Marina Heights rendering courtesy of DAVIS.

Arizona Commercial Real Estate Experts predict slow recovery leading to better 2015

In the ’90s, the joke was that the state bird was a construction crane, says AAED’s Executive Director Joyce Grossman. She motions out the window of her downtown Phoenix office and says, “You look around here, and you see cranes in the air. That means jobs.”
Arizona isn’t seeing the growth it did in the ’90s, Gorssman continues, but at least we’re not going backward. Arizona is slated to be one of the fastest growing states over the next five years, and GPEC CEO Barry Broome predicts 2014 will see a lot of creative and risky development.
“It’s going to be a developer’s paradise around here for the ones who are really smart and creative, and it’s gonna take some guts,” says Broome. “So, if you’re waiting for your building to be 50 percent leased before you break ground, you’re going to miss a lot of opportunities.”
Phoenix is running out of space, as far as large-scale investment goes, but Broome says  that will be cause for in-fill and urban development. Also, next year will bring spec business development opportunities to people who own land in the West Valley.
“If you have a building, it’s going to go off the market,” Broome says. “If you don’t’ have a building, you might not be in business. In the next two years, there’s going to be so much capital moving from the balance sheets of corporations and into the economy that you’re gonna see a lot of large-scale appetite for buildings.”
Another prediction, looking 25 years ahead, is the importance of transit-oriented development — particularly that along the light rail and Loop 303.
“The old model is going to be in business, but the new model is where the action’s going to be,” Broome says. “My concern is the Valley is an increasingly more complicated market to understand.”
Rural America is growing at a faster rate than the urban areas, and Mignonne Hollis, executive director of the Sierra Vista Economic Development Foundation, suggests the state is headed in the right direction with Arizona Commerce Authority’s rural grants.
The East Valley has seen significant increase in development and business attraction — “I can point to almost any point of the city and say, ‘There’s the growth,’” says Mesa’s Director of Economic Development Bill Jabjiniak. “It’s just a matter of figuring out how the city helps.” (See page 26 for more details on SE Valley development.)

LAYING A NEW FOUNDATION
The economic developers aren’t the only ones touting innovation. Construction costs and a labor shortage meant a modest year of growth in 2013.
“Twenty-thirteen was a year of reinvention,” says Weitz Executive Vice President Mike Bontrager of the construction industry.
The recession and evolving technological tools were the two major incentives in expanding the company’s services.
“We took a big, hard look at how we were building and how we could add more service and more value to our customer base.”
For Weitz, that meant expanding its front-end services, from site selection to in-house designing and equity and debt prototypes.
“The cautionary forecast is that if (construction costs) go up too much and rents and revenues do not go up to match that, building stops and so construction stops. Some inflation on the material side is being seen but it goes up and down.”
The labor shortage is an issue, Bontrager says.
“In some cases, projects will have to be redesigned,” he says, adding, “Arizona is a race horse in the gate; We just need to get the gate open.”
Next year will be one of recovery. Bontrager forecasts that in the fourth quarter the construction sector may see some pickup in projects.
“I don’t think 2014 is going to be the breakout year a lot of people have forecasted,” Bontrager says.
“Last year was another modest growth year coming out of the recession,” says McCarthy Building Companies Southwest President Bo Calbert. “I say modest, but we were up 20 percent in revenue from last year. We’re experiencing a trend back to normalcy. There’s nothing booming. There’s nothing really taking off. It’s just slow steady growth in a lot of different market sectors.”
Similar to Weitz, McCarthy diversified its company. McCarthy is taking interest in utility-scale solar work and wastewater treatment plants.
“There’s a lot in planning, and I think the commercial developers are seeing that and there are some projects being planned now we won’t see for a year or two.”
As far as education goes, Calbert says, K-12 development is at the mercy of bonds and most of the opportunities remain in community college expansion. Calbert also foresees a slowdown in healthcare projects.
McCarthy has found success in developing its job order contracting market and may see more P3 opportunities due to lack of funding.
“It’s still important to be diversified geographically because of the size of the market out there,” Calbert says. “Most people will tell you it’s going to be that way for another two or three years. You really have to have some market penetration outside of Arizona.”
“The only way we’re going to attract the workforce to Arizona is to raise wages,” Calbert says.

