Tag Archives: commercial real estate

E012850

Greater Phoenix Economic Forecast 2011: “Painfully Slow”

The economy may be better in 2011 than it was in 2010, but the road to full recovery will remain long and full of potholes. But hey, it could be worse. It could be 2009.

That’s according to economist Elliott D. Pollack, CEO of Elliot D. Pollack & Company. Pollack was speaking at the Greater Phoenix Chamber of Commerce’s Economic Outlook 2011 breakfast today at the Arizona Biltmore Resort & Spa.

Pollack said population growth in the Valley should settle at 1 percent this year and rise to 2 percent in 2011. Net job growth will contract by 1 percent in 2010 and climb by 2 percent in 2011. Retail sales will increase 1 percent this year and rise by 8 percent next year. Building permits will increase by 20 percent in 2010 before jumping 50 percent in 2011.

In summarizing his 2011 forecast for the Valley, Pollack read a laundry list of good news and bad news:

  • The housing market is at or past bottom, but there are many negatives still trumping a full recovery, most notably slower migration flows.
  • The commercial real estate market is at or past bottom, but recovery will be slow and “take a long time.”
  • Sales tax revenues are no longer falling, but they aren’t growing quickly enough to fix the state’s battered budget.
  • Retail sales have past bottom and there is pent-up demand among consumers, however, those same consumers are still so worried about personal debt that they will continue to curb spending, thus thwarting a big recovery.

While Pollack said the Valley’s economic recovery will be “painfully slow,” he points out that a recovery is indeed underway. For example, the state’s standing in employment growth compared to the rest of the nation is gradually improving — but only after a precipitous decline. In 2006, Arizona ranked second in the nation in job growth; that dropped to 22nd in 2007; 47th in 2008; and 49th in 2009. Up to July of this year, the state had moved up to 42nd in job growth.

Another indication that the Valley’s economy is showing improvement is in the number of economic sectors that have shown net job gains. Of the state’s 12 major economic sectors, five have shown net job gains so far this year (education and health services; trade; leisure and hospitality; professional and business services; other services). That compares to the same time last year, when no economic sectors reported net job gains.

But, Pollack pointed out again, the Valley and state can’t expect the robust and recoveries that have accompanied past recessions.

He says the Valley’s housing market continues to be weighed down by:

  • Weak job growth
  • Tough underwriting standards
  • Negative home equity
  • Loan modification failures
  • High foreclosures
  • Option ARMs (adjustable rate mortgages) peaking in 2011

In terms of equity, 51 percent of houses in the state have negative equity. The national average is 23 percent. Such negative equity severely curtails people’s ability to buy and sell homes. In addition, supply still outstrips demand in the single-family home market, with an excess inventory of houses somewhere between 40,000 to 50,000 units, Pollack said. A balance between supply and demand will not be fully achieved until about 2014, he added.

The picture is bleaker for the commercial real estate market, with delinquencies on loans still very high. In the office market, Pollack cited forecasts from CB Richard Ellis that said vacancy rates would peak at 25.6 percent in 2010 before dropping to 23.9 percent in 2011. As Pollack pointed out, there currently is no multi-tenant office space under construction in the Valley. In fact, he expects “no significant office building in Greater Phoenix for the next five years.”

Industrial space vacancy rates are faring only slightly better, with CB Richard Ellis predicting year-end vacancy rates of 16.4 percent for 2010 before falling to 15.2 percent in 2011. As for the retail market, the vacancy rate will rise to 12.3 percent in 2010 and hit 12.9 percent in 2011.

For office, industrial and retail commercial real estate, Pollack said he did not expect vacancy rates to reach normal levels until 2014-2015.

Still, Pollack maintained that the economic outlook for the Valley “remains favorable,” thanks to the recovering national economy, increased affordable housing in the Valley, a rise in single-family home building permits, unemployment bottoming out, consumer spending improving and continued problems in California.

retail space avaialble sign in a window of a building

Arizona’s Local And Regional Banks Are Facing More Distressed RE Loans

The recent New West Era of Arizona’s fast-growth economy from 2004 through 2007 is now expansion-cycle history. Having faced the Great Recession and what Alan Greenspan called a “once-in-a-century credit tsunami,” we now plan to resume positive economic growth in 2010.

Since late 2008, Arizona has lost more than 200,000 jobs. Commercial real estate (CRE) loan delinquencies are programmed to accelerate, with some distressed loan exposures exceeding 200 percent of total equity for smaller financial institutions. Given the scale of pending defaults, key decision-maker questions revolve around ideas such as “Who is too big to fail?” and “Who will benefit and who will pay in loan restructuring?”

