Tag Archives: naiop-az

roundtable

2014 NAIOP-AZ Roundtable

It’s an exciting time for commercial real estate. With technological advances and a new generation entering the workforce, office space is undergoing a significant paradigm shift. NAIOP Arizona’s roundtable members discuss the state’s reputation and role in the market — its strengths, weaknesses and promising statistics ­— as well as what companies need to do to keep that trajectory on the up-and-up.


Moderator:
Megan Creecy-Herman Liberty Property Trust

Megan Creecy-Herman
Liberty Property Trust

Participant:
Anthony Lydon Jones Lang LaSalle

Anthony Lydon
Jones Lang LaSalle

Participant:
Bob Mulhern Colliers International

Bob Mulhern
Colliers International

Participant:
Chuck Vogel American Realty Capital Properties, Inc.

Chuck Vogel
American Realty Capital Properties, Inc.

Participant:
Keaton Merrell Legacy Capital Advisors

Keaton Merrell
Legacy Capital Advisors

Participant:
Molly Ryan Carson Ryan Companies US, Inc.

Molly Ryan Carson
Ryan Companies US, Inc.

Participant:
Steven Schwarz ViaWest Group

Steven Schwarz
ViaWest Group

Participant:
Tom Johnston Voit Real Estate Services

Tom Johnston
Voit Real Estate Services


Megan Creecy-Herman: What is different in July 2014 in our local commercial real estate industry than a year ago?

Tom Johnston: Although the economy is growing slowly, it just feels better. Vacancy rates are dropping and rates are increasing in all product categories. Job growth is improving year over year, and it is great to see office and industrial projects under construction again.

Bob Mulhern: The most distinct difference in the local commercial real estate market today from a year ago is increased momentum. In the first half of last year, the office and industrial markets were impacted by tepid employment growth and economic uncertainty at the national and local levels. As such, net absorption was minimal in the first half of 2013. The pace of absorption accelerated in the second half of last year and that trend has carried over into 2014. In the first half of 2014, net absorption of office space totaled more than 1MSF, compared to approximately 150KSF in the first half of 2013. In the industrial market, net absorption in the first half of this year topped 4.6MSF, up from approximately 1.5MSF in the first half of last year. The other noteworthy change in the market is sustained rent growth in the office market. A year ago at this time, rent trends were mixed. Today, office rents are clearly trending higher and, with absorption likely to remain positive, rent should continue to rise.

Chuck Vogel: The local economy has continued to gather momentum. Job growth is running 50 percent faster than the national pace and unemployment is lower. A stronger local economy and a pickup in regional and national distribution activity is fueling more demand, especially in the office space (industrial recovered earlier). Rent growth has accelerated, from nearly zero a year ago to about 2 percent annually today.

Construction has resurfaced. Office deliveries in 2014 will be more than double that of the last two years combined, although at under 800KSF it will remain low. Industrial construction is nearly back to pre-crisis levels: nearly 2.5MSF is expected to complete in 2014, split 50/50 between speculative and build-to-suit projects.

Steven Schwarz: The market has shifted very quickly in the past year. A year ago, we were very busy buying distressed properties. Those deals are now few and far between. Capital is extremely active now pursuing both development projects and stabilized assets in certain submarkets. As well, the 1031 Exchange buyer is back because they now feel comfortable selling the assets that they have been sitting on for the past seven-plus years. We have sold three projects in the last few months to 1031 buyers. Corporate America has continued to lease space at a moderate pace and we have seen a return, albeit very gradually, of some of the local tenants becoming more comfortable expanding and leasing space.

Megan Creecy-Herman: There are several things that are different and I would say the vast majority of them are positive. Two differences that stand out are the increased speculative development in the office sector, specifically in Tempe, and now even some proposed ground up development in the retail sector. These are good signs as the market continues to recover and I am optimistic that the recovery will become more broad-based across the Phoenix Metropolitan area over the next 12 months.

Keaton Merrell: From a financing perspective, there is more and more money in the market chasing deals and it continues to get more and more aggressive on LTV and rates.

Molly Ryan Carson & Bob Mulhern

Molly Ryan Carson & Bob Mulhern

Megan Creecy-Herman: How would you compare our Metro Phoenix commercial real estate market to other major markets throughout the nation and specifically the western U.S.?

Anthony Lydon: We believe Phoenix is like many other national markets who are experiencing two types of recovery. Value-add, high technology submarkets (i.e., San Francisco Bay Area; Phoenix’s east Valley and Deer Valley) are experiencing a higher level of user demand and good capital flow related to employment. Lower tech submarkets like California/Inland Empire and Phoenix/southwest Valley are seeing an inconsistent, staccato recovery. While the national employment has risen to pre-recession times most of the new jobs are part-time and/or lower wage. This reality has muted U.S. and Metro Phoenix recovery.

Bob Mulhern: The Metro Phoenix commercial real estate market is noteworthy among competing markets nationally and in the Western region for both elevated vacancy and healthy tenant demand. With office vacancy near 20 percent and industrial vacancy in the 12 to 13 percent range, Metro Phoenix is at the high end of the vacancy spectrum. Despite elevated vacancy, tenant demand for commercial real estate is healthy. Final second quarter data is not quite available yet, but in the first quarter, net absorption of office space in Phoenix outpaced all other Western region markets. Tenant demand is sufficient to spark some spec office construction due to tight conditions—particularly for large blocks of Class A space—in a handful of popular submarkets such as Tempe and Chandler. Local industrial properties are further along in the cycle, and spec developments began to deliver in mid-2013. To date, much of the spec industrial space that has been delivered has yet to lease, but the improving national and local economies should ultimately fuel absorption in these buildings.

Chuck Vogel: Phoenix has among the best growth stories in the nation. Population growth is running at 2-3 times the national pace. That means more office workers, more shoppers and more goods circulating through the metro’s warehouses. People and businesses are attracted to the metro’s low living and business costs (especially relative to California), amenable climate, and strong transportation infrastructure.

Although commercial real estate prices have picked up, cap rates remain very competitive relative to those in the top six coastal metros (New York, Boston, DC, LA, San Francisco, and Chicago), which have seen an influx of foreign capital. Expect prices to increase and cap rates to fall further as more investors look beyond the top markets to places like Phoenix for yield.

