R.O.I. Properties

Beth Jo Zeitzer

Beth Jo Zeitzer is the President and Designated Broker ofR.O.I. Properties, a full-service real estate advisory and brokerage firm based in Phoenix. Before founding R.O.I. Properties, Beth Jo, served as the Director of Commercial Properties at Del Webb Corporation where she handled $96 million in real estate transactions and a 600-acre commercial property portfolio which included: regional and neighborhood retail centers, business, medical and professional offices, industrial parks, and light industrial spaces.

She is experienced in commercial development including planning, entitlement, infrastructure delivery, budgeting and financial oversight, marketing analysis, sales and marketing, contract negotiation, design review, and construction monitoring. Beth Jo is a licensed attorney in Arizona and California and a licensed real estate Broker in Arizona.

An Arizona resident since 1971, Beth Jo graduated from the University of Arizona with a B.A. in General Research (with Real Estate and Marketing emphasis). She is also a graduate of the University of San Diego Law School, where she was the Research Editor of the Law Review and the recipient of the Hahn Award for Excellence in Real Estate.

What to Know Before Investing in Property in Phoenix

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For the fifth year in a row, the Phoenix metro area ranked as the fastest-growing city in the United States, according to the US Census Bureau. Over the past decade, Maricopa County’s population has increased by 15.8%. In the process, the growth rate for Phoenix investment properties has also created top opportunities in Arizona.

Behind the growth is Phoenix’s appeal as a business-friendly destination, which has spurred local investment as well as out-of-state interest from pricier coastal markets in California, such as San Francisco, Los Angeles, and San Diego. There are several factors at play: Valley Partnership recently noted that companies can save an estimated 30% or more compared to Southern California. Phoenix has a robust transit infrastructure, low-cost land, few natural disasters, reliable power, and a growing workforce. And, of course, tax incentives and other initiatives by city leaders in the Valley have helped attract headquarters, strategic acquisitions, and development.

The Current State of the Phoenix Commercial Real Estate Market

Arizona Commercial real estate is divided into four different asset classes—industrial, office, retail, and multifamily. Here’s a quick summary of the current state of the Phoenix commercial real estate market as of the end of 2021.

Industrial real estate in Phoenix

This sector has been a standout in recent years, thanks to the trend of consumers ordering online, with ever-increasing compressed delivery time, giving rise to strong demand for “last mile” delivery. The pandemic further fueled demand for warehouse and distribution space in Phoenix, with investors leveraging lower land and building costs, easy access to highways, rail, and air, and infrastructure. After a record year for demand in 2020, this year has been even better for industrial real estate, with tenants expanding their footprints at an unprecedented pace. Amazon alone inked 13 leases from January 2020 through June 2021, in addition to ground-up construction such as a 2.3 million-SF robotics fulfillment facility in Goodyear.

Retail real estate in Phoenix

Retail has largely recovered from the disruption caused by pandemic restrictions. Boosted by pent-up demand and consumers armed with stimulus checks, retail leasing in Phoenix is approximately back to pre-pandemic activity levels. Vacancies ticked up slightly in the first half of the year, but robust absorption in Q3 2021 and the demolition of over 1 million SF in retail properties has brought vacancy rates to pre-pandemic levels as well. Looking ahead, the retail market will have divided potential, which means investors need to take a targeted approach. Discount, grocery, drive-thru, and service-based retailers will continue to expand, while other retailing segments will continue being challenged by e-commerce and evolving consumer expectations and preferences.

Office real estate in Phoenix

There’s no sugar-coating the situation in office space, with Phoenix recording its weakest performance since the Great Recession. Vacancy rates and available space are up; in addition, a significant percentage of leases are coming due in the next few months, which could increase direct and sublease office space. If you’re looking for optimism, leasing activity has increased, and asking direct lease rates and average gross rates have risen in all three property classes this year. The prospects for this market will remain uncertain while businesses formulate work-from-home/hybrid working strategies and reduce their footprints to save on expenses.  

