Tag Archives: real estate

medianpricenotfullstory

Median Price Not Full Story For Phoenix Market

The median price for resale homes in the Phoenix area has been edging up for several months. Does this signal that the market is approaching normalcy? Jay Butler, associate professor of real estate and author of the Realty Studies report from the W. P. Carey School of Business, talks about the factors affecting median price, including the still high number of foreclosure-related sales. It’s tempting to declare a market up-tilt based only on median price, he says, but because of that foreclosure activity, Phoenix is still far from a normal market. (13:09)

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Falling Prices, More Foreclosures Plague The Valley’s Housing Market

The housing market in the Phoenix metro area continues to tread through troubled waters.

According to a new report from the W. P. Carey School of Business at Arizona State University, the median price for an existing home in the Valley fell for the third straight month. Making matters worse, foreclosures continue to weigh down activity in the existing-home market.

The median home-resale price for last month was $135,000 — $3,000 less than August 2009. In fact, existing-home prices have been falling steadily since May, when the median price was $144,000. The median price was at $143,000 in June, and $137,500 in July.

“Although current interest rates and home prices are very attractive, homeowners don’t seem to be motivated to buy,” says Jay Butler, an associate professor of real estate at ASU. “This lack of motivation can be attributed to anemic economic and job recovery, low consumer confidence and stricter underwriting guidelines, among other factors.”

Home sales last month were particularly sluggish, with 4,800 homes re-sold. That’s down from almost 5,100 in July. In August 2009, almost 6,000 homes were re-sold. The numbers aren’t expected to improve anytime soon as home sales traditionally slow down after the summer season.

“As the year comes to an end, median prices often decline in response to holiday and school activities that allow little time or desire to buy a home,” Butler says. “Beyond the impact of foreclosure activity, the absence of a strong move-up market, will also limit any growth in home prices.”

The other barometer of the Valley’s existing home market — foreclosures — fared just as badly in August. Foreclosures accounted for 45 percent of the existing-home market last month, the highest percentage since January.

“When you add in re-sales of previously foreclosed-on homes, all of this foreclosure-related activity represents a full two-thirds of the market’s transactions in August,” Butler says.

About 4,000 foreclosures were recorded in Maricopa County in August, up slightly from about 3,900 in July. In August 2009, 3,100 foreclosures were reported.

Housing Development

Shea Homes Again Ranks Highest In Customer Satisfaction Among New-Home Builders In Valley, Report Indicates

For the third straight year, Shea Homes ranks highest in customer satisfaction with new-home builders in the Phoenix market, according to the J.D. Power and Associates 2010 New-Home Builder Customer Satisfaction Study released today.

“The downturn of the housing market — along with intensified competition for a very limited pool of home buyers — has reinforced the importance of customer focus for new-home builders,” says Dale Haines, senior director of the real estate and construction industries practice at J.D. Power and Associates. “In this buyers’ market, builders that are attentive to customer needs and focus on relationship building stand the best chance of enduring through the market recovery.”

The study, now in its 14th year, includes satisfaction rankings for builders in 17 markets. Nine factors drive overall customer satisfaction with new-home builders: builder’s sales staff; builder’s warranty/customer service staff; workmanship/materials; price/value; home readiness; construction manager; recreational facilities provided by the builder; builder’s design center; and location.

Shea Homes achieved a score of 922 on a 1,000-point scale in 2010 — which represents an increase of 19 points from 903 in 2009 — and performs particularly well in the Phoenix market in six of the nine factors: builder’s sales staff; builder’s design center; construction manager; workmanship/materials; home readiness; and builder’s warranty/customer service staff.

The average customer satisfaction index score in the Phoenix market is 872 — 46 points above the 17-market average of 826. Satisfaction has improved substantially in the Phoenix market in 2010 — up 29 points from 2009.