Since rents and property values rapidly declined last year, banks’ loan delinquencies have been widely reported. Borrower defaults are increasing due to the inability to make timely debt service payments on existing notes. Rent concessions abound, and some recent short-term leases have been negotiated as break-even deals that just cover operating expenses, a preferred choice over the cost of holding vacant space. Many existing tenants are attempting to renegotiate contract rents as record high vacancy rates are underreported, especially in cases where leases are intact but the tenant is in default. The credit freeze has taken a toll on loan refinancing, especially when funding loans of more than $1 million with lower loan-to-value constraints. Costar Analytics recently reported commercial property price declines from 15 percent to 35 percent since 2007 peaks.

Negative commercial space absorption has given back the early gains of a few years ago, as new construction deliveries wind down and building permit activity is off dramatically in Arizona. Commercial space demand is driven by jobs, and employment is expected to be weak through the middle of this year. Positive business growth and a boost in hiring are essential for large-scale investment in the built environment. Considering employment as a lagging economic indicator and consumer spending as a prime driver in economic activity, commercial real estate vacancy rates are problematic.

Since March 2009, Bloomberg reported a five-fold increase in Phoenix-area loan delinquencies backed by office, industrial, retail and apartments. Recently, Deutsche Bank projected price declines from 35 percent to 45 percent as necessary to maintain return-on-investment requirements in a declining rent environment. Over the next 24-plus months, delinquency rates are expected to exceed the results posted in the savings-and-loan bailout days of the early 1990s.

Non-performance is two-fold: initially as term default risk where debt repayment cannot be met, and later as maturity default risk where the loan cannot be repaid or refinanced due to value declines and higher borrower down-payment requirements. Perhaps two-thirds of loans do not qualify to refinance at maturity, mostly recent (2004-2007) originations.

The fall 2009 Greater Phoenix Real Estate Consensus Forecast, a quarterly consensus on general economic indicators and key construction measures from economists, real estate analysts and executives, shows only “marginally better” commercial real estate market results expected through 2011. With office vacancy so high, it is likely there will be no new office building construction for the next five years. Retail sales are tied to rooftops. While housing markets are expected to improve through 2011, improvement in single-family residential activity is expected to be slow by historic standards. Industrial demand will be end-user driven and also likely to be slower than historical trends.

Economist Elliott D. Pollack, CEO of Elliott D. Pollack and Company in Scottsdale and co-editor of the Greater Phoenix Blue Chip Economic Forecast, states, “Now is the time for banks to raise capital in order for them to workout their loans.”

He says many banks believe the best way to handle the loan workout is to deal with the current borrowers. The difference between now and the 1989-1992 real estate crisis is bank regulators are not currently forcing banks to immediately liquidate loans. Given the events of late 2008, regulators are reluctant to force financial institution closures and seem to be more willing to let institutions work out their problem loans. The idea is to rebuild confidence in America’s financial system.

In positive terms, the Mortgage Bankers Association forecast calls for Real Gross Domestic Product growth in 2010, the first GDP gain in two years. Clearly, widespread hope exists for a rebound in local commercial real estate prices. In the near term, investors are closely monitoring federal government bank policies that privatize profits, nationalize losses and buffer the banks against failure.

Fundamentally, real estate market performance will follow the time pattern when Arizona’s primary economic activity rebounds with measurable employment gains. Without recognizable fundamentals focused at the property level, end-user demand is missing, and commercial real estate performance is likely to remain speculative through 2011 and beyond.


Sharon Harper, president and CEO, Plaza Companies - AZ Business Magazine February 2010

CEO Series: Sharon Harper

CEO Series: Sharon Harper


Sharon Harper
President and CEO, Plaza Companies


Assess the current state of commercial real estate development in the Valley.
The commercial office sector is being impacted significantly. Vacancies are on the rise, rental rates are going down. In addition to all those statistics there is also kind of a shadow vacancy factor in place, in that companies are downsizing and subleasing their space or not occupying that space. And so all of that does have impact. There’s been negative absorption for some seven quarters in our region and probably more to come. So it has forced the industry to do a number of things. First and foremost, there’s no new construction really underway, so that’s going to have some impact. Secondly, building and business owners have had to adjust the way that they do business, and certainly in the case of Plaza Companies we have so that we can maintain a competitive edge for our buildings, for our tenants, for our investors. An example of this is that we are very focused on maintaining our buildings; we want them to be in excellent condition. We want to make sure that we are doing everything we can to make our buildings competitive. We’re working with our tenants, making sure that the buildings are clean and safe and accessible and beautiful and wayfinding is well-organized, and doing what we can to enhance their businesses. We are an owner and a property manager who is so hands-on, really thinking about the tenant, how their business is doing, how they are faring, as well as how we are performing for our investors and our owners and the facility itself. That makes a difference. There’s a concerted focus and effort and it’s my thought with our company we go above and beyond in every way we can, and it’s made a difference. Our buildings are doing quite well because of it.

