Commercial real estate in Arizona 2024

“Our members remain cautiously optimistic,” shares Clark Princell, CEO and president of Valley Partnership. “If I had to choose a market to weather uncertain times, this would be it. We’re experiencing significant population growth alongside strategic post-recession initiatives that have laid the groundwork for our thriving economy. Industries like semiconductors, electric vehicle batteries, and logistics are driving this transformation. Even if a national downturn occurs, Arizona is better positioned than most states to navigate it.”

Princell notes that while industrial growth has decelerated, sentiment among stakeholders has improved compared to four or five months ago. Molly Carson, executive vice president and Southwest market leader for Ryan Companies, echoes this view. Although the pace has moderated from what she describes as a “frenzied” period, Carson sees it as a healthy adjustment.

“We’re no longer riding the wave of the 18-month boom, and honestly, that’s a positive shift,” Carson explains. “The market is stabilizing, and what we now consider ‘normal’ is exceptional when compared to Phoenix’s historical performance and national trends. It’s less of a decline and more of a leveling out.”

During the pandemic, supply chain disruptions led to surging costs and prolonged project timelines. Carson observes that construction expenses have largely stabilized, though slight increases still occur periodically.

“Over the past few months, we’ve gone to hard bid several times and noticed increased competition, with firms showing more enthusiasm. Staffing shortages aren’t as prominent as before,” Carson adds. “As a developer, I always want lower costs, but the current pace feels manageable and sustainable.”

“Our members of Valley Partnership maintain cautious optimism,” says Carson, acknowledging that while historically low interest rates previously spurred Phoenix’s rapid growth, the current high-rate environment has tempered the market. She notes that this slowdown, while challenging, could bring long-term benefits.

“Sometimes you need tough medicine, even when it’s hard to take,” she explains. “I believe we’re nearing the end of this period of elevated rates. Capital has been constrained, and current interest rates are tough to handle, but over the past two months, we’ve seen signs of improvement. Some major institutional investors, who stepped back during late 2023, are reengaging with the market.”

Teeter agrees, pointing out that rising interest rates have had a significant effect on various development aspects. Many properties face expiring loans, such as bridge or construction financing, which now require conversion to permanent funding.

“The sharp rise in rates since these properties were purchased or initiated will create movement in the market,” she says. “It will be interesting to see if lenders collaborate with borrowers to find creative solutions or if we start seeing more foreclosures.”

Carson believes the market’s slower pace compared to the last two years signals a healthy stabilization. “Slow and steady wins the race,” she remarks, adding that future growth hinges on showcasing Arizona’s robust water management strategies and incorporating more sustainable materials in development projects.

“We also need to prioritize heat island mitigation,” Carson says. “Remaining both business-friendly and community-focused is essential. I’m optimistic about institutional capital shifting back into housing, especially multifamily projects at varied price points.”

Teeter highlights strong user demand as a stabilizing factor, even as transactions take longer to finalize due to more careful decision-making. She underscores the importance of passing initiatives like Proposition 479 to ensure ongoing investment in infrastructure, a key driver of the region’s growth.

“Power availability will be a critical factor in project feasibility,” she explains. “Industries like manufacturing and data centers require substantial energy, and climate changes are further impacting power usage. Still, Arizona’s diverse and dynamic economy makes it an appealing destination for global businesses. We’re on the radar of companies that never considered us before, and our story is one of resilience and opportunity. I remain highly optimistic.”