Overall customer satisfaction across all 17 markets has improved for a third consecutive year, averaging 826 — the highest level since the inception of the study in 1997. Markets with the highest levels of overall satisfaction in 2010 include Phoenix, Las Vegas, southern California, Orlando, Fla., and Sacramento, Calif. Overall satisfaction has increased in 15 of the 17 individual markets that were also surveyed in 2009.

Centex Homes ranks highest in new-home quality in the Phoenix market. Home quality in the Phoenix market has improved considerably from 2009, averaging 856 in 2010 — up by 26 points from the previous year.

The problems reported most often in this market include: landscaping issues, exterior paint, and kitchen cabinet quality/finish.

Overall new-home quality across all 17 markets has increased notably to an average of 844 in 2010, reaching a record high. Home quality has improved from 2009 in 15 of the 17 markets. Overall, the most commonly reported quality problems include issues with landscaping; kitchen cabinet quality and finish; and heating and air conditioning.

New-home builders have improved from 2009 in raising awareness of the “green” features of their homes. Approximately 61 percent of new-home owners in the Phoenix market in 2010 perceive that their home is environmentally friendly, compared with just 31 percent in 2009. In addition, the proportion of new-home owners in the Phoenix market who indicate that their builder did not identify the home as green has declined to 51 percent in 2010 from 63 percent in 2009.

“In this hypercompetitive market, green features have become a crucial selling point, since new-home buyers are seeking to save on energy costs, as well as to increase the value of their home,” Haines says.

To be included in the studies, Phoenix-area builders must have closed 150 or more homes in the market in 2009. The new homes are located in Maricopa and Pinal counties.

The studies are based on responses from more than 16,400 buyers of newly built single-family homes that provided feedback after living in their home from 4 to 18 months, on average. There were 1,641 respondents in the Phoenix market.

For rankings for all 17 U.S. markets, visit www.jdpower.com/homes.

Illustration of suburb with recycle logo

Sustainability Is Possible In The Suburbs. Really.

Is it possible to build a sustainable suburb? The answer depends largely upon your perspective.

Of course, sustainability is a word freely associated these days with eco-friendly building materials, alternative energy and “living off the grid,” and is usually used in conjunction with the concepts of urban living, light-rail and transportation-oriented development. However, some of the first sustainable buildings were lovingly referred to as “land ships,” and built far from cities.

The deserts of Taos, N.M., for example, still host these forward-thinking renegade buildings dating back to the late 1960s and 1970s, and were colorfully branded by many as “crazy hippy stuff.”  And certainly these buildings are a far cry from the buildings and locations we think of as locations of sustainable development today.

Arizona has long been associated with sprawl, and frankly it’s the reason why the sustainable movement has been slow to catch. However, with a struggling economy and real estate development virtually at a standstill, it’s important to think beyond our limited frame of reference. But the suburb? Can it really be sustainable?  Our twin love affair with privacy and the automobile has made the suburb far from a likely place to orchestrate sustainability. Places where garages line streets instead of trees and retail buildings have walls around them virtually imposing a drive instead of a walk. But there is a sustainable sun on the horizon.

Arizona State University’s Stardust Resource Center has created a Growing Sustainable Communities Initiative, and its strategies for growing sustainable communities in the Valley of the Sun include:

  • Promoting mixed land uses
  • A range of housing types
  • Thriving economies
  • Environmentally responsive design
  • Having a variety of transportation choices
  • Compact development
  • Making places safe
  • Promoting healthy living
  • Community engagement

 

I could write four pages about each of those points, but essentially they mean: building sustainably occurs block-by-block, street-by-street, house-by-house. It is an organic process and there is no cookie cutter, one-size-fits-all approach. In fact, the standard of cookie cutter replication is what has created much of the challenges in every community built after 1950 in Arizona.

To be successful, it is imperative that we change our standard “square mile” approach to development, where commercial businesses exist only on the edges and residential homes on the interior and there is virtually no interplay between them. No parks, and no tree-lined streets. A better strategy is to develop on the quarter-mile, where neighborhoods have work and play uses and schools and shopping centers interact with residential neighborhoods through a network of paths and pedestrian/bike connections — just like the village concepts of the historic neighborhoods built prior to the 1950s. Ask any Midwesterner what they miss about home and I’ll bet they say their “neighborhoods.” There’s a reason why.