What do you foresee for commercial real estate in 2010?
I think 2010 is going to be another year of flat rates, if not a reduction in rental rates. I think there will be increased vacancies. I think that a number of building owners are having difficulties with their financing and with their loans. As these shorter-term loans come due, it’s going to have an impact on the marketplace. And finally and most important in this marketplace is the owner’s ability to provide tenant improvement dollars to attract a tenant. Many owners cannot do that. And so tenants are, I think for the first time in my history in this industry, tenants are looking to the credibility and the substance of the building owner. Can they keep the buildings up? Can they provide the tenant improvements? Can they keep the promises? Can they keep the lights on? Tenants care about that. And that’s very important right now, more so than ever … and the second part of it is that some substantial companies have had problems performing on their loans and on their buildings and that’s been very unnerving for tenants. They want to know that there are building owners and managers that have credibility, integrity and are going to see the project through, and that gives a competitive advantage and we’ve certainly seen that here at Plaza.
Plaza Companies specializes in health care construction.

What difference did that make during the recession when compared to other commercial real estate developers?
Plaza Companies actually is focused on three specific areas of business. One is medical office/health care, the other is seniors housing and the third is bioscience and biotechnology. And it was in 2005, in a company retreat with the top leaders here at Plaza, that we made a concerted effort to broaden the base of where we are involved in business. We wanted to have certain unique sectors that are related to one another, yet provide it a bit of diversification for us. In addition to that, on our service lines we have grown our facilities’ property-asset management divisions, our leasing department, and our construction division. So we have diversification at that line, as well. And I can tell you that diversification has made a significant difference, and I am most appreciative that several years ago, when no one would have projected what is going on now, our company set the stage for sustainability during these difficult times. And that has made a difference.
Secondly, the sectors that we are involved in have ridden the storm a little bit better than others. They’re very dependent upon demographics, and not just the growth of demographics but aging, as well, and also the whole notion of innovation, research and science. All of that ties together and these are growth, with a small ‘g,’ industries right now.

What strategies did Plaza Companies implement to ride out the recession and how is it repositioning itself for the recovery?

Once again, we readjusted and repositioned our company in 2005, and started to grow foundationally a diversification program and that has paid off significantly for the company. I think that our strategy has stayed the same, our focus is the same; we’ve never deviated from the core principles of our business. But we’ve all worked harder in this company, as well. People are stepping up in all of the divisions here at Plaza Companies, doing what they can because it is more difficult and it is harder to achieve the same goal than it was just a couple of years ago. And so we’re focused, we’re diligent, we’re careful, we’re all working harder, and we are in sync here jointly with the management and all of the employees of the company.

What skills do C-level executives in commercial real estate development need to acquire or cultivate in order to succeed in these difficult times?
I think the traits that a CEO needs to have in difficult times are the very same traits in all times. I think that it’s important to have a vision and to be able to articulate that vision and to inspire and excite people that are going to help carry that vision out, and that’s really what I’ve tried to do here at Plaza. And it’s not just me, but it’s other senior managers here at Plaza.We understand what we’re trying to accomplish. We are so committed to carry through and being accountable for what we commit to do, and we need to be inspired and we need to inspire others to do that.And we also need to be very realistic about the realities of the world, and we have to have high expectations for performance and for people. And more so than ever, the core values of the company need to be part and parcel to everything that we do.

Vital Stats

  • Co-founded the company in 1982 with Dr. Harold Gries
  • Recipient of the 2007 Sandra Day and John O’Connor Award for outstanding community service
  • Is a member of the board of trustees of the Virginia G. Piper Charitable Trust, the board of directors of the Arizona Community Foundation and the Banner Health Foundation, and past chairman of the Greater Phoenix Economic Council (GPEC)
  • Served on the finance committee of Arizona Sen. John McCain’s 2008 presidential campaign
  • Received a Bachelor’s of Arts in Journalism from Creighton University in Omaha
  • www.theplazaco.com

 

Arizona Business Magazine February 2010

tax calculations

Tax Relief For Lenders May Help Commercial Real Estate Borrowers

The credit crunch is severely reducing the availability of financing and refinancing for commercial real estate. Many borrowers with loans maturing in the next few years, who originally expected to refinance their commercial mortgage loans before maturity, are now concerned that they will not be able to do so and will default when the mortgage becomes due.

This concern extends to all commercial real estate loans, even those secured with properties that have good cash flow. Anticipating the many challenges facing the commercial real estate industry, the U.S. Department of Treasury and the Internal Revenue Service have provided helpful tax guidance to remove some impediments for commercial mortgage loan refinancings. As a result, many commercial real estate borrowers may soon find it easier to renegotiate their commercial mortgage loans.

According to some estimates, roughly one-third of all commercial loans are held by investor pools known as Real Estate Mortgage Investment Conduits (REMICs). REMICs administer their day-to-day operations of the mortgage loan pools through servicers. These servicers also handle the modification and restructuring of defaulted loans, as well as foreclosure or similar conversion of defaulted mortgage loan property.

The Treasury and the IRS believe the loan pool administrators have developed and implemented procedures for monitoring both the status of the commercial properties securing the mortgage loans and the likelihood of borrowers being able to refinance their mortgage loans or sell the mortgaged property as the loans mature. They believe these administrators are able to foresee impending difficulties for a mortgage loan well in advance of any actual payment default.

