Phoenix-area commercial real estate starts on a rebound?

While many people have been watching the housing-market crisis in the Phoenix area, fewer have paid attention to the commercial real estate situation. Industrial and office space, storefronts and apartment buildings are among the types of properties also affected by the recent real estate plunge. However, a new report from the W. P. Carey School of Business at Arizona State University shows, even though the housing market is still struggling, the commercial market may be starting on a rebound.

“While the Phoenix-area residential housing market declined for more than three years, the commercial real estate market drop lasted less than a year and a half,” says Professor Karl Guntermann, the Fred E. Taylor Professor of Real Estate, who authored the new report with research associate Adam Nowak. “The commercial market drop was more dramatic, but things may be turning around.”

The commercial real estate market first went negative in 2008, and by the end of 2009, commercial prices in the Phoenix area had bottomed out at an unprecedented annual rate of decline of almost 40 percent. The new figures show that by the end of 2010, prices had already bounced back to almost a 13-percent annual rate of increase.

“Big investors are starting to buy up some of these commercial properties for 50 to 60 cents on the dollar,” explains Guntermann. “They’re not interested in $100,000 houses, but they can buy good commercial properties now at pre-housing-bubble, 2004 price levels. Long term, the Phoenix market still has the fundamentals for growth, so they see real investment opportunities here.”

Guntermann says developers aren’t building new commercial properties in the market right now, so no new supply is being added. This means that as the economy picks up and demand increases in a few years, it will take a while for developers of new properties to catch up.

“Vacancy levels will go down, and rents will go up, but there won’t be new supply in the pipeline,” says Guntermann. “When the market turns around, it will take two to three years for new projects to go through the approval-and-construction process, so properties bought at today’s prices should be good investments.”

Guntermann differentiates the housing market from the commercial one. He says that while residential prices keep moving in response to speculative forces, lax lending standards and low interest rates, the commercial real estate market is tied more directly to economic fundamentals, including employment rates. He says as long as the fundamentals keep improving, the commercial market will likely do better, as well.

The commercial Arizona State University-Repeat Sales Index (commercial ASU-RSI) is based on repeat sales, the most reliable way to estimate price changes in the real estate market. Repeat sales compare the prices of a single property against itself at different points in time, instead of comparing different properties with different quality factors.

The new commercial ASU-RSI report can be found at http://wpcarey.asu.edu/realestate/commercial-market-reports.cfm. Further analysis is also available from Knowledge@W. P. Carey, the business school’s online resource and newsletter, at http://knowledge.wpcarey.asu.edu.