This Industry Outlook is a portion of the 2019-2020 Arizona CFO Spotlight Survey Report
Level of Optimism: High
Like construction, the real estate industry anticipates a healthy wave of activity in all sectors for 2019. Slowing is anticipated late in 2020, but more likely in 2021. This is good news after several years of relatively flat growth. Office and industrial vacancy rates, for example, are decreasing and leasing rates are increasing due to limited new construction. Prospects for the industrial sector are particularly healthy, as companies require updated configurations for new technologies and processes. The need for higher ceiling heights, for example, is shifting leasing terms from square footage to cubic feet, which will result in better leasing rates. Changes in how offices are used, with more knowledge workers in remote locations, may result in less need for new construction as the total square footage necessary for office space shrinks.
“We are looking for unique opportunities and properties for repositioning. We want mixed use, industrial, office, or retail/residential… the work-live environment. We currently own five properties in Opportunity Zones, and will potentially develop two of them.”
— Real Estate Leader, Tucson, 2019
Demand for affordable and workforce housing in urban areas is expected to increase the average height of buildings in some western urban centers, including Phoenix. The Phoenix City Council approved a measure for downtown residential developers to receive either a tax break or an allowance to build taller structures if a percentage of apartment units are offered at reduced rates. Financing for such developments is supported by private equity as investors take advantage of some federal tax reforms for real property investment. Affordable housing is viewed as one such opportunity.
Retail re-leasing rates are expected to decrease by 20-30 percent.
Speaking of opportunity, the jury is still out on the best approach to Opportunity Zones until cities can define their incentives. In Pima County alone, 27 census tracts are approved as federal Opportunity Zones, in which approved investors can reduce the amount of their reinvested taxable capital gains by 10 or 15 percent, depending on the length of the investment. For now, leaders are assessing their priorities to contend with aging infrastructure and neighborhoods.
While hospitality and government construction have both been strong, re-leasing of big box retail has resulted in a lag on real estate revenues overall. Retail re-leasing rates are expected to drop by 20 – 30 percent, which will affect overall fees in 2019. Increases in wages of about 10 percent, as well as an average 12 – 15 percent increase in personnel, will also impact revenues.
Long-term forecasting is difficult. New projects in Arizona last an average of five to six years from concept to completion, which puts the industry into a whole new tax and finance environment by the time leasing begins. In the short-term, leaders cite an anticipated 50+ basis point increase in interest rates, which could impact development plans and financing through 2020.