Steven Schwarz: Generally speaking, our vacancies are far worse than other western major markets but it doesn’t appear that the capital cares. Most California markets have recovered fully. Denver and Salt Lake City have surpassed peak values in nearly all product types and vacancies are tight across the board. The capital believes, and I agree, that Phoenix will continue to be a national leader in annual job growth and population growth and is therefore positioning accordingly, but we have a ways to go before our fundamentals are as strong as most other Western markets.

Megan Creecy-Herman: Where does Arizona stand in its economic development plans? Are we headed in the right direction or leave anything for the asking? Is the furor over SB 1062 still creating an image problem for the state?

Anthony Lydon: Arizona has a terrific story! We can further enhance our brand by passing “thoughtful” legislation supporting our communities, families and businesses. We need to continue to invest in education, increase the state’s job closing fund and maintain lower costs of business. SB 1062 is an extreme example of a well-funded, smaller minority that can negatively impact all of us. Just as Seattle recently “jumped” in front of the minimum wage issue, Arizona needs to be a perceived thought leader on issues like thoughtful immigration, sustainable energy, educational reform, minimum wage, etc.

Megan Creecy-Herman: What kind of business practices came out of the recession that many professionals should keep well past the recovery?

Tom Johnston: Learning to do more with less man power. From the pursuit of new business opportunities to operational efficiencies, a lot of creativity came about because of the recession.

Megan Creecy-Herman: I would hope that an overall prudence in lending with an increased focus on the quality of the borrower and their track record is one of the best practices that we all keep in mind moving forward, specifically when it comes to development. I would also hope that real estate fundamentals are the driving factor behind the corresponding financing decisions, as opposed to the availability of capital driving irresponsible development.  

Steven Schwarz, Megan Creecy-Herman, Tom Johnston, & Keaton Merrell

Steven Schwarz, Megan Creecy-Herman, Tom Johnston, & Keaton Merrell

Megan Creecy-Herman: What has been most surprising about Arizona’s commercial real estate recovery?

Tom Johnston: How slow it has been compared to past recoveries. What is encouraging is seeing our healthcare and high-tech sectors expanding.

Chuck Vogel: Warehouse construction is also surprising. Warehouse development has accelerated dramatically, to 2.8MSF in 2013. As a result, even though demand is robust, vacancies actually increased over the past year. The hope is that demand will continue to expand to meet this supply. Retailers (Amazon, TJX Companies, Macy’s) and third-party logistics firms are gobbling up millions of square feet, attracted to Phoenix’s affordable land, strong transportation network, proximity to southern California ports, and growing local economy.

Steven Schwarz: When the recovery started, I did not expect such a pronounced and extreme gap in values and rental rates when comparing quality, well-located office buildings and less desirable properties. The flight to quality was expected but the ability for landlords to push rates on class-A product as much as they have while class-B buildings remain stagnant has been surprising. This is partially attributable to the need for higher parking ratios and other functional issues rendering many older buildings somewhat functionally obsolete. As well, the recovery has been led by corporate America rather than small business so the class-A buildings have experienced much greater demand. With corporate America’s strong activity there is now a shortage of large blocks of space leading to new development much more quickly in the recovery than anticipated. Each submarket is experiencing a very different recovery than others so real estate operators are evaluating opportunities on a micro-geographic and property-type level. For example, new office and industrial buildings have gone up in Chandler while the overall metro market still had over 20 percent vacancy in office and 12 percent vacancy in industrial. As well, we bought an office complex in 2012 in west Phoenix although overall vacancy in that part of town was over 30 percent. The reality is that the vacancy out there was in specialized buildings – medical, office condos, Westgate, while the service office buildings had an extremely tight vacancy. Lastly, the amount and aggressiveness of the capital has been surprising. There is an enormous amount of capital seeking alternative assets.

Megan Creecy-Herman: What is the current state of our Metro Phoenix office market and what needs to happen to push the office sector into continued recovery?

Bob Mulhern: The Phoenix office market is in a recovery stage, with vacancy ending the second quarter in the mid-18 percent range, 200 basis points lower than one year ago. Net absorption has been positive in each of the past nine quarters, and market rents have increased in each of the past five quarters. Tenant demand growth is being fueled by job growth in office-using sectors, particularly among financial services companies. Over the past 12 months, financial employers have added nearly 8,500 workers. These positions have accounted for more than 20 percent of total job growth in Metro Phoenix in that time. There are a few things that need to happen for the Phoenix office market to move into a more sustained recovery. The first is continued strength in the financial sector. Phoenix is attracting large, corporate users looking to operate in our market. This trend needs to continue to backfill vacant space and support new development. Second, the housing market will need to gain some momentum. The housing market has stabilized, with foreclosures having largely been worked through the system and prices ticking higher. While those trends are positive, new home construction is down approximately 80 percent from peak levels and builders are behaving with extreme caution bringing new homes to market. Housing is a huge employment driver in our market and growth in this sector is essential to long-term economic expansion. While a return to the peak levels recorded at the height of the housing frenzy would be a recipe for another “boom and bust” market, current construction levels are hindering a natural pace of economic growth. The final hurdle to clear for sustained recovery in the office market is the need to move to a more diversified mix of industries. Attracting companies from California will be a significant source of economic expansion in the coming years.

Steven Schwarz: Phoenix still hasn’t recovered all the jobs it lost during the recession. Considering this, our office market is doing pretty darn well. There is a shortage of class-A product and large-floor plates in a number of submarkets presently. The class-B and -C product and less desirable areas just need more bodies in more homes and more job growth. It is steadily getting there, but the market is much better than the headline vacancy makes it appear. Phoenix is still a young city and therefore redevelopment of old, functionally obsolete buildings hasn’t taken a stronghold, but as the market tightens and the city matures this will start taking place more. Time, jobs, people and removal of obsolete space are the answers. It’s in process. Slow and steady isn’t necessarily a bad thing for this historical boom-bust market.

