Sunday Summary: It’s Not Always Sunny in Phoenix
Phoenix’s record-breaking heat wave — with temperatures hitting at least 110 degrees for nearly 31 days in a row — might be the city’s most pressing concern, but its real estate market isn’t giving the Valley of the Sun any relief.
Phoenix’s office market tanked in the second quarter of this year, multifamily rents have stalled, and the city’s once-thriving industrial market faces a risk of an overabundance of space after the industrial absorption rate fell 80 percent in the last three months.
“It’s instability, and just as every other market is trying to find their footing right now, Phoenix is no different,” Jennifer Barili, senior research analyst at Transwestern Real Estate Services, told Commercial Observer. “We have a lot of the same negative energy in our office market that every other major market does, but we have some really good things that will help insulate some of the damage to the [overall] Phoenix market in the next few quarters.”
Barili isn’t wrong that every other city is struggling.
Apartment sales in Los Angeles plummeted in the second quarter — dropping almost 49 percent year-to-date compared to the same time last year — while the nationwide vacancy rate for apartments ticked up to 5 percent.
New York City might have been a bright spot with its apartment vacancy rate dropping to 3.1 percent, which is below its long-running historical average of 3.5 percent, but Gotham still has plenty of problems.
Office leasing in New York City improved in July, growing by more than 20 percent, but the city’s on pace to have a 12 percent drop in leasing activity from 2022 to 2023, according to a new Colliers (CIGI) report. And most of that growth in July came from a single lease: a city agency taking 640,744 square feet at 110 William Street.
Plus, the office availability rate in New York City remained high at 18 percent, still above the pre-pandemic benchmark of around 10 percent.
The country’s struggling real estate market has led to valuation woes coast to coast, and Kushner Companies’ Times Square retail condominium has topped one data provider’s list for the largest drop.
The 238,557-square-foot 229 West 43rd Street saw its valuation plummet 82 percent — from $470 million to $84 million — nearly eight years after Kushner acquired the property, according to CRED iQ.
It’s not just Kushner getting a downgrade on a property, but the entire country itself (literally).
Fitch Ratings gave the U.S. government its first credit downgrade in 12 years last week and lowered bonds to AA-plus from AAA because of “a steady deterioration in standards of governance” after the country nearly defaulted before lawmakers struck a last-minute deal to raise the debt ceiling.
That move also led Fitch to downgrade the long-term debt of two government-sponsored entities — Fannie Mae and Freddie Mac — days later.
The heat is on
Phoenix isn’t the only city in the country dealing with a brutal and extended heat wave this summer, and such waves are expected to keep coming as climate change unfolds. That means construction workers — who often toil outdoors during the hottest periods of the day — need more and longer cool-down breaks to survive.
There are no clear federal or state rules that provide heat-specific protection to outdoor workers, leaving it to municipalities to figure it out. But, even in the face of increasing heat waves, some places are trying to strip protections away, and others are trying to block new ones from becoming law.
A new state law making its way through the Texas Legislature would nullify ordinances in Austin and Dallas that mandate rest breaks for outdoor workers, while a similar one in Miami-Dade County that won preliminary approval may not actually take effect.
Never cross a picket line
That old labor saying isn’t helping Hollywood right now. The summer of strikes means writers aren’t writing and actors aren’t acting so cameras aren’t rolling.
And that obviously means empty soundstages, which could be bad news for the owners of those real estate assets. It could give studios that need to cut costs the chance to terminate deals and productions, and it shows that investment in soundstages has peaked.
The impact goes beyond soundstage owners and tenants, too, to those who rely on show business for work: hair, makeup, wardrobe, agents, accounts, prop warehouses and set designers.
“It’s not only affecting the people you see in the news, but independent operators like us and everybody else that services the production industry,” Sam Nicassio, president of Los Angeles Center Studios, told CO. “I’ve got tenants that are not production but are production-related here asking for rent relief like it was COVID again. It’s affecting publicists, the agents, it’s everything that feeds off the system.”
The collective wisdom that Class B office space was not desirable to tenants and a financial albatross for its owners might not be set in stone, with recent reports finding that demand for B space isn’t trailing that far behind Class A as some would have you believe.
And the culprit could be Class A owners themselves hyping up their own space to attract tenants.
“Simply put, it rankles me when I read certain owners of Class A properties alleging the death of Class B, generalizing that as a group Class B properties have become unleasable, awaiting their final demise,” said Michael T. Cohen, president of Colliers’ New York tri-state region (Colliers also has a real estate-owning firm, Williams Equities). “This runs contrary to the experience I and other Class B owners have had. We boiled it down to this: There is a crisis in Class B, [but it’s] very much like there is in B-plus and A-minus.
“These proclamations by Class A owners are self-serving,” Cohen added.
It’s the dog days of summer, so some may be hitchin’ a ride down to Rockaway Beach while others might be making the long drive to the Hamptons. Commercial Observer polled some in commercial real estate to find out how they spend their summer vacations (and surprise, the work often comes with them).