Multifamily real estate in Phoenix

Like industrial, Phoenix multifamily real estate performed well through much of the pandemic, and vacancies have compressed below 5% in all three property types. The boom in Phoenix population has caused historic demand for apartments for rent, which has been compounded by historically low single-family housing inventory. Not surprisingly, 12-month asking-rent growth and effective rent growth in Greater Phoenix have soared to the highest rates in the country, in excess of 20%. Phoenix multifamily cap rates have been on a multiyear downward trend, with all property classes currently below 4.5% and only a modest rise forecast for the coming years. Two important caveats for would-be multifamily investors: 1) Almost all new construction is in luxury, Class A product, so competition is stiff, and 2) a significant number of units are currently under construction and will be hitting the market and adding to supply and competition.

What to Look for in Investment Properties

What to look for in an investment property goes far beyond the purchase price—it’s about the income potential and return on investment (ROI) that you hope to achieve over the long haul. This type of investing is highly dependent on your own personal goals and appetite for risk, among other factors, but the following guidelines offer a good starting point.

  • Run the numbers: Three different methodologies are used to evaluate income-producing properties. The first is market comparable sales, i.e., comparative closed sales and listings against the property being valued. The second is reproduction cost, i.e., the cost of reproducing a given building. The third is income capitalization, which focuses on actual and projected income stream. (For more detail on the process, please see Thinking Caps: The Basics of Valuing Income Properties.)
  • Appreciation potential: Again, this depends on a number of factors, including the sector, location, and overall market. One of the obvious ways to increase the appreciation is to invest in improvements and amenities—but don’t overdo it without considering the rents you can charge or at the expense of your ROI. Finding an undervalued investment in an up-and-coming area can be tricky, but a real estate expert can help significantly.
  • Location: There’s a reason “location, location, location” is a time-honored real estate adage, and it’s important in Arizona commercial real estate properties too. A few questions to ask: How accessible is the building from adjacent streets and how much traffic is there? Are there any easement issues? How well are nearby businesses doing? Are there any that would be in direct competition with your property or its tenants? What are the crime rates? 
  • Weigh single-tenant vs. multi-tenant properties: As you’d expect, single-tenant properties are generally the simplest to manage and most stable—but keep in mind that the loss of that one tenant also means no income until you secure a new one. A net lease (a.k.a., triple net lease or NNN) is a popular option that provides steady cash flow while the tenant pays all taxes, insurance, and maintenance costs. Multi-tenant real estate such as retail or office is inherently more complex. While it can be lucrative during times of full or near-full occupancy, there is risk inherent in any space where tenants will come and go. As noted above, multifamily real estate has been red hot in recent years, but it is also highly competitive—and no boom lasts forever!

Common Property Investing Mistakes to Avoid

Each property and every deal will be different, with their own pluses and minuses, but here are three of the most common property investing mistakes to avoid:

  1. Neglecting due diligence: Unlike a residential home purchase, investing in commercial assets requires far more than qualifying for a loan, doing a home inspection, and moving in. As a result, enlisting the help of commercial real estate professionals in the search and negotiation process will make sense for less experienced investors. Depending on the type of property, critical research could include market reports, appraisals, rent rolls, discussions with tenants, tenant estoppel certificates, surveys, tax information, zoning, and environmental and soil reports. Working with a qualified property inspector will help uncover issues that need to be addressed, such as plumbing, heating and cooling equipment, a leaky roof, mold or asbestos, and more.
  2. Overlooking key financial issues: Even the most attractive and well-located property needs to pencil out in the near and long term, including contingencies. It’s not just a building—it’s a business! At the time of purchase, that means being aware of potential tax issues or title issues that could increase your closing costs, as well as whatever capital is needed for renovating the property to bring it up to standard. Over the longer haul, vacancy rates, rental rates, and loan rates will fluctuate, so you have to plan for possible worst-case scenarios. Above all, make sure that the seller is providing actual numbers rather than using pro forma or projected income and expenses. Depending on whether you’re investing in retail, office, multifamily, or industrial space, there are a wide range of additional considerations that a real estate professional can advise you on.
  3. Failing to create a team: Commercial rental properties require a significant investment of time as well as capital. It’s important to go into the process with a clear vision of the aspects that you want to handle yourself vs. those places where you need to enlist the help of an expert. Depending on the property or properties in your portfolio, building your team could include a wide range of professionals, most importantly an experienced commercial real estate broker, a lawyer who specializes in real estate law, financial and tax advisors, and a lender who handles commercial assets. If you’re committed to making property improvements, a reliable, licensed and bonded professional contractor is a must. Finally, if you want to save yourself from day-to-day headaches, engaging a property management company may also make sense.