Chuck Vogel: The Phoenix office market, like the national office market, is recovering gradually. Job growth is creating some demand, but companies are still soaking up “shadow space” (space under lease but not being used) left over from the recession. Technology (firms do not need the libraries and filing space that they did in the past) may have also dampened demand. Construction is rising modestly but is primarily limited to build-to-suit facilities. Vacancies are high at 25 percent, but they are down 90 bps from last year, and rents are rising by about 2 percent year over year. We expect that the recovery will accelerate over the next few years. Much of the “shadow space” has likely been absorbed. Provided that construction stays in check, vacancies should fall substantially.

Molly Carson: In order to push the office sector into continued recovery, we need to continue to focus on strengthening Arizona’s brand to best position our market to be the first choice for companies looking to relocate — with specific focus toward corporate and regional headquarters. This cannot be done by one organization, rather a collective, unified effort by the private and public sector on the city and state levels. We have a wonderful opportunity at hand to capture a number of new, relocating or expanding firms from other markets with California being our low-hanging fruit. This takes a strong positive message illustrating the advantages our cities and state have to offer. I think this is one of the most important things the real estate business segment can put efforts toward now and in the coming years.

Anthony Lydon & Chuck Vogel

Anthony Lydon & Chuck Vogel

Megan Creecy-Herman: Why does the Tempe submarket appear to be so hot right now?

Molly Carson: Tempe has done a wonderful job of positioning itself for success within the development realm. The abundance of amenities (restaurants, the Tempe Center for the Arts, Tempe Town Lake) within this walkable community are desirable from a work-and-live standpoint. Arizona State University remains a valuable draw from an employment standpoint. Simply put, Tempe has done an impeccable job of building a strong foundation and was ready to take advantage of the uptick in the market.

Tom Johnston: The confluence of our freeway system and the center of Metro Phoenix is in Tempe. Proximity to ASU, the airport and light rail make it advantageous for employers. It has become a real urban core where you can live, work and play.

Chuck Vogel: Tech companies want to locate in areas that are attractive to younger, tech-savvy workers. Arizona State University and recreational, cultural and retail amenities are draws for this cohort as is easy access via the Loops 101 and 202, Highway 60 and Interstate 10. Somewhat central locations (are ideal), especially for the east Valley and the nearby Phoenix Sky Harbor.

Megan Creecy-Herman: Tempe doesn’t “appear to be hot” … it is hot. There are numerous reasons why tenants want to be in Tempe, one of which is its central location and the fact that it allows employers to pull talent from across the metro-plex considering that 60 percent of Phoenix Metro residents live within a 20-minute commute of Tempe. Also, its proximity and access to Sky Harbor Airport and proximity to the largest public university in the United States are substantial contributing factors.

Megan Creecy-Herman: There’s a lot of buzz around adaptive reuse and redevelopment of downtown spaces, particularly in Phoenix. What significance does this development have to the industry? What have been some of the most important projects?

Tom Johnston: As someone who grew up here and now lives downtown, it is refreshing to see all the redevelopment in our central core. As evidenced by housing price increases in central Phoenix, people want to be in an urban environment. They no longer want to drive 30 to 45 minutes to get somewhere. We have seen tremendous success with retail (particularly restaurants) and multi-family redevelopment. There is a lot of opportunity with infill sites for office redevelopment as well. Important projects include 7th Avenue and McDowell Road, 7th Street and Osborn Road, Central Avenue and Colter Street, and the Roosevelt Arts District.

Bob Mulhern: Phoenix is in the early stages of the adaptive reuse and redevelopment phase, in part because Phoenix is a newer city and in part because the area does not have as developed a downtown as some other markets. That is not to say that the city does not have opportunities for adaptive reuse, either with outdated inventory in the downtown/midtown area or some large blocks of vacant retail space. Education has been a driver of redevelopment in the downtown portion of Phoenix, and further expansion by Arizona State University and University of Arizona could be a source of future activity.

The pace of population growth is the wild card for adaptive reuse downtown. First, a larger residential presence would fuel development of retail properties to serve the population. Chef-driven restaurants, where properties are purchased, rehabbed and then re-opened would be an example of this. Also, an increase in the local population would make transit oriented development increasingly feasible and alleviate some of the strain associated with office parking ratios that are lower than the current market standard.

Megan Creecy-Herman: What is the current state of our Metro Phoenix industrial market?

Anthony Lydon: Metro Phoenix typically absorbs 3.5MSF to 4MSF of space annually. As we move through Q2 Metro Phoenix’s industrial market remains in flux. Larger, national/regional employers like Living Spaces, Winco Foods, Pepsi and others have selected Metro Phoenix to be their “West Coast solution” through the design-build process. These requirements tend to be larger and/or sophisticated “process” facilities that mandate signature construction. In fact, Metro Phoenix has almost 3MSF of industrial facilities currently under construction. In fact, almost two-thirds of “net” absorption is due to corporate design-build projects.

Conversely, the smaller (less than 50KSF) and larger (more than 200KSF) “existing building stock has yet to see a clear, sustained level of occupant demand.” The mid-sized (75KSF to 200KSF) market does show significant activity with several leases and user sales pending. Leading vertical sectors include high-technology, food and beverage, e-commerce and regional retail fulfillment. With a metro industrial vacancy rate at +/-12 percent versus the national average at 8 percent, the Valley has significant product runway to accommodate most occupant requirements.

Chuck Vogel: The Phoenix industrial market is very strong. Demand has been booming, fueled by e-commerce (Amazon), as well as traditional retailers and third-part logistics firms attracted by the area’s low costs, proximity to southern California ports and expanding local economy. Construction has picked up more quickly than we would have expected and led to an increase in warehouse vacancies last year despite robust demand. It is expected that demand will continue to accelerate, putting vacancies back on a downward path.

Megan Creecy-Herman: NAIOP conducted the industry’s first in depth look at e-commerce and its effect on industrial. Where does Arizona stand in preparedness for this shift, in existing and future developments?

Anthony Lydon: Due to the lack of sales tax consistency nationally, Metro Phoenix was an early winner in attracting e-commerce operations. In fact, Arizona contains almost 10MSF of e-commerce space with operators like Amazon, Target, Home Depot and others. Moving forward, facilities will provide a multichannel service: internet, store replenishment, catalog, etc. Older industrial properties will be hard-pressed to compete with higher clear heights, larger electrical services, higher auto parking needs, super flat floors and other building/site enhancements mandated by e-commerce employers.

shopping cart mouse

Megan Creecy-Herman: What role does our proximity to the Inland Empire increasingly play in industrial development?