What the sustainable movement is advocating is greater creativity on the developer side and less regulation and restrictions on the government side. Scott Carlin, an associate professor of geography at the C.W. Post Campus of Long Island University, makes an excellent case for a deeper theory of sustainability. He suggests we re-invigorate ties to cities and villages, by building new homes only where there are existing water and sewer lines, sidewalks, schools, businesses and the other infrastructure within a reasonably close radius. In other words, so we can get out of our cars and walk.

What about existing neighborhoods? Well, they can be re-imagined as sustainable by relaxing zoning code to allow for commercial uses consistent with vibrant neighborhoods and by resisting the status quo. It will also happen when residents advocate for and pursue the creation of public amenities like parks and pathways and tree-lined streets. Even the Urban Land Institute recognizes the opportunities suburbs represent because it’s where the biggest gains could be made. Still, it cautions that connecting the dots between suburban projects through effective sub-regional planning is essential.

It is possible for us to focus on more than buildings when we think of sustainability.  With a bit of imagination, and the commitment to integrate the principles of sustainability even on the outskirts of town, we can succeed. Surprisingly, in fact, we won’t be creating anything new. Because, it’s when we look to the past and incorporate the best of what it means to live in an American neighborhood we win. Sustainability is certainly a look to the future, but its reality and its secrets are grounded in our American past.

housemarkethardtoread

High Foreclosure Rate And Unemployment Make Housing Recovery Hard To Read

The Phoenix resale market slowed a bit in May when compared to April, possibly because activity spiked last month as the federal first-time home buyer program came to a close, according to Jay Butler, associate professor of real estate and author of the monthly Realty Studies Report from the W. P. Carey School of Business. And though foreclosures as a percentage of the market are continuing to decline, the actual number of foreclosures is still quite high, he said. Even hopeful signs, like the recent increases in median price, are connected to foreclosures — in this case because foreclosures on high price homes pulled the median up. So where will Phoenix be in the fall? Hard to say, according to Butler, because we’ve never been here before. (9:37)

green-house

Bringing Energy-Efficient Mortgages To Valley Homeowners

Mortgage and auditing firms are teaming up to help green homeowners cut costs

Buying a home can come with many unexpected and obstructive costs. REEIS is partnering with mortgage companies to help homebuyers curtail costs and go green.

By teaming up with W.J. Bradley and Wells Fargo, REEIS, an energy efficiency auditing firm, offers free energy audits to homebuyers who are interested in energy-efficient mortgages.

What does an EEM do for a homebuyer?

    An energy-efficient mortgage (EEM) allows homebuyers to:

  • Qualify for a higher loan by taking into account the savings of an energy-efficient home
  • Receive up to $8,000 to put toward energy-efficient improvements after the close of escrow
  • Combine the total amount of energy-efficient upgrades with the loan to create one payment

Previously, homebuyers would be forced to shell out around $500 for an energy efficiency audit before they would qualify for an energy-efficient mortgage (EEM). This up-front cost “stops the process right there,” says Todd Russo, president of REEIS.

Lenders found it difficult to ask their clients to spend more money without the guarantee of an EEM, Russo says. Now W.J. Bradley and Wells Fargo clients can receive an energy efficiency audit for free.

REEIS’ audit produces two options for the homebuyer to choose from. The two options feature improvements that can be done to the house, each at a different price point.

“Ninety-five percent of people move forward with one of the two packages,” Russo says.

Not only will an EEM create a greener home by making it energy efficient from the start, it will also help the already strapped-for-cash homebuyer save money.

“When factoring all the costs of home ownership, the customer will pay less every month from the day one, in most cases,” Russo says.

