By Andrea Davis, CCIM
As Scottsdale slowly begins to open its businesses, one question remains top of mind for business owners: What’s next for the commercial real estate market? Nationally, there have been several news sources that talk about how dismal the CRE market will be for the foreseeable future. According to Costar, “The nation’s average vacancy rate is currently 10%, a figure CoStar expects will steadily climb through mid-2023.”
While tourism and the entertainment industry have been hit hard, Scottsdale has seen diversification in our business sectors. Take for example the Cure Corridor, which focuses on health and bioscience; the McDowell Corridor, which is tech savvy; Old Town Scottsdale’s entertainment sector; and the Airpark, which houses most of our industrial.
These areas, and others in Scottsdale, are going strong. Vacancy rates in all of Scottsdale’s commercial real estate sectors were at an all-time low prior to pandemic. ADRCRE believes Arizona as a whole will continue to sustain manageable vacancy rates in office and industrial post-pandemic for these reasons:
1. Spec office space is minimal in Scottsdale. Much of the construction is spoken for such as Nationwide’s campus at Hayden and Loop 101.
2. Some companies will discover they need more space due to the “new norm” defined by OSCHA and HR standards.
3. Other companies may seek to sublet their office, and sublease space will increase for the short term.
4. Call centers will either split shifts or expand their footprint if cubicles are too close for employee personal comfort or CDC recommendations. During the transition period, sneeze shields and upgraded filtering systems could be put in place.
5. Businesses that need additional space will absorb space that other companies release to the landlord. Smaller business with individual offices may not feel any change in the work environment other than government-mandated health signs in the workplace.
6. Rental rates may equalize. Landlords with no debt, lower debt or agreeable lenders will do what is necessary to keep their buildings at high occupancy. They’ll offer incentives to attract renters. This will cause a domino effect on office rental rates as landlords compete for tenants. Like we saw in the Great Recession, landlords with inflexible lenders will not be able to adjust to these new rental rates and will probably lose their buildings.
7. For flexible tenants, this presents a good time for companies to negotiate an advantageous lease. Already landlords are open to shorter term leases if minimal upfront capital is required from the landlord.
8. Working from home doesn’t work for every company and has shortcomings. Synergy and creative inspiration are two of the big drawbacks. Humans desire the company of others and need a break from the home routine.
9. Many businesses who need office and industrial space are on “hold.” It feels the pent-up demand for space will be absorbed quickly, further reducing office choices for renters.
As we wait to see what happens next, I suspect Scottsdale will come out of the pandemic above other major cities for reasons including our geographic location, our “dry heat,” plethora of land for development, low building footprints, and nationwide stats that show we managed the outbreak well.
It’s important that companies use this time to focus on the next “pandemic.” Those companies who create a plan now with workspace, renegotiated rent terms and a readiness plan will come out ahead down the road.