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NAIOP, AZRE Magazine September/October 2010

NAIOP Roundtable 2010: Q&A With Members of NAIOP

Q: What is the average 30-year-old commercial real estate person thinking about their careers right now?

MH: Anyone in their early 30s, (5-7 years experience) has not experienced this type of real estate recession. In fact, people with more than 20 years experience have not experienced anything quite like what we’re going through today. It is extremely difficult to make money in the commercial real estate industry. If you had experience and could pick up the telephone from 2004–2007, fees were relatively easy to earn. Today (whether you are 30 or 50), you need to work existing relationships, create new ones, work longer hours, and find deals that make economic sense. Remember that commercial real estate will be back, but it could take a couple more years.

BM: The most successful brokers are using this time to focus on their clients’ needs and to create memorable client experiences in a difficult real estate environment. They are making the development of new relationships as important as completing transactions. Colliers’ brokers are focused on creating value, and they are experiencing the opportunities that naturally follow. Their attention is not on their losses or their difficulties, but on the development on new skills and strategies. Experienced brokers are finding this to be the perfect time to set new goals for the future, while being grateful for all their blessings, past and present.

JB: If you lasted this long in a down cycle as a commercial real estate person, you are not going anywhere. Most commercial real estate professionals have gone through a period of significant reductions beginning in 2007. When the average deal size shrinks by 40% and the amount of transactions are off approximately 50%, it is pretty easy to witness your income shrinking by 80% from the record highs of 2006. The saving grace for real estate professionals is that we all know real estate cycles, and if you are able to reduce your overhead and hang on, there will be greener pastures ahead.

Q: What is the current state of our Metro Phoenix office market?

KR: Concessions are gone, rents are rapidly moving up and vacancy is non-existent. Oh wait, that was a great dream! The reality is that the Phoenix office market has a long way to go until we begin to see recovery. There exists virtually no net absorption. The activity in the market from both a local and outside perspective is there to chase value. I believe that we may be near the bottom, but only job creation will help lead us out of the mess we have created and it is hard to be positive about our economy’s position on job growth. As with any market correction, speculative development will be non-existent. Lender and investor appetite has almost redlined Phoenix office, and it will take some time to correct that viewpoint. The current state of our market boils down to “it will be a long hot summer.”

BM: Any discussion regarding the current state of the Metro Phoenix office market needs to focus on tenants who are controlling the market. With more than 29 MSF of office space available, and a 22% market-wide vacancy, it is definitely a tenant’s market. Today’s tenants are very educated regarding bottom line thresholds landlords are willing to accept. This is driving up concessions and driving down the rental rates. Large tenant activity has an especially significant impact as landlords compete for such users as Phoenix School of Law (200,000 SF+/-), Fennemore Craig (140,000 SF+/-) and United Health Care (125,000 SF+/-). Until Metro Phoenix experiences true job growth, allowing medium-sized companies to expand and drive up office occupancy levels, this tenant-dominated environment will continue.

JB: The Phoenix office market has posted positive direct absorption in the past two out of three quarters, signaling the potential of the recovery phase by the end of 2010. Year-to-date, Phoenix has increased its employment by 8,500 jobs, which results in the demand for space, which should continue to reduce our overall vacancy rate.

Q: What is the current state of our Metro Phoenix industrial market?

MH: Tenant demand is the most positive factor within the industrial market today. In the 2Q of 2009, our net absorption was negative 1.4 MSF. The 2Q of this year, we reported 1.3 MSF of positive net absorption. Vacancy rates are comparable over the past 4 quarters, new supply is relatively zero, but the major shift is that tenants are taking advantage of historical low pricing. Tenants and landlords have one thing in common: Lease space now.

JB: Consistent with the office market, the Phoenix industrial market has seen three quarters of positive net absorption. Demand for space has risen with large industrial users due to available labor, affordable labor rates and reduced occupancy costs. Moody’s revised its employment forecast for Phoenix to a positive 14,000 jobs in 2010. Coupled with little to no new deliveries, it will result in a lower vacancy rate and stabilized rental rates, with the potential for growth by year-end 2011.

JD: Nice to see some positive absorption this past quarter. National and multinationals are somewhat active. Local/smaller users are fairly dead in the water, as they do not have access to capital. Rents are down and concessions are up. Landlords have to be aggressive to make deals today. Some recent user purchasers on the West side will help absorb space and add credibility to the market and associated pricing.

Q: What does the debt and equity supply look like today? Who is lending and for what type of projects?

KR: Some reports are now saying that values are down 25%-35% from the 2007 peak. That, combined with the low yields in fixed-income securities, is sending investors back to commercial real estate. The problem is that those investors are looking at a product in “core” coastal locations, and Phoenix is not on that map. The big banks have $1T in excess reserves, but they’re really not lending except with low LTVs, principal pay downs, and loan-to-own situations.

JD: This is clearly a time that it is much better to be a public company vs. a private real estate company. Liberty and companies like us have virtually unlimited access to the capital markets today. Getting private bank financing continues to be difficult for private players.

WS: As stated before, all types of lenders are starting to jump back into the market. The most activity for financing is on stabilized or near stabilized projects. We have closed on a few construction loans for build-to-suit projects that have national or regional credit tenants.