FROM THE MOUTHS OF BROKERS
It’s tale of several submarkets, says Colliers International researcher Pete O’Neill of the Valley. There will be some vacancy challenges in the East Valley and north Phoenix retail markets, he says, adding that some submarkets — Chandler, Tempe and 44th Street — are seeing better absorption.
“Because of so many mixed messages in the national marketplace, it’s hard to deal with uncertainty (and gage demand),” says Colliers International Managing Director Bob Mulhern. “It tends to work against clear decisions.”
Ultimately, brokers expect more of the same in 2014 — industrial and multi-family will be strong participants, retailers may circle around in the pro-business climate and with the exception of a few submarkets office is still dragging its feet.
“An interesting event recently occurred in the office market,” Mulhern says. “There’s no trend yet, since it’s just a one-quarter trend. Rent has decreased every quarter for the last five years. In the (3Q, 2013), action has picked up a bit.”
Based on absorption numbers to date, and with companies such as Apple and State Farm coming to the Valley, Cushman and Wakefield’s Vice Chairman Larry Downey predicts Tempe will be the next big employment hub and where users will look to buy.
“Where there is activity in the office submarket, there will be gains,” Downey says. “Right now, that’s the Southeast Valley.”
As for markets that will need some more time to recover, Downey looks to retail and office within some submarkets.
“Retail needs to shed some inventory before any new product can come online,” he says. “Office in some suburban submarkets will continue to decline or bounce along the bottom.”
“The difference between 2013 and 2014 is going to be from large users to medium and small users taking advantage of the market who are feeling comfortable expanding in the market,” says John Bonnell, managing director of office at Jones Lang LaSalle. Dennis Desmond, senior managing director at JLL, says coastal cap rates are below those in Phoenix, which makes the Valley more attractive.
“We’re seeing a shift back to Phoenix,” Desmond says, adding that JLL recently sold a building at the aggressive rate of 6.15 to a German investor. “Investors realize the worst is behind us now, housing’s going up, we’re getting strong employment numbers again, so from a macro-perspective, acquisition directors can come to Phoenix and go back to their investment committee and say this is why (we should invest).”
Desmond is also excited by the prospect of core product coming back onto the marketplace. Concessions, he said, are also beginning to diminish. Desmond suggests that educating investors about lesser known, burgeoning markets such as those in the East Valley is going to be an important step in office.
The industrial market had a great 2013, says Steve Sayre, executive vice president of industrial services at JLL. He adds the Valley has announced the kind of spec development that hasn’t been seen in years taking the form of the 900KSF industrial business park planned for development near Sky Harbor Airport by a Clarion-Wentworth Property parternship. Sayre predicts more build-to-suits in the Southwest Valley from businesses moving out of Los Angeles. Bill Honsaker, managing director of industrial at JLL, is seeing more confidence in the market.
“I tell people there is more good money out there looking for good product than there is good product,” he says, adding that lease terms are lengthening and more specialized, large spaces are coming to the Valley.
Multi-family will see year-end numbers just under 2012’s $2B for 4,000 units. JLL’s Vice President of Multi-family Investments, Charles Steele, says 2014 will see a bigger influx of delivers between 5,000 and 5,500 and at rents that haven’t been introduced to the Valley before.
“Most are being built at $200 per SF, which is very expensive for Phoenix,” he says. “Typically, we’re asking for rents that haven’t been achieved previously in Phoenix.”
The Broadstone on Camelback is close to 50 percent occupied with rents close to $2 a SF, which is about 50 cents higher than rent prices previously in the submarket. Steele rhetorically asks, if there are enough people making more than $100,000 a year who want to rent in north Tempe and Scottsdale; it takes nine jobs to absorb one unit in Phoenix over the last 25 years, he says.
One of the biggest challenges brokers will face in 2014, Downey says, is the price of land. As it continues to escalate, he says, it will be difficult to break ground on new projects.
Multi-family has already started to adapt its construction from garden-style apartments to podium or wrap projects built around parking garages. Before this cycle, there were less than 10 structure-park apartments, at the end of 2013 there were 25.
About half of the units in 2014 will be structure-park apartments.
“This is uncharted territory,” Steele says. “Houston went through it last cycle. We’re hoping we will go the same way. So far it’s been well-received. The question is how deep is that pool?”

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Amanda Ventura

About Amanda Ventura

Amanda Ventura is an editor, award-winning writer and pop culture enthusiast. When she's not up against deadlines, she is exploring Arizona, trying recipes that require every dish in her kitchen be used, collecting 5K swag bags and race numbers and volunteering at a local animal shelter. Her bookshelf is full of autobiographies and her desk is covered in Sticky Notes. She dislikes the Oxford comma and still cannot believe she gets to meet and write about interesting people for a living.