7 Benefits of Investing in Arizona Commercial Real Estate

During a time when the economy fluctuates on a day-to-day basis, there remains many good reasons to invest in real estate, and specifically in Arizona commercial real estate. When searching for a reliable and rewarding means of investing, you can expect benefits such as cash flow, steady appreciation, and long-term financial wealth. Here are seven factors that make Arizona and the Phoenix metropolitan market very desirable for commercial real estate investors:

1. No Rent Cap

One benefit to investing in multifamily real estate in Arizona is that there is no rent cap. This means that unlike most other states, Arizona does not place limits on how much rent can increase from year to year. In 2021, Arizona rents increased by as much as 30%. Other states cap rent around 5% increase each year, making Arizona a more profitable state in which to own a commercial property. In 2022 there has been a 9.1% increase in average rent, and the average rent is $1,750 per month. 

2. The Average Cap Rate is Dipping

The average cap rate dipped roughly 40 basis points last year to 4.7%. Heightened buyer interest led to this compression, as per-unit sales pricing in the Phoenix metropolitan area nearly doubled from the end of 2017 to more than $205,000 per unit at the start of 2022. Cap rates above those in California have drawn institutions toward large Class A assets in Phoenix. North Scottsdale has recorded a sharp rise in such trades, and its proximity to upscale shopping and entertainment districts allows for sizable rent growth.

3. Transaction Velocity is Rising

Transaction velocity continued rising in the second half of last year, coinciding with historic fundamental improvements. Tempe and North Phoenix remain some of the most traded areas, and have seen more assets change hands than usual over the past 12 months. At the same time, rising activity in the rejuvenating Downtown Phoenix and Southwest Valley sub-markets has resulted in these areas recording sales volume among the highest in the whole metropolitan area.

4. New Construction

19,000 new units will be completed this year, as builders significantly ramped up commercial real estate development in 2022. This year’s anticipated volume is slated to be ahead of the previous Phoenix metropolitan record by 7,000 units. This is resulting in 5% inventory growth–the fourth largest of all major American markets. These new units are quickly being bought and rented, as the need for commercial real estate in Arizona continues to grow. 

5. Current Job Market

Arizona also has a robust and diverse job market, making purchasing a commercial property a safe investment. The job market continues to grow steadily, with over 80,000 jobs being created. This widespread economic growth has resulted in increased targeting of all quality levels, but activity has climbed most sharply for Class B/C properties. This is a great sign for commercial real estate investors as it means there is a continued need for housing and a workforce prepared to reliably pay for it. Investing in a commercial real estate building in an area where you have guaranteed occupancy will help you grow your portfolio steadily. 

Additionally, companies like Intel, General Dynamics, Honeywell, Amazon and others have large Phoenix operations, attracting the companies serving these corporations. In turn, these companies are creating jobs for the area that will lead to an influx of qualified renters. 

6. Low Vacancy Rates 

Vacancy rates are currently at 2.8%, as a record new number of units enter the market. While the number of new units skews the vacancy rates, the absorption rate is running much higher and net absorption is set to surpass 17,000 units during this calendar year. This is the first time since 2000 that such a statistic has been reached. Because of this, commercial real estate investment offers more income opportunity than investments like stocks or bonds. Commercial properties generally have an annual return between 6-12% of the purchase price.

7. Diversified Earnings

Another benefit of investing in commercial real estate is that you will likely have multiple tenants, which diversifies your earnings. Since you are not relying on a single person to produce income, this reduces your risk. 

If you are looking to secure a commercial property, you need an expert guiding your purchase. Butler Apartment Group is here to help you benefit from selling or buying income generating properties.