 

Browse R.O.I. Properties’ Investment Opportunities

R.O.I. Properties represent investors, owner-occupants, and fiduciaries in buying, selling, and leasing commercial real estate throughout the Greater Phoenix market, and the state of Arizona. We are full-service real estate brokers who handle all commercial asset classes, and would welcome the opportunity to work with you on your investment requirements. 

To view investment properties for sale in Phoenix available through our brokerage, our commercial property search tool will get you started. Search options include the ability to select by property types, building size, and price range. Be sure to contact us as well for off-market deals!

New investment opportunities are added to our listings on a regular basis. In addition, our team of real estate professionals keeps a close eye on top real estate markets throughout the Valley and can help you identify available properties that meet your financial needs and goals, whether through on- or off-market deals.  

Contact R.O.I. Properties

Ready to jump into the Phoenix real estate market? Contact us today to learn how we can help you find the perfect investment property: [email protected] or call 602-319-1326.

Phoenix Office Space Continues Struggling

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Nationally, the largest office commercial real estate markets are showing signs of recovery, and the NAIOP Research Foundation is projecting a strong resurgence through 2023. When we last addressed this sector in August, we discussed who has the upper hand in the Valley’s office market.  As we head into the final weeks of 2021, we ask: Is Greater Phoenix following or lagging the positive national trend, and what does the future look like? Based on the metrics of vacancy rates, direct and sublease space, and the volume of leases coming up for renewal, it is clear that challenges remain in this sector of the Valley real estate market.

Vacancy rates and available space remain elevated. While the hard-hit retail sector has recovered to pre-pandemic vacancy rates, Phoenix office space has tracked in the opposite direction, with vacancies estimated from 14.3% to nearly 20%. For Class A properties, exceeding 20% vacancy represented the worst mark since 2014, due to negative absorption and the completion of several large projects.

Of the nearly 190 million square feet of office space in Phoenix, more than 35.5 million square feet is available. For comparison, in Q1 2020 (i.e., before the full scope of the pandemic was known), the market was at 12.2% vacancy; today’s vacancy levels are comparable to what we experienced in 2015. Meanwhile, total available space has stayed high, although it has fallen slightly since Q2. An estimated 29 million SF is available for direct lease, and another 4.8 million SF for sublet. Again, compare that to Q1 2020: about 1.9 million SF was available for sublease.

A significant number of leases are approaching renewal. This is a trend we’ve been watching closely throughout 2021. December has the year’s largest percentage of office tenants with an expiring lease, representing more than 400,000 SF. January is nearly as large, at 325,000 SF.   We are seeing a lot of tough negotiating by tenants who continue to have the upper hand, as was the case in August, with heavy lease concessions for tenant improvements and free rent.  We likely will see a significant uptick in direct and sublease space, even with concessions.

Glimmers of Hope for Phoenix Office Space

If you’re looking for a bright spot, Phoenix’s economy continues to improve and our population is in growth mode. In particular, we’re reaping the benefits of more technology companies migrating here—including satellite telecommunications, electronic manufacturing and aerospace—attracted by operational costs up to 36% less than California as well as lifestyle factors.

Despite the overall weakness in the market, there are some positive signs. Asking direct lease rates are up in all three property classes this year and the average gross rate is up as well. In particular, the Tempe submarket has been leading the pack, both in office leasing activity and rising rental rates. More than 70% of the sublease deals in the third quarter of the year occurred in Tempe and Scottsdale.