Anthony Lydon: Metro Phoenix offers an excellent location option for energy-centric, higher head count employers who seek a 25 to 40 percent operational cost saving while enjoying a deep, qualified workforce population at +/-4.5M. The +/-300MSF Inland Empire lies an hour from the ports of Long Beach and LA and is comprised of “West IE” and “East IE.” IE West has significant geographic and economic development barriers to entry. The IE East lies further from ports while being susceptible to California’s perceived over-regulated and cost environments. Accordingly, Metro Phoenix’s west Valley provides same-day access within the federal truck driving rules and regulations.

Bob Mulhern: In the short- to intermediate-term, proximity to the Inland Empire will play a minimal role in the Greater Phoenix industrial market. The Inland Empire’s status as a premier big-box industrial market is well-deserved, with approximately 70 percent of the market space in buildings of 100KSF and greater and 88 percent of its space built in the past 20 years. Current vacancy in the region is approximately 4 percent, which at first glance would suggest an opportunity to attract tenants that are unable to secure space in the Inland Empire, but developers have more than 15MSF of space under way to meet current and future demand. Tenant demand in Metro Phoenix is forecast to be fairly steady in 2014 and 2015, but tenant activity will likely stem from organic growth rather than spillover from the Inland Empire.

Megan Creecy-Herman: Is the Phoenix market ripe now for spec building? If so, where and what type of building?

Molly Carson: Yes, for responsible spec building. Tempe’s sub-5 percent, class-A vacancy and overall 10 percent office vacancy combined with very healthy activity in the class-B+ office product make for a market ripe for spec class-A office. The construction of Hayden Ferry Lakeside phase III allows Tempe to remain squarely competitive (with other markets such as Denver, Austin and California in general).   

Keaton Merrell: For the right submarket and project, banks will finance spec buildings in the 60 to 65 percent of cost range.

Megan Creecy-Herman: There’s a lot of capital coming into the market right now. Where is this best invested? How is financing trending? 

Molly Carson: Core assets in solid locations within primary and tertiary markets. The discipline to invest in core assets through upturns and downturns is almost always rewarded. As for financing, we are seeing institutions continue to be competing to invest/purchase/lend for the type of assets mentioned above. Lending for land is still challenging.

Steven Schwarz: Since we are selling a decent amount of office product right now, I would say that the best investments are in stabilized office. The reality is that there are certain office markets (certain pockets of north Scottsdale, like Chauncey, Tempe and Chandler) where rents are beginning to really move in a positive direction. We have sold some assets at sub-6 percent caps, but if full-service rents move from $20 to $25 that is really a 40 percent increase in net rents.
That cap rate becomes an 8.3 percent, which is a pretty
nice return on investment when interest rates are 4 to 5 percent. One of our strategies that applies to the local market is a focus on acquiring and developing general industrial in tightening markets. This asset type can take advantage of the current historically low interest rate environment, upside potential in rents and being bought at below replacement cost.

Chuck Vogel: There is no shortage of available debt and equity capital. Senior secured lenders still remain modestly levered. Projects with 30 to 40 percent equity work because there is plenty of capital available. If the 10-year treasuries tick up, there will be pressure for the senior secured lenders to take a bigger part of the capital stack if cap rates remain low.

Keaton Merrell: Financing is getting very aggressive. CMBS is back and quoting interest only for up to half of the loan term at 75 percent loan to value. Banks are getting aggressive as well.

Megan Creecy-Herman: What new trends are coming to our industry?

Steven Schwarz: In the short-term, the “densification” of office space and focus on creative space will continue. I love these companies saying they want their office to be a “home away from home.” If that’s the case, why are they cramming eight people in 400 SF? I doubt most people are sharing their bedroom with seven other people! The corporate world has realized that density saves the company money, so they have offset that negative by making the space fun and cool so people aren’t bothered by their lack of space. There are a lot of studies going on right now about productivity and morale related to office space. It’s still early, so I’m not sure anyone has the true answers at this point. Obviously, the continued adoption of technology such as the internet, smartphones and 3-D printing will change the supply chain and use of industrial space, as will the shifting energy landscape and globalization. These items will have a profound impact on the office environment on a rapid and constant basis for many years to come.

Anthony Lydon: The newest industrial trends include 3-D printing, robotics and open source hardware. 3-D printing deposits thin layers of plastics or metals atop the other fabricating a component part and/or finished good. This will have a profound impact on how companies manage their supply chains. For instance, half of typical pharmacy stock can be 3-D printed on-site. The cost of robotic equipment has dropped from +/-$250,000 per machine to $25,000 per machine. Amazon hopes to increase its pick-pack-ship robotics from 1,300 to 10,000 by end of 2014. Finally, open source hardware found in mechanical systems and networking equipment is available to all without reverse engineering need. This will compress the prototyping cycle time and move machine tools to the production line sooner, quicker and faster.

Chuck Vogel: It is becoming easier for the small investor to invest in institutional quality real estate through non-traded and exchange traded REITs. More investment products are coming available for investors that may offer liquidity and yield in the product types they are looking for. I expect you will see these kinds of investment vehicles continuing to grow. There is also an increasing disparity between credit and non-credit cap rates as the investor appetite continues to grow for credit opportunities, which is keeping the credit cap rates low

Money on paper_13970049_grayscale

NAIOP invests in voter education of pro-business legislators

Tim Lawless President NAIOP - Arizona

Tim Lawless
President
NAIOP – Arizona


About 10 years ago, NAIOP Arizona made a concerted effort to engage in public policy advocacy at the state capitol in order to attract and grow more high-paying jobs to our state. During this time, we have had a number of successes in the area of lowering commercial property tax assessment ratios. Where we had among the Top 5 worst rankings in the U.S., Arizona is now moving toward the middle.

 This past session, we worked with a number of other business trade associations to allow many manufacturing firms that help produce these high-paying jobs to no longer pay sales taxes on their electricity or natural gas consumption. This top priority of NAIOP-AZ, SB 1413, now brings Arizona more into alignment with other states in the union for this tax treatment.

