At the beginning of this year, the Phoenix commercial real estate market had strong potential. There was considerable job growth in the area, the population was on the rise and interest rates were low. All signs pointed toward a favorable performance in 2020 until the novel coronavirus outbreak and subsequent uncertainty hit the U.S. economy.
The rapid spread of COVID-19 has impacted the Arizona commercial real estate market in unique ways. Here’s a quick guide to get you caught up.
Coronavirus Impact Varies Between Sectors
Governor Doug Ducey issued a stay-at-home order in March, effectively shuttering all non-essential businesses until midMay. The state has since mostly reopened with the exception of bars, gyms and movie theaters. Consumers, however, have continued to rely on ecommerce and delivery services.
Changing shopping habits and decreased travel has led to a severe and negative impact on malls and hotels, in addition to the sectors that are still closed. Rent collections in June were only at 61% of normal for shopping malls, per a recent Nareit study. Regardless, national commercial rent collection rates have remained fairly steady. The findings revealed that 98% of industrial properties and apartment complexes paid rent as normal, as did 95-96% of office and medical-center properties.
Leasing Activity Is Uneven Across the Valley
Just as industry sectors were affected differently, so were parts of the Valley. West Valley leasing activity is steady, especially for large industrial spaces with 50,000 square feet or more. Tempe, on the other hand, has seen an uptick in spaces available to sublease.
Industry experts are predicting a move away from high-density commercial areas, due to the public’s concerns about being near large concentrations of people. Suburban commercial real estate can also attract employees looking to live in more cost-friendly areas with better schools.
Small Businesses Are Changing Hours of Operation
Many family-owned Arizona businesses did not receive Paycheck Protection Program relief and are rethinking their hours of operation as a result. Some have even switched to an appointment-only business model. With fewer days or hours open, there is less opportunity to bring in enough revenue to cover rent. We expect to see many businesses downsize or move locations where expenses are more manageable.
Space Needs Are Shifting
As businesses and employees are navigating the new normal, space needs are shifting. Some companies are resuming business as usual, others are implementing permanent remote work and still others are creating offices with social distancing measures. This means for every business that opts to go fully digital, another will need to lease a larger space. Property owners should be prepared, especially as we head into September and kids go back to school. “Returning to work” looks different for each tenant.
Commercial Real Estate Brokers Are Encouraging Investments
Aspiring property owners should note that brokers say now is the time to invest in commercial real estate. Lenders only require 10-20% down for business owners using more than half of the property full time, and interest rates are lower than they’ve been in years.
The shift in office needs and closure of many businesses will result in a surplus of opportunities to buy commercial property, even in prime locations. Of course, this comes with its own risks, but an experienced commercial real estate attorney can help property owners navigate any tenant disputes or other situations, including understanding an Arizona commercial real estate purchase contract.
Find An Experienced Arizona Commercial Real Estate Lawyer
The attorneys at MacQueen & Gottlieb have significant experience with commercial real estate in Arizona. Our attorneys can draft a commercial real estate letter of intent that will allow you to start the negotiation and due diligence period on a property. Contact us today at (602) 726-2229 to schedule an initial consultation or make an appointment online.