At $858 million, the third quarter notched the highest quarterly volume of office investment sales in the past two years.  Recent notable deals in the Phoenix market have included:

  • City Office REIT acquired Block 23, a highly amenitized office tower property built in 2019 in downtown Phoenix, for $150 million.
  • Silver Creek Development bought Norterra West II, a 144,800 SF office building in north Phoenix (fully leased by Cognizant Technology Solutions) for $48.5 million.
  • Electric/hydrogen semitruck manufacturer Nikola Corp. bought its 200,000 SF headquarters in Phoenix, which it has been leasing for several years, for $25 million.

Nearly two years into COVID-19, and with the recent concerns about the omicron variant, it’s a familiar tune by now: The Phoenix office sector continues to face a wide range of headwinds, particularly for businesses with successful work-from-home/hybrid options, employees who are reluctant to return to the office, or plans to shrink their footprints to save on expenses. This will be a very different looking market in the coming years.

 

R.O.I. Properties represent investors, owner-occupants, lenders, and fiduciaries in buying, selling, and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in properties (mainstream or distressed properties), we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.

Concerns Lurk Behind Phoenix Multifamily’s Torrid Pace

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The Greater Phoenix multifamily market continues to maintain a torrid pace, driven by a combination of population growth, an economy that’s among the country’s strongest, and persistently pricey residential real estate. While there are indications that Phoenix home prices are starting to stabilize, many would-be buyers remain in locked in rental mode.

Thanks to that unrelenting demand, rental rates have persisted in their upward surge. Unfortunately, renters can’t anticipate a break anytime soon, with Yardi Matrix projecting a rise of 6.1% this year. The fact that Phoenix’s average rental rate is lower than the U.S. average ($1320 vs. $1430) is not much comfort when the bill comes due.

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Phoenix-vs-National Rent Growth

On the business side of the equation, multifamily net absorption has climbed to record highs and outpaced new supply by a wide margin. In addition, with $2.38 billion in sales, Phoenix was the second-strongest U.S. metro for multifamily investment during the first quarter.

Challenges Ahead for Phoenix Multifamily Properties

While multifamily properties for sale in Phoenix have been hot, there are reasons for concern about what happens next. A significant wave of deliveries will hit the market over the coming few quarters, so landlords must plan for heightened competition. While the construction pipeline is focused nearly exclusively on top-tier (Class A) rentals, demand for affordable units (B and C Class units) has surged. This supply-demand mismatch will likely push up Class A vacancies in the near term—with the potential for driving Class B and C rental rates higher and vacancies even lower as people scramble for their most affordable housing options.

A second looming issue is construction costs, which have gotten a lot of press in residential homebuilding but are hitting multifamily properties as well. The U.S. experienced a two-decade record rise in construction costs from Q1 2021 to Q2 2021, with an increase of 2.9%. Phoenix led the nation with a 4.29% increase.

A third question mark is the impact of FHFA’s extension of COVID-19 forbearance for multifamily property owners and tenants. Originally set to expire at the end of June, they are now valid through September 30, 2021. With further stimulus payments seeming unlikely at this point, this could be problematic for property owners and renters that are currently in precarious financial situations.

A Look Inside the Multifamily Stats

Here’s an overview of the trends that R.O.I. Properties is tracking:

  • Vacancy rates: Overall vacancies remained low at 5.0% in May, but the three property classes performed differently: Vacancy rates in Class A properties rose from 6.0% to 6.5%, while Class B fell from 3.8% to 3.6% and Class C dropped from 4.6% to 4.3%.
  • Rental rates: Through the end of May, 12-month asking rents were up 17.2% and effective rents up 18.1%—again setting new quarterly highs. Across the market, landlords are relying less on concessions to lure renters to their properties than they had during the pandemic. Just 12% of communities surveyed in May were offering concessions, down from 30% one year ago. Concessions of two to four weeks are typical at newly built properties, but the incentives vary widely based on location.
  • Construction: 12-month deliveries topped 9,000, and about 20,500 units are underway. Downtown Phoenix continues to be a prime destination for multifamily development, with new supply concentrated near Roosevelt Row Art District. Hubbard Street Group recently broke ground on another luxury high-rise: the 309-unit Skye on 6th. Within a half-mile radius there are six other luxury apartment buildings, with a total of 1,600 units under construction.
  • Sales: The buyer pool continues to expand, even with cap rates compressing below 5% in all three property classes. While local investors drive most of the volume, out-of-state interest has steadily grown. In one of the year’s largest sales, a New York-based pension fund advisor acquired the Almeria at Ocotillo apartments in Chandler for $129 million ($332,260/unit).

