Commercial Real Estate

Office, retail spaces struggle in Valley boom


As Arizona slowly-but-surely recovers from the devastating impacts of the coronavirus pandemic, so does its commercial real estate industry.

Phoenix continues to see immense population growth — thanks to its relatively low cost of living, weather and professional opportunities. But that doesn’t mean every sector has been immune to the pandemic. While the multifamily housing market is booming, the office space and retail sectors have taken heavy hits and will take longer to fully recover, if they do at all.

Rick Padelford, a certified commercial investment member and a commercial agent with Realty Executives, says “a lot of eyes are on Phoenix” right now. He estimates the Valley earned a net population of 83,000 people — a conservative estimate.

With Valley home prices surging and inventory shrinking, the demand for more multifamily housing has never been higher. The industrial sector is also booming, especially in the West Valley near Loop 303.

“Working from home is changing the whole landscape of the office,” said Mr. Padelford. “Retail is changing with e-commerce and is hurting brick-and-mortar stores. Retail is totally in transition right now. People with a viable concept, viable products, they’ll be fine. What it will look like coming out of this pandemic, e-commerce is the winner.”

Mr. Padelford said he’s seen more subleasing of office space lately than he has in his entire 30-year career, thanks to employees staying home and companies either downsizing or letting go of offices altogether. He’s also seeing shorter 1-year leases, compared with the typical 5- or 7-year leases in the sector.

He suggests that the city of Phoenix cooperate with the repurposing happening all over the Valley, pointing to Paradise Valley Mall’s future as a mixed-use retail and housing development as an example.

“Repurposing is probably the biggest single antidote to that problem, and it’s happening all over the place,” said Mr. Padelford.

According to commercial data from Chamberlin & Associates, central and southwest Phoenix properties are 2% more vacant than in other parts of the Valley. Office and multifamily properties are 7.5% and 20% more vacant, respectively.

John Oliver, commercial director for Century 21 Arizona Foothills, agreed subleasing is here to stay in the office sector, but said he has hope retail will survive if the industry can pivot in new directions.

“Retail will still be strong in the experiential space rather than the retail space,” he said. “It’s moving heavily online but if there’s an experience attached to it, that can’t be replicated online. Gymnasiums, shooting ranges, volleyball courts, things like that are taking up some of the slack. Landlords out there are struggling to attract your traditional retail operator.”

While he said he believes office spaces will recover thanks to the number of businesses moving into the area, Mr. Oliver said he sees some office spaces one day being turned into condominiums or apartment complexes if high vacancies continue.

“It’s going to be a lot of time before we start looking at office space to convert into apartments and condos with the way inventory and prices are going,” he said. “There’s the increased cost on building supplies, particularly lumber, and a scarcity of skilled workers in the building trades. We will be in a situation soon where office buildings, especially if they’re not Class A and have high vacancy rates, could easily be changed into living quarters.”

Todd Folger, first vice president at commercial broker CBRE in Phoenix, said he’s not seeing many vacancies in the area after a tough 2020.

“Space is being filled in 2021,” said Mr. Folger. “We are also seeing new development across the Valley but specifically in the West Valley with a couple of grocery-anchored centers planned in Avondale and Buckeye but also a large power center in Surprise.”

Despite the uncertainty of the past year or so, he says the Valley has fared well throughout the tumult and the region seems to have learned valuable lessons after the Great Recession.

“Construction seems to be pacing with demand,” said Mr. Folger. “We aren’t seeing overbuilding as we did in the lead-up to the Great Recession. If a center is being built, it is because the housing market is there currently and the retail users have demand for new stores.”

While it’s too early to tell what impacts the pandemic may continue to have on the commercial real estate market, he said, lease terms and contract clauses may reflect this time moving forward.

“It’s too early to tell how the effects from COVID will change the landscape going forward but building in protections in the leases for retailers and landlords alike are going to be likely,” said Mr. Folger. We haven’t faced mandated closures in retail in our lifetime and determining what remedies tenants and landlords have will certainly be discussed as we progress back to a more normal environment.”