Houston’s commercial property market experienced a significant slump in Q1 2023, with sales dropping 74% compared to the same period last year. This decline reflects a nationwide trend due to increased interest rates and tighter lending standards. Office vacancies in Houston are at nearly 27%, with leasing down 29% in Q1 compared to the last three months of 2022. The recovery of the market and an increase in commercial property transactions will likely depend on the stabilization of interest rates.

Arizona has determined there is insufficient groundwater for approved housing construction in the Phoenix area, resulting in a halt to some new subdivisions. This decision could signal the end of rapid development in the region, which has been the fastest growing in the country. State officials will not revoke existing building permits, but will rely on water conservation measures and alternative sources for approved housing developments. The groundwater shortage will prevent developers in certain areas from receiving new permits for homes reliant on well water.

The Oro Valley Church of the Nazarene’s plan to develop an indoor sports complex and outdoor sports field has faced strong opposition from residents, leading to four years of arguments and revisions. The $10M-$12M expansion has undergone seven revisions to address concerns, but opponents still seek its cancellation or relocation. The Oro Valley Planning and Zoning Commission recommended denying the project’s rezoning request, with the matter expected to go before the Town Council in the fall.

Venue Projects and Sunbelt Holdings have presented a site plan for the Hayden Flour Mill Redevelopment adaptive reuse project in Tempe, Arizona. The plan includes eight structures, with six new buildings, and aims to use as much existing machinery as possible for historical purposes. The development will feature retail and hospitality components, and construction is expected to begin in late 2023 or early 2024.

Following the failure of several projects, including the $300 million Legacy Sports Park, Arizona Governor Katie Hobbs is implementing new guidelines for projects bonded under the Arizona Industrial Development Authority (AIDA). The Auditor General’s report criticized AIDA for lax oversight in funding and fee payments, with the failed projects representing approximately 4% of AIDA’s portfolio. Under the new guidelines, AIDA will be required to prepare background information, financial history, and a project business plan for potential developers before Governor Hobbs signs off on the projects.

The commercial real estate (CRE) market faces challenges due to high inflation and remote work, but Bank of America analysts believe these issues are manageable and do not pose a systemic risk to the U.S. economy. They expect loan modifications and extensions to become common, helping borrowers avoid higher costs or defaults. Property repurposing and the limited impact of the office sector’s woes on the overall CRE market also support a manageable outlook. Improved underwriting standards and increased equity provide a buffer against risk, leading to the assessment that CRE contagion risk for the broader economy is minimal and manageable.