Until now, despite being able to anticipate loan defaults, REMICs have been reluctant to renegotiate and restructure these mortgages for fear of losing certain favorable tax benefits that apply to them. Existing rules severely hamper the ability of a REMIC to modify any mortgages that it holds. These rules were drafted at a time when the government did not anticipate the challenges faced today by the mortgage industry.

The Treasury and the IRS have now issued some clarifying rules in anticipation of a rise in defaults of commercial real estate loans to give REMICs comfort that they will not face dire tax consequences when they modify commercial mortgages. The regulations say that “(t)hese changes will affect lenders, borrowers, servicers and sponsors of securitizations of mortgages.”

The relief is generally limited to commercial real estate loans and multifamily housing loans, and does not apply to single-family residential mortgages. The new rules will not affect commercial mortgages held by banks because the same tax rules do not apply to banks.

Specifically, the revised rules allow changes in collateral, guarantees, credit enhancements and changes to the nature of an obligation from nonrecourse to recourse without adverse tax consequences to the REMIC. One caveat is that the mortgage must continue to be principally secured by real property after giving effect to any releases, substitutions, additions or other alterations to the collateral. Under the old rules, the fair market value of the real property securing the mortgage would have had to have been at least 80 percent of the face amount of the mortgage at the time it was originated.

The new rules allow for retesting of the fair market value taking into account any reductions in the amount of the mortgage at the time of the modification. Another favorable new rule permits a more relaxed method for satisfying the principally secured test. As long as the fair market value of the real property that secures the loan immediately after the modification equals or exceeds the fair market value of the real property that secured the loan immediately before the modification, the test is satisfied.

According to the Treasury, all these changes are intended to “accommodate evolving commercial mortgage industry practices” and to allow for more loan modifications.

There are numerous other areas of uncertainty in tax law as they apply to loan modifications, which impede loan modifications in other circumstances. For now, it appears that the Treasury and the IRS are working hard to provide clarifying rules in many of these other areas, as well. For example, the Treasury has also asked for comments from tax practitioners and the industry about extending tax flexibility to loan revisions for properties held by other types of investment trusts.

Of course, loan modifications do not only affect lenders from a tax perspective. In many cases, the tax consequences of a loan modification also severely limit the borrower’s options and willingness to enter into a workout. Many borrowers modify their loans only to learn of the negative tax consequences and tax-efficient alternatives after the fact. Although tax consequences may be the tail wagging the dog, they are important considerations for both the lender and the borrower in any debt-workout situation.


money in vice

The Economic Recovery Begins In 2009, But It Will Be Slow Going

The national and state economies are expected to start feeling the effects of a recovery during the last quarter of 2009. However, the recovery over the next year will be slow, with unemployment continuing to rise and economic growth anemic at best. Meanwhile, the state’s expenditures are rising, even as revenue continues to fall, setting the stage for future budget cuts and an expected tax increase.

That was the consensus forecast unveiled by top economic experts from the W.P. Carey School of Business at Arizona State University and the Arizona governor’s office at the annual Economic Outlook Luncheon on May 20. Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at W.P. Carey and editor of Economy@W.P. Carey, provided an overview of current economic conditions on the state and national level, and offered a forecast for the coming year.
“The economy is going to show some signs of recovery in the last part of 2009, but the way I like to look at this is that lots of our economic indicators will still be underwater in a sense — they just won’t be as far underwater,” he said. “We’ll probably see positive growth in GDP, we will see job losses getting smaller, but there will still be job losses. There will still be people claiming unemployment insurance and, of course, unemployment rates will still be going up.
“It’s going to be a deep, sort of U-shaped recovery and 2011 will probably be a pretty good year of job growth,” McPheters added. 
In the meantime, job losses will continue to mount. In March, with an over-the-year employment decline of 7.1 percent and 136,000 jobs lost, the Valley just edged out Detroit as the weakest large metro labor market in the nation. And even as the economy begins to recover, the Greater Phoenix area will still see its labor market contract by 1 percent in 2010, according to McPheters.
Nationally, McPheters stressed that while the current recession has been painful, it still is not on par with the Great Depression. The Great Depression was marked by four consecutive years of decreases in Gross Domestic Product (GDP), while the current recession is expected to result in four consecutive quarters of decrease in inflation-adjusted GDP. In fact, in the first year of the recession, the national GDP actually increased by 1.1 percent.
“During 2008, the first year of the recession, you would expect that the GDP would be decreasing,” he said. “Well, one of the factors holding it up was exports. Exports continued strong in the United States through 2008.”
This year, however, exports are expected to drop by 10 percent. That’s just one example of how the national and state economies will continue to struggle as the recovery begins to take hold. Another example is the expected freefall in the commercial real estate market, especially in Arizona.
“Commercial is the next shoe to drop and we have seen this pattern before,” McPheters said. “Even as you see residential (construction) begin to pick up, I think you can expect that commercial building is going to be very, very weak all the way through 2010 and probably 2011, because what we need to see is population growth come back and job growth to come back. There’s no point in building retail space and office space if the jobs are not there and the consumer is not coming out to shop.”
And it is consumers, who account for 71 percent of GDP, who really hold the key to the economic recovery.
“The consumer is the only part of this economy that can bring us back,” McPheters said. “Consumers are not going to come back into the game until home prices stop falling, until the stock market stabilizes, until they see unemployment rates have peaked out and job losses start to get smaller and smaller. And the consumer has to have confidence to buy, and believe it or not, the consumer has to back off of their inclination to save their money.”
In March, the savings rate as a percent of disposable income was 4.2 percent, up from 2.6 percent six months earlier. While increased savings are considered a good thing in robust economic times, a pullback by consumers as an economy tanks can have devastating effects. McPheters pointed out that for each 1 percent increase in the savings rate, approximately $100 billion are being pulled out of the consumer-spending stream.
However, McPheters expressed confidence that the very calamity that sent our state and national economies reeling will eventually add to Arizona’s attractiveness to new residents and businesses — falling home prices.
“Housing prices have now returned to the traditional level, where Arizona housing prices are now more affordable than the national average,” he said. “In 2005 and 2006, we had come to the point where we were one of the least affordable markets. That has turned around and it has turned around very quickly. Of course that has been very painful.”

