At a recent meeting, one of our team members brought along a June 2014 issue of The Real State, a reminder of just how much can change in commercial real estate in the space of a decade. The biggest concerns in CRE today are inflation, interest rates, and pressures on the office and multifamily markets. But back in 2014, memories of the economic damage caused by the Great Recession were still fresh, and the acute pain had mostly faded. While job numbers were recovering nationally, Phoenix lagged behind other regions, recovering just over 60% of the jobs lost at that point. The unemployment rate was 7.8%, compared to the U.S. average of 6.3%. The Federal Reserve had kept the federal funds rate at zero since 2008, and the first 25 basis point rate hike wasn’t made until 2015.
The headline in our June 2014 newsletter was “Active Commercial Market! The commercial market is showing strong signs of stabilization across all property classes… investor activity/interest is strong.” This was a 30,000 foot view of the market, but a closer look at the details provides some interesting comparisons and contrasts with today's performance.
CRE by Sector: 2014 and 2024
Office: In 2014, office vacancy was around 20%, not technically that different from today. But the goal back then was to keep the number below 20% with a focus on disciplined development, i.e. build-to-suit activity/development. The plan was successful and by 2019, vacancy had fallen to 12%. And then we all remember what happened in 2020 and the uncertainty that lies ahead. The average verified sales price for office sales in Q2 2014 was $143 per square foot, and today it is $162 per square foot.
Retail: Five years after the 2008-2009 recession, retail was still struggling, with vacancy rates around 10% and concerns about how online sales would impact brick-and-mortar stores. For the next two years, little new development came to the market, except for redevelopment and reuse projects. Other than a brief uptick during the pandemic, retail vacancy rates have steadily declined since then and are now around 5%, making retail a surprise success story. The average verified retail sales price in Q2 2014 was $138 per square foot; it is now $213.
Industrial: In 2014, the Greater Phoenix industrial market was described as “relatively strong,” with vacancy rates hovering around 12%, similar to today. However, a big difference between then and now is the amount of new development that has surged into the market to meet demand. While less than 8 million square feet of industrial space was completed in 2014, developers have been adding more than 10 million square feet per quarter for nearly a year, ranking Phoenix number one in the nation for the size of its active industrial pipeline. The average verified sales price for industrial sales in Q2 2014 was $69/sq ft; it is now $154/sq ft.
Multifamily: As with other sectors, multifamily vacancy rates were held down in 2014 as relatively slow development (approximately 5,000 completed units) and strict lending standards kept would-be homebuyers in the rental pool. A quick look around Silicon Valley shows that the surge in development that began in 2020-2021 has continued, and as expected, vacancy rates have risen to around 11%. The average price of multifamily sales in Q2 2014 was $62,377 per unit and is now $279,492 per unit, down from the market peak in early 2022.
There is no crystal ball in CRE. Looking back at the economic ups and downs of the past decade, we can see how the market has evolved, with many surprises and sometimes counterintuitive results.