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Shea Scottsdale Safeway

Safeway sale creates looming cloud over Phoenix retail real estate market

Over the past two years, the Phoenix retail real estate market continues to improve with lowered

vacancy rates and strong absorption. The one area that persists as a cause for concern is the number of vacant big boxes in the market. With the recent announcement of the impending sale of Safeway to one or more of their competitors, this is news that could create further hardship in the Arizona shopping center industry; here is why.

Overall Phoenix retail market 4Q 2013.

Overall Phoenix retail market 4Q 2013.

 

Currently, there are 308 vacant big boxes in the Phoenix metropolitan area. Over 56% of these boxes are in neighborhood shopping centers.

 

This amounts to a total of 175 vacant boxes in neighborhood centers. Never before in the history of the Phoenix area have we ever come close to having this amount of vacancies in our neighborhood shopping centers.

 

When a grocery store becomes vacant in a neighborhood center this obviously creates a harmful effect on the small shop tenants in the shopping center who depend on the traffic driven by the grocery store. A grocery anchored center does not have the same pulling power to draw customers that a power center or regional mall does. Neighborhood centers typically only reach shoppers in a one to three mile radius. These smaller trade areas are the hardest to replace from a re-tenanting perspective if there is not another grocery store that can fill the void.

Vacant big boxes by type of center.

Vacant big boxes by type of center.

 

 

With the continued transformation of the grocery industry shifting to regional trade areas and to larger and larger formats often over 100,000 square feet, retailers such as WinCo, Super Wal-Mart and Fry’s Marketplace are not viable candidates for these neighborhood centers. Additionally, many times a grocery store has a restriction against another grocery store going into the same space, limiting the already small pool of potential replacement tenants even further. These types of vacancies also have a very negative effect on the value of this type of shopping center. Many of them have lost 70% to 80% of their value because of a vacant anchor.

 

When Basha’s filed for bankruptcy in 2009 they left 25 vacant grocery stores in their wake. Today, five years later 13 stores — over half —are still vacant. If Safeway is sold to someone who is currently in our grocery market, I fear that there will be a rash of store closings which will further exacerbate our big box problem – just as we are starting to gain some ground.

 

Neighborhood shopping centers have been a mainstay for investors as power centers have lost some of their appeal in recent years. Neighborhood centers were considered a safer investment as they had not been affected by the downsizing and consolidations among the power center users (electronic stores and office supply, are examples). Many REITs are looking for a safer product type for their investors and neighborhood centers fit their criteria nicely. A merger of this type will cause the investors to step back and evaluate their options even further.

 

In the event of a Safeway-Albertson’s merger this could be one of the better outcomes for Arizona, as Albertson’s would have an opportunity to increase their footprint and market share in Phoenix. In this event, don’t be surprised if there is a large block of stores that hit the marketplace, which will impact our improving yet still fragile retail market.

 

The grocery business in Arizona is very diverse and like all retail, will continue to evolve. There is no doubt that we will have some interesting times on the horizon. Let’s hope that this merger creates a cloud that has a silver lining, and that however this merger shakes out that the stores are able to continue to operate and not add to our big box surplus.

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GPE Releases Metro Phoenix Healthcare RE Market Overview

As we end 2013 and begin 2014, the question healthcare landlords and tenants are asking is, “How is the Affordable Care Act (ACA) going to affect me as it is implemented?” Providers continue to remain uncertain of their practice’s future by requesting shorter lease terms and renewal terms. Healthcare organizations such as Banner Health (“Banner”) have been purchasing medical office buildings and retail centers near their hospitals at “bottom-of-the-market” prices and becoming owner-users of these properties. On Feb. 15, 2013, Banner purchased 755 E. McDowell Rd., a 93,411 SF property for $6,169,742 ($66.05 psf) near Banner Good Samaritan Health Center in Phoenix. Near Banner Baywood Health Center, Banner purchased a 103,411 SF retail center called Cooper Village, located at 6704-6744 E. Broadway Rd., Mesa, for $4M ($38.68 psf) on April 4, 2013. On the provider side, Banner has been purchasing practices and placing them in these properties.