Dennis Hoffman, director of the L. William Seidman Research Institute at W.P. Carey, agreed with McPheters, adding that he believes the state’s economic rebound will be strong.

“This of course is the big question: What kind of bounce will take place? Now, I’ll have to say that the dramatic shakeout in prices in housing, while it has been absolutely disastrous for a number of folk and put a lot of pressure in a lot of different places, it might set us up for a more robust recovery than I would have thought six to nine months ago,” he said. “The thinking is really, very, very simple; an attractive attribute of Arizona has historically been great climate, affordable housing and a place to get a job. That third aspect really doesn’t exist right now, but it could exist if our economy recovers at a little faster pace.”
In the economic downturns of the past four decades, Arizona has bounced back strongly, and Hoffman is confident history will repeat itself, especially if the state and Valley can re-create the environments that people from around the country have found so attractive.

However, a major wrench in making the state attractive again is Arizona’s current budget crunch. In fiscal year 2009, the state’s budget gap stands at $1.6 billion. In fiscal year 2010, that’s expected to almost double to $3 billion dollars. As the economy has worsened, unemployment has soared to almost 8 percent, foreclosures have skyrocketed and businesses have closed their doors. As a result, billions of dollars in revenue from income, property, sales and business taxes have evaporated. Conversely the need for state services has exploded.

“We’re really seeing the effects of the downturn in the economy, both in terms of state revenues — our collections are down at a very significant rate — and likewise, our caseloads are up at a very significant rate, because more of our citizens are in need of services,” said Eileen Klein, director of the Arizona Governor’s Office of Strategic Planning and Budgeting, adding that in the past two months alone the Arizona Health Care Cost Containment System (AHCCCS) has enrolled 50,000 people.
Hoffman pointed out that in the past, $48 to $50 out of every $1,000 of personal income had gone into the state’s general fund.

AZ Big Media 25 years

Arizona Business Magazine Celebrates Its 25th Anniversary

An important lesson in the launch of any business or new product is to learn everything you can about your target consumer, and that’s exactly what Mike Atkinson did when he bought the Office Guide to Phoenix 25 years ago. He approached leaders in the community in such industries as health care and law, and asked them what they wanted and needed from a local business magazine.

“I took reams of notes and what came out of it was Arizona Business Magazine,” Atkinson says. “The research led me down a path of this is how it should look and read.”

Atkinson was inspired to enter the publishing arena because it presented the chance to exercise his artistic abilities. He wanted to create “a product that was fundamentally art-related and a product that could help inspire, excite and help educate,” he explains. “I’m an artist at heart, so the magazine’s pages were like my mini-canvases.”

Initially, Atkinson was the sole employee of the publication — he wrote the stories, shot the photos and sold the ads. Today, however, the company has increased to nearly 30 employees and publishes an additional six titles, including AZRE: Arizona Commercial Real Estate, Ranking Arizona, Experience AZ, People to Know, Creative Designer and Scottsdale Home & Design. The flagship publication has also undergone many changes over the years, including its frequency, which has gone from quarterly to bimonthly, and in February 2008, to monthly. The company has evolved as well, and last year was re-named AZ Big Media.

Atkinson didn’t limit his creativity to the magazines, however. In 1991, the company launched its first Arizona Home & Building Expo, which is now in its 18th year. AZ Big Media also hosts a series of awards and events that honor various segments of the business community, from health care to finance. In March 2009, the company held its inaugural Southwest Build-it-Green Expo & Conference. AZ Big Media’s newest venture, the Home & Design Idea Center, opens this summer. The company is also building a strong presence online with its new Web site, www.azbigmedia.com, where readers can find many of the stories featured in each magazine.

