In late October, as the autumn leaves begin to fall, the nation's sports attention inevitably turns to the baseball diamond. This year, the World Series pits the Arizona Diamondbacks against the Texas Rangers, with the first game on Friday in Arlington, Texas.
But the series doesn't just match two of the game's wild-card upstarts, it also features two of the nation's most dynamic real estate markets.
The CoStar Analytics team stepped up to the plate this week to size up the markets to determine who has the commercial property edge ahead of the big series.
Representing Arizona is Connor Devereux, CoStar’s director of market analytics for Phoenix. And representing Texas is Bill Kitchens, CoStar’s director of market analytics for Dallas.
Here are their scorecards:
Multifamily
Phoenix: The Phoenix apartment market is experiencing one of the most aggressive moves to add new units in several decades, and though demand has shown signs of recovering thus far in 2023, it was not enough to absorb the record amount of new construction. As a result, vacancy has been on a steady upward climb from the low 5% range in mid-2021 to 10.3% as of the third quarter and rent growth is decidedly negative. Moving forward, the 32,500 units now under construction are likely to continue pressuring property performance into 2024.
Dallas-Fort Worth: Demand is rebounding in Dallas-Fort Worth with net absorption of about 12,300 units through the end of the third quarter. In turn, the vacancy rate is hovering near 9%, up from a record low of 6% at the end of 2021. While the market ranks among the top spots for construction, the supply picture remains balanced with most development concentrated in Collin and Denton counties, tracing healthy population growth and in-migration. Supply-side pressure weighs on rents, which are down 1% over the past year. With demand rebounding, rent growth is anticipated to recover, trending above 3% at the end of 2024.
Retail
Phoenix: Strong population growth, rising incomes, and minimal construction activity have supported over a decade of steady improvement in the Phoenix retail sector. At 4.6% as of the third quarter, the Valley’s vacancy rate is at the lowest level on record, driving a 9.1% annual increase in rents. That rent growth figure ranks Phoenix as one of the strongest-performing markets in the country, well outpacing the 3.6% gain seen at the national level. With less than 1% of inventory currently under construction, the lack of supply-side pressure along with steady demographic tailwinds are likely to keep vacancy compressed into 2024.
Dallas-Fort Worth: Retail is thriving in Dallas-Fort Worth as steady demand for space, limited construction and plentiful economic and demographic tailwinds keep vacancies relatively tight at 4.4%. Meanwhile, the volume of available space on the market to be leased is at record lows, creating a competitive environment for tenants. In turn, rent growth remains healthy at 4.7%, above the U.S. average of 3.6%. Even with the prospect of a downturn which would cause a pullback in consumption, retail vacancy rates in Dallas-Fort Worth should remain stable.
Office
Phoenix: Broad-based economic uncertainty and the increased adoption of hybrid work arrangements have structurally weakened underlying demand for Phoenix office space. Lower space utilization has led many tenants to downsize or shutter offices altogether, causing the amount of vacant space on the market to climb nearly 50% since the end of 2019. This dynamic pushed the Valley’s vacancy rate from 11% in the fourth quarter of 2019 to 15.8% in the third quarter of 2023, matching a figure last seen in 2015. A precipitous rise in sublease availabilities further highlights the challenging environment, with more than 7.5 million square feet available for sublease, representing nearly 4% of total inventory.
Dallas-Fort Worth: The office market in Dallas-Fort Worth faces elevated uncertainty as firms identify the amount of space they require to support their workforces, leading to weaker demand and pushing vacancies higher to 18%. Demand is characterized by smaller leases, with leases of 5,000 square feet or less contributing to over 50% of total lease volume. Meanwhile, leases of 100,000 square feet or more are becoming scarce. The flight-to-quality narrative persists with newer buildings attracting the most attention from tenants, while about 74% of vacant office space is attributed to buildings from the 1990s and earlier. The vacancy rate is projected to rise further above 20% as leases approach expiration. Even so, the market carries a structurally higher vacancy rate, a relic from the boom-and-bust of the 1980s.
Industrial
Phoenix: Phoenix boasts several structural tailwinds supporting industrial space demand. Not only has the area emerged as a critical link in national supply chains, but the Valley has strong momentum in terms of advanced manufacturing, headlined by TSMC’s $40 billion investment to build a pair of microchip properties in North Phoenix. The substantial supply pipeline, however, is beginning to outpace steady leasing activity, causing market conditions to normalize. Developers completed a record 13.7 million square feet of gross deliveries in the third quarter, causing vacancy to spike to 6.6%. The 48 million square feet under construction is expected to continue pressuring fundamentals over the next 12 to 18 months, particularly for larger buildings where most of the development pipeline is focused.
Dallas-Fort Worth: The industrial market is riding a wave of completions, with developers adding 57 million square feet so far in 2023, a result of heavy speculative construction over the past few years. Most new space is larger logistics warehouses geared toward users seeking to tap into Dallas-Fort Worth’s central location, wide network of highways and rail lines and two major airports in Dallas-Fort Worth International and Alliance that offer international reach. Demand remains steady with e-commerce, third-party logistics and manufacturing driving leasing activity with Niagra Bottling, Southwire Company ad DSV Global Transport representing the largest leases this year, each taking over 1 million square feet. As supply continues to outpace demand, vacancies are expected to expand to above 9% before retightening as construction activity subsides.