Contact R.O.I. Properties

R.O.I. Properties represent investors, owner-occupants, lenders, and fiduciaries in buying, selling, and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in properties (mainstream or distressed properties), we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.

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Examining the Intersection of Commercial and Residential Real Estate

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Overview of the Intersection of Real Estate in Arizona

There’s a tendency to view commercial real estate and residential properties in Greater Phoenix through different lenses, but it’s also a useful exercise to observe them together, as components of the state’s larger economy. At the risk of oversimplifying complex economic and social factors, Arizona’s solid economy (fourth highest GDP growth in the U.S.) and relatively affordable cost of living and commercial properties in recent years (minus the downward blip of COVID) have attracted more people and jobs. In turn, that spurred housing demand, both in residential homes and the multifamily sector. Subsequently, the additional influx of people spending money on goods and services has driven the need for even more businesses—and the cycle reinforces itself.

At the moment, with the economy strongly recovering from last year’s challenges, several trends are emerging at the intersection of commercial and residential real estate:

Intersection #1: Self-Storage Properties

According to 2020 U.S. Census data, Arizona currently has the country’s highest population growth rate and the third highest since 2010. An influx of new residents means a need for more places to put their stuff—and not surprisingly, that has been a boon for self-storage in the Valley. Phoenix ranked #5 in self-storage markets based on investment volume in 2020 according to Multi-Housing News—more than 1.17 million SF changed hands for $126.4 million.

Intersection #2: Multifamily & Multigenerational Living

With residential home prices soaring and supply at historic lows, many would-be buyers have been driven to rent. As a result, rents in Greater Phoenix have risen 21% in the past year—the highest ever recorded by CoStar. There are two major trends imbedded within multifamily real estate. First, across much of the country, apartment developers, investors and lenders remain cautious about new apartment building—but Greater Phoenix is defying that with an increase in apartment construction over the past year, second only to Orange County in units under construction, and strong absorption levels. Second, we are seeing a large increase in the number of people sharing living space with friends or relatives, a trend we noted in November in Boomerang Effect – Grandparents and Kids Moving Back Home in Phoenix.

Intersection #3: Booming Startup Activity

Industrial warehouse sales and corporate headquarters moving to Phoenix tend to be the headline grabber in commercial real estate because of the brand names and eye-popping valuations. But quietly, the Valley has also been expanding in entrepreneurial activity, according to a new report from Roofstock. Phoenix, including Mesa and Chandler, earned the #7 spot in the country for its business formation rate: 9.63%, calculated by the number of new businesses divided by the total number of businesses formed in a given metro area from 2014 to 2018. The report estimated a creation rate of more than 37,000 jobs at 6,100 companies each year. This business expansion will likely lead to an increase in demand for multiple commercial asset classes, including office, industrial, multifamily, and self-storage, as well as residential product and single-family housing, whether for rent or for sale.

Intersection #4: Is Retail Back to Expansion?

We’ve detailed the headwinds facing retail in several recent blog posts, including Adaptive Re-Use Trends in Phoenix: Hospitality and Retail. Interestingly enough, there are glimmers that better times may be ahead in this sector—particularly as the population grows throughout Greater Phoenix. Tracking by Coresight Research indicates that U.S. retailers have announced 3,199 store openings and 2,548 closures year-to-date—a far cry from the 3,298 openings and 8,953 closures in 2020.