“If you go to our Web site, you’ll see ‘online’ is where we’re heading in the future,” Atkinson says. He adds that the future will include more home shows when the market is ready for them. He also hints of possibly even adding a radio station.

If he could go back in time and change one thing, Atkinson says, it would involve the company’s interaction with its audience online.

“At the time, we were just learning about the Internet, and I remember one of my editors came in my office and said ‘Guess where I was today? I was on the computer and I was talking to people all the way in Italy!’ and he began to describe how it took him to different places,” he says. “I thought that was pretty cool, but I didn’t have the foresight to say, ‘This computer Web thing just might turn out to be something really big!’ ”

Looking back on the past 25 years, Atkinson says his success is due to two key things: “Hard work and surrounding myself with the right people.”

Here’s to one day cashing in this 25-year silver achievement for gold.

CB Richard Ellis - Best of the Best Awards 2009 presented by Ranking Arizona

Best of the Best Awards 2009: Real Estate Commercial

Real Estate Commercial Honoree: Brokerage Firms: 25 brokers or more

CB Richard Ellis

CB Richard Ellis - Best of the Best Awards 2009 presented by Ranking Arizona

Photograph by Duane Darling

CB Richard Ellis has been serving clients in Arizona for more than 55 years, becoming a dominant player in the state’s commercial real estate market. From leasing, acquisitions and sales, marketing and consulting, it has earned a reputation as a respected leader in the business community through its ability to track market trends and build relationships. Whether marketing a portfolio of properties or negotiating a complex lease agreement, CBRE brokerage professionals — more than 100 statewide — offer the most integrated array of commercial real estate services. Their approach is strategic rather than merely transactional.

That is, CBRE’s professionals can assess a client’s entire real estate portfolio requirements on a company-wide scale, delivering results and surpassing expectations.

2415 E. Camelback Road, Phoenix
602-735-5555
www.cbre.com/phoenix

Year Est: 1952 Brokers: 103
Principal(s): Craig Henig
(Arizona/Phoenix), Tim Prouty (Tucson)


Real Estate Commercial Finalist: Architectural Firms: 10 architects or more

SmithGroup

SmithGroup Inc. is one of the largest architecture, engineering, interiors and planning firms in the United States. With 10 offices and a staff of 800, Smith- Group specializes in the health, education, science and technology, office workplace, high tech and urban/campus planning markets. SmithGroup’s Phoenix office is well-known for its innovative design of the Arizona Biomedical Collaborative; the award-winning Apollo Riverpoint Center; and the recently completed Norton School of Family and Consumer Science at the University of Arizona.

455 N. 3rd St., #250, Phoenix
602-265-2200
www.smithgroup.com


Real Estate Commercial Finalist: Contractors: General, 120 staff or more

The Weitz Company

Since entering the Phoenix market in 1978, the Southwest Business Unit of The Weitz Company has built a solid reputation based on excellent service, quality work and long-term relationships. Weitz attributes its success to the company’s core values: honesty and integrity, respect for people, performance with absolute reliability, long-term perspective, and nurturing personal growth. In 2007, Weitz expanded its Arizona market by opening an office in Tucson based on its reputation for quality and service to clients.

5555 E. Van Buren St., #155, Phoenix
602-225-0225
www.weitz.com


Best of the Best Awards 2009 presented by Ranking Arizona

wood beam

As Commercial Real Estate Sector Prepares To Be Hit By Recession, Leaders Should Become Proactive

The headlines today have focused on the bailout of the banking industry and the housing market’s severe contraction. Not a lot of attention has been paid to the commercial real estate sector. As with all business cycles, there is a flow-through to the various sectors. The fact that we have lost more than 1 million jobs this year, and have had a severe reduction in housing values and record foreclosures, can only bode ill for retail and other commercial areas.

Since retail traditionally follows housing, how can it not be negatively impacted when fewer homes are being built and more and more people can barely afford their current homes? In recent months Mervyn’s, Linen ’n’ Things, The Shoe Pavilion and Circuit City have all announced either closing of some or all of their stores. The larger tenants oftentimes are the anchors of some of the smaller centers. There is usually a cascading effect on other tenants who feed off the traffic generated by the anchors. We have many clients who talk about tenants leaving in the middle of the night.

At this time, most of the bankers we have talked to have stated that they have few commercial projects on their radar, but most admit this is the next big area to hit them and the economy in general. Are they prepared and how can the lenders minimize the fallout from this?

We would like to outline some of the steps that lenders and others can take to be proactive in the process. Some lenders we have talked to take the position that they will sell the returning assets “as is,” so they do not incur anymore costs on a bad loan. This shortsighted approach will end up costing these lenders and their shareholders money.