The leasing statistics in the Phoenix market prove to show little change from Third Quarter 2013 to 4Q 2013. The average lease rate remains steady in the 4Q at $21.99 full service from $21.72 in the 3Q, according to CoStar. The average lease rate has been at this level for most of 2013 and the vacancy remains at +/-30%. The above data is comprised from 324 medical office buildings consisting of 10KSF or more, for a total of 12,580,074 SF.

Sales Activity

In the 4Q 2013, the medical office/investment sales continue to improve as we see larger properties change hands and little or no distressed assets traded. According to CoStar, there were a total of 12 medical office sales transactions in the  4Q, 2013 including three large investment sale transactions; owner/users including John C. Lincoln Healthcare Network and two others that purchased smaller medical office buildings; only one REO sale; and the remaining are smaller investment sales of Class-C medical office buildings. The total sales volume for the 4Q 2013 was $57,496,412, with an average price per square foot of $143.44, decreasing from $204.80 in the 3Q, 2013.

Details for the three large investment sale transactions for the Fourth Quarter 2013 are below:

Copper Point , 3530 & 3570 S. Val Vista Drive, Gilbert, AZ 85297

93,961 SF building sold Dec. 27, 2013 for $108.56 per SF for a total of $10.2M. Built in 2008, WCCP Copper Point, L.L.C. purchased this property from Investment Equity Development, L.L.C. Kathleen M. Morgan, CCIM and Trisha A. Talbot of GPE Commercial Advisors are leasing this property.

Mercy Medical Commons, 3645 S. Rome Drive, Gilbert, AZ 85297

46,732 SF building sold Dec. 23, 2013 for $303.86 per SF for a total of $14.2M. Built in 2010, MedProperties, L.L.C. purchased this property from Gilbert Mercy Medical Partners.

McAuley Building, 500 W. Thomas Road, Phoenix, AZ 85013

168,511 SF building sold Oct. 24, 2013 for $123.41 per SF for a total of $20,795,381. Built in 1994, Heitman, L.L.C. purchased this property from LaSalle Investment Management in a bulk portfolio sale, including MOB assets in Arizona and California.

Senior Housing Supplement

Senior housing continues to be a “hot” topic as we continue to retire “baby boomers” in record numbers. Questions of how the changes in healthcare will affect the services offered in this healthcare segment, and how the real estate for this industry needs to change and/or grow to meet the current and upcoming demand are still being discussed.

The demands for senior housing is not only defined by need, but especially for independent and assisted living the delineation starts with public versus private pay. Then, within private pay, a number of models and demographics are affected by a variety of income levels. According to the Senior Care Investor, November, 2013 forecasting the supply and demand of senior care facilities, decisions will have to be made on whether to remodel, sell and/or reinvest into developing new facilities.

Relating senior housing demands to our local market, in November 2013, the National Investment Center for the Seniors Housing and Care Industry (NIC) reported that Phoenix is among the top five markets with assisted living properties under construction. The top five markets account for 43 percent of the assisted living construction nationwide.

In other local news, Encore on First, a tax-subsidized senior-housing complex located in downtown Mesa, opened in December 2013. Encore located at 25 West First Avenue Mesa, Arizona is a five-story, 81-unit complex offering its residents the opportunity to walk to nearby venues including the Mesa Arts Center, restaurants and future light rail, according to the Arizona Republic. One Encore resident pays $550 monthly for her apartment with the federal tax credits offered for this facility.

CoStar reports two senior care facility transactions in the 4Q, 2013.

Casa Valle, 5516 E. Thomas Road, Phoenix, AZ 85018

13,580 SF rehabilitation center sold for $92.05 per SF for a total of $1.25M. Built in 1949, Crossroads, Inc. purchased this property from Primer Paso, L.L.C.

Country Meadow Guest Home, 2815 W. 48th Street, Phoenix, AZ 85008

5,016 SF skilled nursing facility sold for $69.78 per SF for a total of $350,000.  Built in 1949, Bahati, L.L.C. purchased this property from an individual investor.