Arizona’s economy went into the COVID storm in strong shape, which helped us weather it. Inevitably, of course, we need to be prepared for when the cycle cools off—particularly if increases in home prices, rental rates, and cost of living make the Valley unaffordable for larger portions of the population. For the foreseeable future, the diversification of industries and strong in-migration levels appear to put Greater Phoenix at the intersection of business success and high quality of life.

Contact R.O.I. Properties for More Insight on the Intersection of Commercial and Residential Real Estate

R.O.I. Properties represents investors, owner-occupants, lenders and fiduciaries in buying, selling and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in properties (mainstream or distressed properties), we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.

1031 Exchanges: Fuel for Real Estate and the Economy

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Like-kind exchanges—commonly known as 1031 exchanges—have been used for a century by real estate investors. They allow the deferral of capital gains taxes on the sale of a property as long as the proceeds are invested in a new property of like kind and equal or greater value within certain time limits. Although 1031 exchanges were among the potential targets for Congress in the reconciliation bill, they are not included in the most recent version.  That’s good news (assuming Congress doesn’t have a last-minute change of heart), because 1031 exchanges serve as fuel for real estate in general and the economy as a whole.

Ready to find out more?

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Economic Benefits of 1031 Exchanges

An Ernst & Young study from earlier this year gives some eye-opening perspective on how much 1031 exchanges stimulate the U.S. economy:

  • 1031 exchanges drive $4.4 billion in investments and related consumer spending, support 568,000 American jobs, and create a total economic impact of $55.3 billion.
  • In the process, they will generate about $7.8 billion in federal, state, and local taxes in 2021, and another $6 billion in foregone depreciation/reduced deductions on replacement properties.

1031 exchanges are used in a high volume of real estate transactions, across all commercial (and many residential) asset classes. Here’s a quick look at how they benefit the real estate market, according to the Federation of Exchange Accommodators (FEA) in its report, “Economic Impact of IRC §1031 Like-Kind Exchanges—Clearing Misconceptions and Setting the Facts Straight”:

  • Allowing property owners to shift to more productive properties, or to diversify or consolidate their holdings.
  • Providing owners flexibility on where their properties are located.
  • Increasing the velocity of transactions, due to the requirements of finding a replacement property within a specific time period.
  • Increasing the volume of transactions, because property owners and investors can defer the taxes owed rather than getting penalized with a capital gains tax.
  • Discouraging capital/cash hoarding.
  • Incentivizing renovations and adaptive reuse plans.
  • Encouraging active reinvestment vs. profit taking, and giving an incentive to maintain investments in U.S. real estate.

While 1031 exchanges often get maligned as a tax break for the wealthy or large corporations, that’s far from the truth. The FEA notes that “60% of exchanges involve properties worth less than $1 million, and more than a third are worth less than $500,000.”

With 1031 exchanges appearing to be safe from Congressional action, they can continue to fuel real estate transactions and the economy. If you own investment property and are currently considering your options—including a potential 1031 exchange of commercial or residential property—the R.O.I. Properties team welcomes the opportunity to discuss strategies with you.

R.O.I. Properties represent investors, owner-occupants, lenders, and fiduciaries in buying, selling, and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in properties (mainstream or distressed properties), we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master, Chapter 11 Trustee and Liquidating Agent, as well as REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.

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Retail Real Estate Recovery Keeps Chugging Along

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Even before the arrival of the pandemic, competition from Amazon and other online retailers was already causing headaches for traditional brick-and-mortar locations. When lockdowns and other social restrictions made in-person shopping an even greater challenge, the situation looked dire. With the worst of the pandemic behind us, however, the retail real estate recovery that sprouted in spring is looking stronger as we head into the holidays.  Foot traffic is up at regional malls and multitenant strip malls, and neighborhood retail has successfully shifted from products to services.

According to CoStar, mall vacancy rates fell 150 basis points last year, and it is expected that they will decline an additional 170 basis points in 2021. AZ Big Media recently reported that investment sales are up in Greater Phoenix retail real estate, and the market posted positive net absorption in the first half of the year—more than twice what was absorbed in all of 2020.