 While we have had great success in helping to make our state more competitive in tax policy, Arizona has suffered some recent economic development image setbacks such as SB 1070 related to illegal immigration enforcement and SB 1062 related to religious freedom in the eyes of supporters and discrimination to detractors.

In order to help prevent some of these perceptual challenges in the future, our NAIOP-AZ Board of Directors has set aside up to $100,000 from our reserves to help elect state legislators who are more sensitive to our national image in this election cycle.

 The key caveat to our investment is that the races we get involved in must be to help educate voters in favor of candidates vetted and endorsed by the general business community like the Arizona Chamber of Commerce and Industry. The further caveat is that our contributions need to be used for positive independent expenditures to educate voters rather than “hit pieces” against their opponents.

 With the upcoming change in the governor’s chair this November, the commercial real estate industry is in a unique position to do our part to continue to make Arizona a beacon for job creation with a like-minded state legislature rather than the butt of jokes on the national talk show circuit.

low flying aircraft

Caution: Low-Flying Aircraft Policies

Tim Lawless President NAIOP - Arizona

Tim Lawless
President
NAIOP – Arizona


The Federal Aviation Administration (FAA) is considering a significant reduction in the maximum height limit of buildings near U.S. airports to ensure aircraft have clearance to continue an ascent in the unlikely event that an engine fails at takeoff.

The proposed policy would limit building heights of new commercial projects within 10,000 feet of the end of the runway to no more than 160 feet tall. As a result, NAIOP-AZ has submitted a letter to strongly advocate that the FAA retract the proposed One Engine Inoperative (OEI) Procedures in the Obstruction Evaluation Studies published in the Federal Register on April 28.

While NAIOP-AZ fully supports the FAA’s role to oversee aviation safety, it opposes this proposed OEI policy, note that it does not address safety, does not contain adequate justification, penalizes unfairly communities surrounding airports by impeding much needed economic development, and lacks rigorous cost-benefit analyses.

NAIOP-AZ especially has a keen interest around one of the largest airports in the U.S., Sky Harbor International Airport in Phoenix where a number of its members have existing and planned buildings in multiple communities in relatively close proximity to the airport.

NAIOP-AZ is of the belief that if the policy determination outlined recently in the Federal Register is driven by economic considerations, it will have a chilling effect on developers constructing new facilities and on firms and tenants who may want to own existing facilities for investment purposes should a facility be close to or exceed the lower height requirements.

Should the FAA move forward, any OEI policy should, at a minimum, provide for certainty to developers and communities who engage in long-term planning, take into account the impacts and views of all stakeholders – not just in the aviation community, and be subjected to robust legislative rule-making requirements of the Administrative Procedures Act, including a full cost- benefit and Federalism analysis.

Toward this end, NAIOP-AZ support HR 4623, pending in the US House of Representatives, which would mandate that the FAA follow normal rule-making procedures for a policy change of this magnitude that would include such an economic cost-benefit analysis.

Arizona Health Care Cuts, AHCCCS

NAIOP Arizona announces opposition to Prop 480

The NAIOP Arizona board of directors has unanimously opposed Prop 480, an item on the Nov. 4 general election ballot that asks Maricopa County voters to approve a $1.4 billion general obligation bond over 27 years for the Maricopa Integrated Health System (MIHS).

If passed, Prop 480 would be the third largest bond issuance in Arizona history, according to the Arizona Tax Research Association (ATRA), the group spearheading the effort to defeat the proposition.

The NAIOP board could have supported a narrower bond request focused more on the behavioral health component and replacement of the Level One Trauma Center and Arizona Burn Center, NAIOP-AZ President Tim Lawless said.

However, it is opposed to the bond issuance, which would pit a taxpayer supported institution against a number of private healthcare systems where there is much duplication of services and excess hospital beds that private payers must support within a relatively small geographic radius of about five miles.

“We are especially concerned about duplication and unfair competition with taxpayer money,” Lawless said. “While the proponents claim there are three discrete funding components, the wording of the ballot proposal seems far more open-ended regarding the purposes the monies can be used.

“The timing of the bond issuance is also troubling as there was a massive property tax shift from residents to businesses during the Great Recession and these same businesses are still struggling to recover,” Lawless added.

From fiscal year 2010 to fiscal year 2014, there was a 30 percent increase in property tax rates for businesses. If the bond passes, a typical small business with assessed valuation of $1 million will be paying $7,800 more over time in property taxes.

“We also believe patience is the watchword as we still are not certain of all the impacts of the Affordable Care Act, which was allegedly created to better meet the needs of the uninsured yet who are cited as the primary reason for the bond,” Lawless said. “Related to this, the state expanded Medicaid insurance to the poor to draw down more federal dollars and there appears to be an equity issue that only Maricopa County residents are being asked to pay for the MIHS services when these same taxpayers already pay $65 million per year.”

The point that proponents make where interest rates are near or at historic lows thereby decreasing overall costs seems valid until it is realized that the total cost of the bond ($935 million is the actual amount) with principal and interest will exceed $1.4 billion over 27 years.

The NAIOP board says it needs the Affordable Care Act provisions to be understood with all of the attendant costs associated with its implementation before Arizona embarks on the bond issuance where a new hospital and multiple clinics financed by taxpayer money are constructed only to compete against private hospital systems in an area that already has excess bed capacity and duplication of services. The costs will be shouldered by the same private payers.

“Our board has also set aside some level of funding for the opposition campaign formed by ATRA,” Lawless said of a $10,000 contribution to be made by NAIOP Arizona to the opposition campaign.

Tim Lawless Discusses HB 2001 - AZRE Magazine September/October 2011

Q&A With NAIOP-AZ President Tim Lawless: The Impact Of HB 2001

Q&A with NAIOP-AZ President Tim Lawless who discusses HB 2001,  commercial property tax and how the commercial real estate industry is affected by these tax cuts

Recently, the Arizona State Legislature passed the most sweeping economic development/job recovery bill in years (HB 2001). It included a number of phased tax cuts and tax credits for businesses along with a deal-closing fund to attract high wage firms to Arizona.

Q: WHAT WERE THE SPECIFICS?

