Negotiating Leverage Shifts to Buyers in Greater Phoenix’s Commercial Real Estate Market

Negotiating Leverage Shifts Toward Buyers in Greater Phoenix

The Federal Reserve’s quarter-point interest rate increase in mid-September was widely anticipated, but the reality of its arrival still sent shock waves into the commercial real estate market. Higher-for-longer interest rates have increased borrowing costs, lowered overall return expectations and property values, and caused difficulty in refinancing, particularly for overleveraged properties on floating-rate loans.

The result has been the most challenging business conditions we have seen in the past few years, and it feels like someone pressed the “pause” button on the real estate market (including residential properties). Beyond the potential for another Fed Funds increase later this year, it does not quell nerves in the market to see the 10-year Treasury above 5.2% for the first time in about 20 years. 

Even so, this particular slowdown has its own unique dimension. Many economic indicators are positive or trending that way. Inflation has slowed but remains persistent, hence the rising rate environment. The market does not rhyme with 2007-08, when loans were defaulting and nobody was buying because prices had not adjusted, nor is it like the shock of Covid. 

How Can Buyers and Sellers Adapt to the Current Commercial Real Estate Market?

The lack of market activity in Greater Phoenix is most notable in commercial owner-occupant properties, as these types of commercial buyers often react to uncertain financial conditions with a consumer mindset. They are often small-business owners, and this is a more difficult market for them to wrap their arms and brains around, particularly with increasing interest rates. In the current interest rate environment, with current market pricing, the prospective buyer’s decision may align more closely with a “rent” versus “buy decision,” purely from an economic perspective.

While the impulse may be wait-and-see in times of uncertainty, anticipated interest rate increases may make the argument for getting on top of things now—provided the numbers work and favor a buy. As is the case in the residential sector (excepting properties over $2M), Greater Phoenix is in a buyer’s market in most commercial asset classes. Strategic buyers who can pay cash are moving through this market strategically, and in many instances, with negotiability in an environment that is rife with nervous sellers and experiencing an uptick in deals that fall through. 

For sellers who have owner-occupant product, in which buyers typically use financing, there is no sugar-coating it: It’s a tough market. Make sure you are at bullseye pricing, to attract attention, and when inspection items come back that need to be addressed, move through them with patience and professionalism. Buyers hold the high cards for now, and you need to play your hand wisely for a deal to be successful.

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