Residential Real Estate Leads The Way
March 23, 2015
Written by Ari Spiro
The real estate adage, “retail follows rooftops” is a simple way to explain the demand for commercial services when a residential community is established or emerges. Despite the seemingly obvious relationship between residential and commercial real estate, many view the two as entirely different worlds. However, in Phoenix metro residential and commercial markets are especially interconnected.
Consumer Home Equity
The direct relationship between the residential and commercial market is seen on the consumer side. When residential home pricing recovers and a homeowner’s equity builds, the homeowner transforms into a confident consumer, flush with excess capital to spend. Many entrepreneurs chasing the “American Dream” utilize home equity as seed money to launch new businesses, ventures and retail shops. As this transformation occurs with the rebound of the residential market, Phoenix metro is prepared for additional entrepreneurial activity such as start-ups and new concepts with its pro-business environment, availability of retail space and relatively low barriers to entry.
This is great news, but even better news is around the corner. Phoenix metro’s countless strip centers, office buildings and industrial spaces have historically been dominated by “mom and pop” tenants; this tenant class has largely been dormant since the residential downturn. A strong return is anticipated from this type of tenant class primarily due to the build-up of home equity over the past several years.
Residential Real Estate Businesses
Phoenix metro area shopping centers as well as office buildings are largely filled with residential real estate businesses: real estate companies, mortgage brokers, title companies, and other related financial services during an expansive residential construction market. At the same time, industrial facilities are largely occupied by contracting companies, home furnishing showrooms and vendors such as tile and carpet installers. Phoenix metro is undoubtedly a real estate town and the countless jobs in the industry support the need for commercial space.
When the residential market crested nearly a decade ago, the commercial market descent followed two years later. When the residential market’s bubble burst, the commercial bubble exploded! Today, with a demonstrative, albeit choppy, residential recovery, the commercial market recently followed suit into recovery mode. As we’ve seen, the rebound is resulting in corporations hiring, restaurants are bustling again and the vibrancy has returned back to once lifeless shopping centers. Statistically, vacancies have dropped approximately 5% across the board from a high of near 13% in 2011 to under 10% year end 2014 for retail properties; 21.2% in 2010 to under 17% year end 2014 in the office sector and near 17% in 2009 to under 12% year end 2014 for industrial properties. Though this represents a 4%-5% drop in vacancy, we are still far off the lows of 5.8% for retail and 10.6% for office in 2006. Industrial properties strongest leasing market was in 2005 with a 7.6% vacancy.
With residential values still at “off peak” prices and new home starts at just a fraction of peak numbers in 2015, the residential real estate market still has a way to go. As always, the commercial market will follow the residential market’s lead.