Specifically, the corporate assessment ratio used to calculate commercial property taxes will be reduced from 20% to 19.5% in 2013, 19% in 2014, 18.5% in 2015, and 18% in 2016. Moreover, the current corporate income tax rate of 6.968% will be reduced over four years to 4.9%. The $25M “deal-closing fund” (the Arizona Competes Fund) partially derived from lottery revenues will also give the privatized Arizona Commerce Authority (ACA) a key tool in landing firms that may need a nudge in deciding between finalist states for relocation or regional expansion decisions.

Q: WHAT DOES IT MEAN FOR THE COMMERCIAL REAL ESTATE INDUSTRY?

Significantly, NAIOP-AZ’s top three priorities to: 1) reform our uncompetitive commercial property tax system; 2) to lower our corporate income tax rate; and 3) to enact a deal-closing fund to attract new firms to the state are all contained in the law. This is a remarkable turn of events for our industry. NAIOP-AZ helped lead the fight six years ago to begin lowering the property tax assessment ratio from 25% to 20%, which resulted in more than a billion dollars in property tax savings to businesses over this time. More needs to be done but we have successfully addressed the single biggest impediment to job creation in our state — high uncompetitive property taxes for commercial real estate.

Q: WHERE WILL WE RANK NOW COMPARED TO OTHER STATES?

The corporate income tax rate reduction down to 4.9% will bring us more in line with our Western state competitors (some of whom who do not have a corporate income tax) and give us the fifth lowest rate in the nation. We also are now seeing the fruits of our labor as we have moved from having among the top five worst business property tax burdens in the U.S. to currently 15th and with these changes we expect to move to the middle of the pack by 2016, which is more where we should have been all along.

Q: WON’T THE DECREASE IN BUSINESS PROPERTY TAXES BE SHIFTED TO HOMEOWNERS?

No, this was not the intent of the legislation. In order to address the issue of perceived shifts in taxation to residents, legislators agreed to toggle the “Homeowners Rebate” upward in the future per calculations from the Dept. of Revenue and to help finance this impact to the State General Fund by reforming the Homeowners Rebate for those that illegally take it on multiple homes that are not their primary residence and those homes that are vacant and in foreclosure. In short, those who are most deserving get a bump and those that are abusing the credit get dumped.

Q: WHAT BIG ISSUES ARE ON THE HORIZON FOR COMMERCIAL REAL ESTATE?”

The eventual sunset of the recent sales tax increase will exacerbate a structural budget deficit for our state should it prove politically untenable to cut base spending levels more than they have already. As a result, the spending lobby will be looking to raise almost a billion dollars, especially for K-12 education, at the ballot next year. Initial ideas are to either make permanent the temporary sales tax rate increase; to increase the sales tax to currently exempt goods and services; and/or to institute a new statewide property tax. Because commercial property tax rates are still considerably more than what residents pay, NAIOP-AZ would certainly fight the specific alternative to raise a new statewide property tax. This would erase all the progress we have made the last six years in making our state more competitive for job creation. The proposed expansion of the sales tax base to exempt goods and services would also bear close watching as some proposals may make commercial lease sales subject to state taxation again which would be a hindrance to economic recovery for our industry and in turn for the state.

Q: HOW WOULD YOU SUM UP THE ACCOMPLISHMENTS THIS SESSION?

Hopefully, the measures passed in the recent “Jobs Bill” will give your readers, our members and businesses in general the confidence that Arizona is a great state to locate, invest, and expand.

AZRE Magazine September/October 2011

 

 

Mike Haenel, Chairman, NAIOP - AZRE Magazine September/October 2011

NAIOP-AZ Mike Haenel A Major Player In Future Of State's CRE Industry

NAIOP-AZ chairman Mike Haenel a major player in the organization and in the future of state’s CRE industry

For 26 years, Mike Haenel, executive vice president for Cassidy Turley/BRE Commercial Industrial Group, has been successful marketing industrial and back-office land and building space in Arizona.

In the early 1990s, he even did a brief stint in the development side of the business.
Since 2003, Haenel has completed 300-plus deals worth a combined $740M. He also has collected several industry awards along the way.

But Haenel said he couldn’t have achieved these significant accomplishments without his partner, Andy Markham, and the support of Cassidy Turley.

They have been able to close transactions during the good and bad times.

So for more than two decades, he has been an active member of NAIOP — the organization he considers a must for anyone hoping to be a major player in Arizona’s commercial real estate future.

Now as NAIOP Arizona chairman, Haenel gets to set the course for the organization.

It’s a challenging time to be at the helm.

Arizona’s commercial real estate industry, like that of much of the country, is adrift in turbulent waters.

In Arizona, the industrial segment has hit bottom and is slowly heading back into better times, Haenel said.

The Phoenix metro area absorbed 3 MSF of industrial space in 2010, and, with the new Amazon warehouse deal, already surpassed 4 MSF by mid-year 2011.

“There are several large build-to-suits looking in the marketplace, and we expect to exceed 5.5 million square feet (absorbed by year-end),” he says.

But the office market, NAIOP’s other purview, is still foundering with too-high vacancy rates and too low rents.

Still, Haenel offers tempered optimism for that segment going forward.

Office rental rates “showed some stabilization” in second quarter, he says, and that is a hopeful sign.

“If we continue to absorb industrial space as we have for the last 18 months, I see speculative development again within the next three years,” Haenel says. “Clearly, office would be longer.”

NAIOP will be essential for charting a clear course through the still-choppy seas ahead, he adds.

Industry professionals banding together, exercising their combined clout and sharing knowledge and experience, helps them survive the difficult times and prosper when the storm clouds dissipate, Haenel says.

“NAIOP is such a great networking organization,” Haenel says. “It shows how important relationships are especially in a period like this. The relationships you create, nurture and foster help as the market recovers, but help (especially) when the market is as tough as it’s been.”

Haenel said while it’s a rough time for Arizona’s commercial real estate industry, it’s really not so bad sitting in NAIOP’s pilot seat.

The previous chairman, Todd Holzer of Ryan Companies US, and NAIOP Arizona president Tim Lawless, have set so many fruitful programs in motion, Haenel just has to hold the wheel steady, he says.