We advise lenders to do a thorough analysis of the project in such areas as:

  • What is the current situation with the permits, utilities and other entitlements? This may unfortunately turn up information that the bank should have known about before it made the loan or kept funding it. There is a good case to not have the same people who approved the loans involved in this process. Some of these items may involve minor fixes that could make the project more marketable. For example, assume the contractor had not ordered some of the utilities, which usually involves a long lead time. By the bank being proactive (after they take the project back) and ordering some of the utilities, the project would have more appeal for a potential tenant versus sitting on the asset and waiting for things to happen. A new potential owner may have a tenant, but he needs to get him into the space within a set period of time. If the bank has done nothing but sit on the asset, the buyer may go to a project where he can get his tenant in immediately.
  • What is the status of payments to the contractors versus how much work has actually been performed? Is the project really 50 percent complete but you have paid out 60 percent, for example? Where are materials stored if ordered and paid for?
  • Another problem is when banks have the same people or departments evaluate the project. They are the ones who may have missed some of these issues to begin with. You want a fresh look at what you have. It is difficult to want to spend more money on an asset that will be a loss — but if you can do a proper evaluation of what you have, you may recoup quite a bit of additional money.

Why do Realtors for homes recommend cosmetic fixes to make them more saleable? Because they work. But the real estate owned (REO) departments of many banks do not want to incur additional costs in these areas. We like to assist the lenders by also giving some ideas on how to reposition the property. When clients come to us for an initial project, we frequently work with them on site plans. Even on a project that is partly or fully built, you can analyze how it can be revitalized and repositioned. It may have been poorly designed to begin with. Smart buyers are going to be looking at these ideas before they make an offer. If the lender hires someone to give them some of these ideas it can be very helpful information real estate brokers can use in marketing the asset.

We know of certain retailers developing new concepts to fit into smaller spaces to take advantage of a good location. If you have prepared some estimates of what would be involved to reconfigure the space, that makes it easier on the potential new owner and his tenant.

In summary, retail should be the next area to seriously impact the balance sheets of lenders. Most lenders have not had departments devoted to this problem because the market has been good for so many years. It is important to hire experts who can give an unbiased view of the asset and what can or cannot be done with the project. When a lender uses the same people or moves some of its people over they may not have the expertise to properly analyze the project to obtain the best possible value from it upon a sale.

Majerle-Cover-2

Cover Story – He Shoots

He Shoots…

Will former Sun Dan Majerle
score in real estate?

Photography by Brian Fiske

Dan Majerle’s left ring finger is broken. It’s wrapped in a small black cast, the result of some aggressive play in a pickup basketball league he plays in. Ironically, the same finger on his right hand was broken in a hoop-playing battle called the NBA. “I went too hard after the ball, go figure,” he smiles as he relays the cause of his most recent injury. This late summer day, he’s sitting at a Starbucks in Phoenix sipping an iced coffee, wearing jeans and a cool blue T-shirt. He’s sporting a thick black leather watch and looking tan and relaxed — probably because he’s been playing golf and, well, playing basketball.

Dan Merjerle

But this day, Majerle’s thoughts aren’t too much on the sport that brought him wealth and fame. Several people will stop by for an autograph during our chat, which he always obliges with that Thunder Dan white-tooth smile. He’s got a couple things on his mind today: first up, it is his son’s fifth birthday.
“Getting ready to cut some cake,” he says.

Most days, however, Majerle, purple and orange No. 9 to most of us, is thinking about something beyond basketball and birthday parties. Like many sports stars, he is searching for the next big thing following his professional career. Sure he’s got a successful namesake restaurant, Majerle’s Sports Grill in downtown Phoenix and another one opening soon in Chandler, but No. 9’s thoughts are now on the No. 1 industry in the Valley and how he can partake in it, make a name for himself and maybe score a buck or two. Yep, today, Thunder Dan is a real estate man.

He Shoots, He Scores
The Dan Majerle Group will soon break ground on its first real estate project and already this former power forward is thinking about how he can score his next big deal.

“It’s been a great learning opportunity for me,” says Majerle, 42, who played pro ball for 14 years, eight of those with the Phoenix Suns. “I have surrounded myself with some great people and I think we can do great things. I don’t attach my name to anything but something that will be first-class.”

Majerle’s first commercial real estate venture will be a retail project at McDowell and Dysart roads called The Shops at Palm Valley. The two-and-a-half acre project is a slice of a SunCor 30-acre project and master-planned community, Palm Valley.

“We’ve been meeting people, getting into the groove and figuring this thing out,” says Majerle. “We’ve got our architect and we’re selecting a contractor. We should be up and running sometime by early next year.”
If anything, Majerle smells the sweet nectar of real estate: the planning, the vision, the design, the build-out, and of course, the payday. But for Majerle, it is much more than a power play. It is something his name is tied to, so it has to be great.

