Caution, Patience Will Be the Themes of Phoenix Retail for 2023

by Jeff Shaw

— Kyle Davis, Sales & Leasing Agent, Commercial Properties Inc., a CORFAC International Firm —

A market cooldown is likely in 2023 as interest rates rise and the investor pool becomes more cautious to some degree. I believe many investors recall lessons from the Great Recession and are not as significantly overleveraged, which means the effects of this market correction may not be nearly as drastic.

Phoenix’s retail market also has some bright spots. The area’s retail net absorption was positive at more than 1.5 million square feet, with vacancy rates down to 5.1 percent at the end of the fourth quarter of 2022. This is compared to the 1,071,783 square feet of absorption and 6.6 percent vacancy rate a year ago.

Kyle Davis, Sales & Leasing Agent, Commercial Properties Inc.

Many look at factors like unemployment, interest rates, housing starts, etc., to speculate about the coming market. What will impact our industry most directly, however, is how the lending market reacts to these indicators. As with 2008 and 2020, creditors may look at the same data points as investors and lower their risk profiles significantly faster than investors are able to counteract. There will be many commercial property loans set for refinancing in the near or upcoming future, as commercial property loans are significantly shorter than housing loans. These maturing loans may have a greater challenge navigating the refinancing market than what owners had previously foreseen.

I also believe market caution will impact the tenant market. Some potential new businesses may choose to delay, while existing businesses may choose not to expand as aggressively. Vacancy factors may regress to a degree after many properties reach full occupancy or historically low vacancy. This may further stress owners in need of new financing.

Overall, however, I believe all the patient capital that waited for opportunities after the Great Recession should equate to fewer deals in significant distress. Thus, there is the possibility that while some magnitude of a market correction is likely coming, it may be much subtler than what we’ve seen in the past.

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