In particular, two trends have been key in fostering recovery:

Trend #1: Service-Based Retail, and Drive-thru, Takeout and Cloud Kitchens

Advances in technology and changes in consumer habits (particularly the desire to eat at home) are the story here—and to be sure, there are several sub-trends within this main trend. A number of chains are placing their bets on for the long term by investing heavily into the drive-thru/pick-up window channels, including multiple lanes, digital signage, curbside pick-up options, and bellhop-style service with tablets. McDonald’s has even tested license-plate recognition for frequent customers. According to a survey earlier this year, nearly three-quarters of U.S. consumers have used a drive-thru since the start of the pandemic, with overall usage up 43% since April 2020.

Similarly, digital orders at fast-food restaurants have increased by 23% since first implemented, a number which is anticipated to triple in 2021. Cloud/ghost kitchens provide lower risk and higher return, particularly in high-rent areas.

Delivery-only models have been made possible recently by advances in technology and changes in consumer habits. Food delivery is set to grow to a $200 billion industry by 2025, due to shifting changes in behavior, with nearly half of consumers preferring to eat at home.

All of these statistics have affected the real estate market, creating a surge in demand for properties with existing drive-thrus (or the space to add them) from investors, developers, and tenants alike.

Despite the boom, this segment is not without challenges, including rising food and fuel costs. The traffic boom has been partly responsible for a nearly 1-minute increase in wait times vs. pre-pandemic performance, as well as a decrease in order accuracy from 87% in 2020 to 85% in 2021.  Exacerbating that issue, the National Restaurant Association’s midyear report found that 75% of restaurant operators cited recruiting and retaining workers as the #1 business challenge, which is the highest in the two decades they’ve tracked that statistic.

Trend #2: Adaptive Re-Use/Mixed-Use Leads the Retail Real Estate Recovery

Next, adaptive re-use and mixed-use trends in Phoenix and across the nation, particularly within hospitality and retail, have continued to unfold. Mixing office and multifamily use creates a virtuous circle: helping mall owners create foot traffic through the addition of office workers and residents, who in turn benefit from easy access to mall amenities such as dining and shopping. Last-mile delivery and distribution centers are often another feasible option for malls with empty space.

Brick-and-mortar continues to be a tough arena, and real estate research firms are predicting that more than half of all major U.S. department stores in malls will have permanently shuttered by the end of 2021. Notwithstanding, consumers still want to touch and feel their goods, and many digital-native retailers (such as Warby Parker, Untuckit, Allbirds, Away and Third Love), are opening up/operating brick-and-mortar stores for this very reason.

Despite the challenges in the retail real estate space, there’s been a wave of new-build activity around the Valley. The mixed-use trend can be seen in several developments currently underway or in the planning stages:

  • In Gilbert, Epicenter at Agritopia is an under-construction mixed-use development. In addition to 320 multifamily units, the high-end site includes 49,000 square feet of retail space that recently added LGO Hospitality’s Buck & Rider to a lineup that includes well-known names such as Gadzooks, Spinato’s, and Matt’s Big Breakfast.
  • Litchfield Park is breaking ground on Litchfield Square, a 400,000-square-foot mixed-used development. The project is expected to include retail, professional offices, and luxury condominiums.
  • In east Mesa, East Gate Plaza will have a prime position across the street from Facebook’s proposed $800 million data center. The development will include retail, restaurants, hospitality, medical and office sites.
  • Other notable developments leveraging a work/live/play model include The Grove at 44th Street and Camelback in Phoenix, 75th & Glendale Retail Center in Glendale, the Shops at Lake Pleasant in Peoria, and Queen Creek Crossing and Vineyard Towne Center, both in Queen Creek.

While department stores may be a thing of the past—or may need to right-size/boutique their operations—there is life in retail, and consumers have dollars to spend. In addition to the trends above, Phoenix’s population growth rate should continue to coax this market into balance as it continues to evolve.

R.O.I. Properties represent investors, owner-occupants, lenders, and fiduciaries in buying, selling, and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in properties (mainstream or distressed properties), we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.

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