 19% year-over-year increase. Despite rising construction costs and interest rates, the industrial outlook remains positive, supported by limited supply and diverse tenant needs, including e-commerce, 3PL, and manufacturing.Retail Sector
The retail market demonstrates remarkable resilience, with a total market size of 249 million square feet across 17,000 properties and an average vacancy rate of 4.9% as of 2024. Sales volume and average price per square foot increased in 2024, despite a slight decrease in the number of sales. The expanding population and vibrant tourism scene sustain retail demand, fueling mixed-use developments that integrate retail, residential, and entertainment. Steady demand and conservative construction levels continue to support strong retail fundamentals.Multifamily Sector
The multifamily sector faces challenges with high vacancy rates and slowing rent growth. As of late 2022, rent growth dropped to 12% from a peak of 27% earlier that year, reflecting reduced demand and lower lease renewals. The development pipeline, particularly for luxury units, outpaces demand for affordable, smaller units, creating risks for investors. Opportunities lie in improving net operating income through operational efficiencies, such as adding income-producing initiatives (e.g., parking or pet rent) and cutting expenses, rather than relying on extensive renovations.Investment and Opportunities
Investment sales through March 2025 totaled $999 million across 62 properties, reflecting strong interest from both local and out-of-state investors. Phoenix’s affordability compared to coastal markets, business-friendly environment, and higher yields attract capital, with cap rate spreads of 100-200 basis points over California for comparable properties. Sustainability and smart technologies are increasingly prioritized, aligning with broader trends toward environmental responsibility. Major infrastructure projects, like the $7 billion Taiwan Semiconductor Manufacturing Company facility, further enhance Phoenix’s appeal for global investment.Challenges and Risks
Despite the positive outlook, challenges persist. The office sector’s high vacancy rates and negative absorption may not stabilize until late 2025 or beyond, driven by the shift to hybrid work models. Posts on X indicate foreign investors, particularly Canadians, are selling off assets due to political concerns, potentially adding pressure to an already fragile post-pandemic commercial market. Additionally, rising construction costs, potential tariffs, and climate risks like water scarcity and extreme heat could impact long-term growth and property values.If you are looking to sell your Phoenix area business property, contact us to schedule an appointment.