“Because of my name, my career and the like, I get approached by all kinds of people offering some sort of a great deal, a ‘sure thing,’” he says. “But I am careful. I will not put my name on something that isn’t good for me, the community and those who have placed their trust in me.”

Riding the Wave
Majerle has been a professional athlete, national spokesperson for various products, restaurant owner, as well as a color commentator with the NBA. So it begs the question: why real estate?

“Over the past 18 years in the Valley I have seen the tremendous growth and I thought with some of the relationships I’ve developed I could leverage to get involved in some projects,” says Majerle. “The projects that we are involved in are at different stages from negotiations to design, and up to construction.”

As Maricopa County continues to add more than 100,000 residents per year as it has for the past decade, real estate — both commercial and residential — has been a far better investment than the stock market. It is because of these real estate deals, grocery-anchored retail centers, mixed-use urban living complexes and more rural strip malls that many-a-fortune has been made. It is also where Majerle has found his calling.

“We are involved with all kinds of clients from nail salons, day spas, tanning salons, health food stores, sandwich shops, dry cleaners and vitamin stores — if you see it at a commercial retail site, we work with them,” says Majerle. “The community has welcomed me with open arms and I am excited about working with them. With any opportunities come different levels of challenges that one needs to overcome to be successful. With my sense of discipline and commitment, I have been fortunate to be successful up to this point in my life.”

No doubt, as it does in professional sports, practice produces results at the end of the day. However, a little luck, strategic planning and a quick elbow or two thrown in the heat of battle goes a long way. While the first of The Majerle Group’s projects will be in the West Valley, he isn’t limiting his company’s anchors to any single area of town, or region for that matter.

“There are so many real estate opportunities here in the Valley — and really the Southwest — that brokers are showing us on a daily basis, that we are looking at numerous sites from Buckeye all the way down to Queen Creek,” he says.

Even though Arizona’s residential real estate market has become mired, as has the nation’s, in a glut of oversupply, overzealous pricing, aggressive mortgage contracts and investor speculation, Arizona, and specifically Maricopa and Pinal counties, remain some of the strongest long-term plays in the national real estate market. Further, the region from Prescott Valley to Arizona’s border with Mexico has been tagged as a “Super Metropolis,” one of only a handful of mega-metropolitan urban areas in the nation that millions of residents and businesses will continue to call home. And of course, there are the retail and mixed-use centers that will surely follow.

Many areas have experienced an enormous growth in housing, but the retail/office market is underserved in new neighborhoods around town, notes Majerle, sounding more like Donald Trump than a physical education major from Central Michigan.

“If they stopped building houses today, we would need to build commercial development projects for the next five years to catch-up,” he says

Everyone Knows Your Name
As in sports, teamwork is key, and Majerle is certainly the go-to guy. He says he analyzes every deal that crosses his desk and knows real estate is a long-term play, not a fourth-quarter sprint.

“Development is all about relationships and with my 18 years in the Valley, I have relationships with a lot of influential people that we work with or complement us in the development game,” he says.

Here’s another intriguing piece of the development game in the Valley: Majerle’s former boss and Phoenix icon, Jerry Colangelo, now dabbles in the real estate game. Colangelo is part of the group developing Douglas Ranch, one of the largest master-planned communities ever to be built in the state. So will the two become business partners?

“At this time Mr. Colangelo and I have not talked about partnering in any deals,” Majerle admits. “I have the greatest respect for him, not only as a business man, but as a person. From day one when I came to the Valley in 1988, he treated my family and me wonderfully. I would love to be associated with him in any aspect.”

Meanwhile, away from the development game, the former Phoenix Suns’ player keeps busy with Majerle’s Sports Grill. The Phoenix location, now in its 15th year, has been so successful, it has spurred Majerle to open a second location in Chandler. The same hands-on, know-every-detail philosophy will be a part of the new Majerle’s Sports Grill.

“The best part of what I have been able to do lately is get more and more involved with the restaurants,” he says.

The Chandler location will mirror the downtown Majerle’s with about 5,000 square feet, a big bar, an indoor/outdoor patio with seating for lunch and dinner, as well as state-of-the-art audio/visual systems with flat screens throughout the restaurant.

Arizona Business Magazine Oct-Nov 2007“With the bigger kitchen size, we expect to expand the menu to include pizzas, fish, steaks and other daily specials that we cannot do at the downtown location,” Majerle says. “Besides that, we expect to bring the same friendly ‘Cheers’-type feeling from the downtown Majerle’s, and to make it both a satisfying and fun experience for everyone who comes in.”

If Majerle’s broken finger is any indication, the real estate industry has a true competitor on the scene. He’s proven throughout his career that he has the determination and smarts to be a major player on the court. Can he transfer this success to real estate?

“I know I can do this,” he grins as he signs another autograph for a fan, who is probably wondering why Thunder is talking about real estate and not hoops. “It’s time for another chapter in my life. I can’t wait to get rolling.”

www.majerles.com

AZ Business Magazine Oct-Nov 2007 | Next: A Mall Rises