“I am grateful for the past chairmen and current/past board members who have built the organization to what it is today,” Haenel says.

But he has his own pet programs, too.

Member education, developing the industry’s future leaders and fostering positive public policy, are top focuses for the new chairman. He sees them as the keys not just for his organization, but for the future of Arizona’s commercial real estate industry.

Providing networking events, information sessions, and education opportunities for more than 540 members is so important for fostering relationships and keeping industry pros abreast of issues and concerns that impact their business, he says.

The Arizona chapter’s Market Leader Series, quarterly events that feature small panels of experts on such important local topics as job growth, distressed real estate and the like, has garnered standing- room-only attendance, he says.

This year, local members also get to share with their peers from around the country and showcase their own state’s attributes as Phoenix hosts NAIOP’s annual meeting in October.

Other key strategies for Haenel as he steers the NAIOP ship forward are mentoring and encouraging the next generation of local commercial real estate leaders to ensure the industry remains vital for the short- and long-term future.

“As we continue to get older, we are blessed to have some great young people coming up in the ranks,” he says. And Haenel is determined to indoctrinate them with the importance of his “build relationships” mantra.

He is a big backer of NAIOP’s Developing Leaders program, aimed at the under-35 up-and-comers, and the Arizona chapter’s DL Mentor Program, a new initiative that has been a year in development and has just launched.

Along with continuing education for all members and developing and nurturing the young members, the third leg of Haenel’s stool of NAIOP initiatives aimed at nursing the state’s commercial real estate industry back to health, is influencing public policy.

The group lobbied hard for HB2001, dubbed “the jobs bill,” which has several elements including tax incentives and the new Arizona Commerce Authority to proffer those enticements to businesses looking to expand or relocate. Haenel hopes the new legislation will reinforce Arizona’s image as business-friendly and provide a big lure for new or growing businesses and their commercial real estate needs.

Haenel says NAIOP will continue to pressure the legislature on issues that the organization feels could make Arizona more competitive for any type of businesses, and to educate members on the legal ramifications of any new or proposed bills and clarify why they should care.

His assessment of the local commercial real estate industry’s short-term future is that Arizona has all the right elements to take advantage of the recovery as it gains ground, and, long-term, to grow and prosper.

“Arizona is considered a top-tier commercial real estate community,” Haenel says. “We are so lucky to have the quality of professionals in Arizona to create and develop first-class commercial real estate projects. And that allows us to attract, compete and win high quality jobs.”NAIOP-AZ Chairman Mike Haenel

For more information about NAIOP-AZ and chairman Mike Haenel, visit www.naiop-az.org.

AZRE Magazine September/October 2011

 

Todd Holzer, NAIOP-AZ - AZRE Magazine September/October 2010

NAIOP-AZ Chairman Todd Holzer Provides Leadership At Crucial Time

After more than a quarter century in commercial real estate, Todd Holzer, chairman of NAIOP-AZ, has been witness to many industry ups and downs.

Holzer began his career with Opus Southwest in Phoenix and San Diego. After 12 years at Opus, he moved on to DeRito Partners, where he spent eight years developing retail projects. Now in his sixth year at Ryan Companies US Inc., specializing in office and industrial projects and overall marketing for its Southwest regional operation, Holzer says market conditions in Arizona make for some intriguing times.

“Two things that I find interesting about our local market: First, the volatility of the Metro Phoenix market has to be among the greatest of all major U.S. markets,” Holzer says. “It seems that in my career, the overall market conditions for office and industrial have either been on fire or in the dumps. There are days I wish we were a little more steady, like some other Ryan offices in the Midwest. The feast-or-famine scenario we have can be an emotional and economic roller coaster for those in the business.

“Secondly, and again unfortunately, I always think about what could have been a very cool, relevant Downtown Phoenix. Despite some good vision out of the City of Phoenix political leaders, we are still a metro area that has grown outward with sprawl. I wonder if true urbanism can happen here. Most people live here to take advantage of activities that are suburban in nature: golf, hiking and other outdoor activities that don’t occur in a downtown setting.”

Holzer takes the reins at NAIOP-AZ during rocky economic times, but he says he is up to the challenge. When he started at Opus, he joined NAIOP-AZ mainly for networking purposes.

“When I moved into retail development, I spent more time and energy in other organizations such as ICSC, Valley Partnership and ULI,” he says. “But when I came to Ryan with an office and industrial focus, I decided that I needed to get back into NAIOP and take on a leadership role.”

Holzer has been on NAIOP’s local board of directors for five years and on the national board for three. After about two years on the local board, he was asked to take on the time and challenge of training for his eventual role as chairman.

“I have served under a few visionary and hard-working chairmen that have given me the experience to run the local chapter in what are very challenging times,” he says.

Holzer is not one to dwell on the negative. Instead, he says focus should be put on the quality of projects being built today, including NAIOP-member LEED certification initiatives.

“I take my hat off to some developers in our market that build with quality and with vision,” he says. “RED Development building CityScape and SunCor building Hayden Ferry are great projects that went to a level that most developers would not go.

“In my opinion, there has not been an increase in the quality of office projects over the last 15 to 20 years. The granite exterior projects built in the ’80s and early ’90s have stood the test of time. Most developers don’t build true quality because they are building to the level requested by the tenant and user market, and tenant and user groups have been fixed upon cost rather than quality and amenities.

“On the other hand, industrial projects have been built in the last cycle to a much higher standard of function than in the past.”

Among those higher standards is building to LEED specifications and the move toward more energy-efficient projects. Nationally, Holzer says, NAIOP has become fully engaged in LEED initiatives by having educational events tied around the green movement, with the major event being an annual conference dedicated to energy-efficient development. Phoenix hosted the conference a few years ago.

“Locally, we are giving awards to the best energy efficient new development each year at our Best of NAIOP event,” he says.

Examples of recent projects, Holzer cites, are Liberty Property Trust and its Scottsdale building for Vanguard; Lincoln Property Company and the Arizona Game and Fish Department building; Ryan’s 3900 E. Camelback building; and Hines’ office building at 24th Street and Camelback. There also are numerous local municipal and higher-education projects that have been built to LEED standards.

For those in the commercial real estate industry preparing for the future, Holzer offers this advice:

“At the present time, our industry is going through a monumental change,” he says.

“Speculative development will not re-appear for approximately five years in the Valley, so new development will be way down and that side of the business will not be hiring. People and companies will need to reinvent themselves. Take your strengths and use them in different ways within our industry.

“We are still the fifth-largest city in the country and our role as a major place of commerce in the Western U.S. will continue to grow.”

Holzer predicts 2011 will be a sequel of 2009 and 2010; users and tenants are price sensitive and looking for deals.

“We are in a period where land, rents and construction costs are on sale,” he says. “Those with a long-term approach and sufficient funding can solve real estate needs at very attractive costs.”

Some of the biggest challenges Holzer sees in 2011 are lack of capital and nominal job growth. The industrial sector needs capital to be available to companies for expansion and purchasing of inventories and equipment, he says, and the office sector is tied to job creation.

“Unless we can get local and national job creation to pick up dramatically, high-vacancy rates and shadow space inventory will continue with us,” Holzer explains. “The main challenge facing most sectors of commercial real estate is the national political scene and the decisions coming out of Washington, D.C. There is too much uncertainty currently for small business owners to make real estate decisions.”

For more information about NAIOP-AZ and Todd Holzer, visit naiop-az.org.

AZRE Magazine September/October 2010

Tim Lawless, AZRE Magazine September/October 2010

Q&A with NAIOP-AZ President Tim Lawless

Q&A with NAIOP-AZ President Tim Lawless

Q: A year ago you cited several factors that needed to occur for the regional economy to get going again. Have those changes occurred and what impact have they made, if any, in regard to the outlook of local commercial real estate?

Last year, I said that four things needed to occur before we could get on our feet again as an industry. They were:

1) credit markets need to act more normally;

2) job losses need to stabilize;

3) the glut of housing inventory needs to be absorbed so folks can sell their homes in the Midwest and California and continue to migrate here; and

4) we need a more competitive state tax code and to enact policies that diversify the economy in order to attract the flight of capital and brainpower, especially from California.

The credit market is not yet normal. People are still hoarding cash and there is an expectation that hundreds of banks nationwide will still fail when they take further haircuts on distressed properties that have yet to move into the barber’s chair.

We have stabilized job losses, but the rebound is much slower than hoped and few think we will replace all the jobs lost even after 5 years in our state. Nationally, many of these jobs will never come back. They are in India and other countries.

Regarding the glut of homes available, we are seeing some activity that gives hope, but I wouldn’t “bet the house” on it recovering just yet.

And finally, we have done little to nothing regarding the tax code besides talk about privatizing a Department of Commerce and enacting a solar tax credit that only helps on the far periphery. If anything, we have gone backwards as business has had to absorb two major tax increases with the prospect of more coming.

Of the four things, the job losses and housing are the most improved, while we are still waiting for the brunt of commercial property foreclosures to move through the system. Once the foreclosure “pig” is digested in the “python,” the credit markets will be more normal. This digestion, however, is soon upon us, which becomes necessary for recovery.

The factor that holds the least optimism is the prospect of changing our uncompetitive business tax code, especially as it relates to high commercial property taxes. Perhaps this can only be accomplished in tandem with yet another tax increase as the political courage to further cut spending has waned.

The silver lining about all of this is that properties are fast becoming a bargain and a lot of cash on the sidelines may soon come in.

Using a baseball analogy, we are in the late innings regarding a residential property recovery, and perhaps only in the mid-innings regarding a commercial property recovery. What we all hope to avoid is the prospect of extra innings through a double dip.

Q: What are some of the new challenges you see facing the industry in 2011?

While it was anticipated that at least one major tax increase would occur (two in fact occurred, the reinstitution of the $250M per year state equalization property tax and the $1B per year sales tax increase) the prospect of multiple tax increases at either the federal, state or local levels is the new challenge.

The feds seem intent on taxing commercial partnerships more like ordinary income rather than the lower capital gains tax treatment, while the state’s structural budget deficit will be more than a billion dollars beyond 2014. The locals will also be eying ways to raise revenue, most likely via the property tax rates.

Multiple tax increases on small businesses that are tenants in our buildings and at financial risk will only result in more potential vacancies if not more rent concessions. Further tax burden increases will also harm our ability to attract more firms to our state.

Q: How do you envision NAIOP-AZ helping to address those challenges?

NAIOP-AZ will continue to advocate at the state Capitol for a more competitive tax code that creates more high-paying jobs for our economy. Besides advocating for property tax reform, we also are now advocating a corporate income tax rate reduction and a deal-closing fund for the governor in order to attract more firms and allow existing firms to expand.

Q: What are some opportunities you foresee in the industry in 2011?

As the foreclosures and the sale of distressed properties mount, this creates the opportunity for more out-of-state entrants to become active in our community. In other words, the companies that were well known before will be replaced by new firms that may re-charge our communities and have the potential to provide new perspectives.

This is the essence of the rising Phoenix myth and the image of Arizona that most Americans have — that it is an egalitarian state where one rises and falls on their merits and where even a desert can be remade into an oasis.

Q: What are some NAIOP-AZ initiatives for the coming year?

During an economic downturn, the key is to do more with less. Our trade association is not immune, as many of our members have lost their job or taken new jobs for less pay in the last year. As a result, we are trying to offer more networking and educational opportunities.

A key example is the institution of a Market Leaders Sunrise Series. We invite our membership to hear from industry panels that are experts in certain fields such as lending, economic development, brokerage or “green” initiatives.

We also have attempted to pursue strategic alliances with other trade associations, where we can co-leverage resources toward more bang for the membership buck. An example is we plan to co-sponsor ULI’s Trends Day in January, where our members may get a reduced fee for attending. We also have partnered with BOMA-AZ in offering multiple continuing education courses.

Internally, we are looking at pursuing a mentoring program, where individual board members would partner with commercial real estate professionals 35 years of age and under from our Developing Leaders Committee.

In closing, we would be remiss in not thanking our corporate sponsors and members who have made our trade association a relevant force in public policy advocacy and in providing a platform for education, networking and philanthropic involvement.

For more information about NAIOP-AZ and Tim Lawless, visit naiop-az.org.

AZRE Magazine September/October 2010