REEIS also facilitates tax credits and utility rebates for the average homebuyer that total between $1,250 and $3,000 within two to three months of close.

Although REEIS’ service is only a few months old, Russo says it is going well. In one week, REEIS completed four energy audits with Wells Fargo, which has initiated a nationwide push to offer more EEMs to clients.

In addition to providing this service, REEIS and Russo want to spread the word about EEMs. Russo says everyone who knows about EEMs wants to offer them, which is why REEIS and Russo are trying to “educate the industry – realtors, lenders and homebuyers – that the conventional way of doing things is not the only option,” Russo says.

REEIS’ commitment to EEMs is the main reason why W.J. Bradley teamed up with the company, says Mike Tompkins, team manager and mortgage banker with W.J. Bradley.

Tompkins and Russo met at a mixer and decided that their shared excitement about EEMs would create a solid partnership.

“It amazes me that [the EEM program is] so under-utilized,” Tompkins says. “We need a vehicle, it seems like, to help us get it out to the public.”

This urge for awareness is the foundation of REEIS and W.J. Bradley’s team.

“I see [REEIS’] commitment in wanting to get the word out,” which is why the companies will be partners for some time to come, Tompkins says.

Along with its partnership with REEIS, W.J. Bradley has created flyers, hosts seminars and speaks with real estate agents daily about EEMs.

The service REEIS, W.J. Bradley and Wells Fargo provide is a “turn-key solution” to the lack of information and knowledge about EEMs, Russo says.

AZ Green SceneHomebuyer should “ask questions. Look into it a little deeper,” Russo says. It would be a “shame” for homebuyers to not take advantage of an EEM because they didn’t know it existed, he adds.

Three Things Building Owners Need To Know To Reduce Their Taxes - AZ Business Magazine June 2010

Three Things Building Owners Need To Know To Reduce Their Taxes

In today’s economy everybody is looking for ways to improve their cash flow, especially as it relates to real estate. Implementing tax-saving strategies is certainly a way to help cash flow in the current year, and in some cases these strategies will provide benefits for years to come. While there are numerous strategies for lowering taxes, three of the more popular current items for building owners are outlined below.

Repair and maintenance deductions
The difference between deductible expenses and capital expenditures can mean significant tax savings for property owners who perform regular maintenance and repairs. The key is when certain costs can be considered expenses that are deductible from current income.
Generally, taxpayers must capitalize expenditures that:

  • Substantially prolong the life of the property.
  • Materially increase the value of the property.
  • Adapt property to a new use.
  • “Put” the property into a useful condition.
  • By contrast, taxpayers may be able to deduct expenditures for:
  • Routine maintenance.
  • Incidental repairs.
  • Equipment and materials that “keep” the property in an ordinary, efficient operating condition.

In most cases, taxpayers will reduce taxes by classifying an expenditure as a repair and taking the current deduction, rather than recovering the cost through depreciation. The IRS has recently adopted more liberal standards for expensing large-ticket items previously considered capital investments.
The difference between repair and maintenance, and capital improvement can be subtle. For example, the wooden shingles on a building are damaged. Replacing the roof with new wooden or asphalt shingles would be considered maintenance and repairs, and it would not have to be capitalized. However, upgrading to a maintenance-free roof system with an expected lifespan of 50 years would have to be capitalized as a long-term improvement to the building.

Many building owners have improperly classified maintenance and repair costs as capital expenditures, creating opportunities to go back and reclassify certain expenditures and recover previously paid taxes.

To claim the deduction, the building owner must submit Form 3115 to request an automatic change in accounting method. The accounting change allows the taxpayer to claim a current-year deduction for expenditures that should have been a deduction in a prior year.

Cost Segregation
Under IRS guidelines, most buildings constructed, purchased or renovated since 1986 are eligible for a cost segregation study. The goal of the study is to make sure business owners are using the appropriate depreciable life for their assets. A cost-segregation study allows a building owner to change the useful life of certain assets and take advantage of any tax savings that may result.

The standard depreciation period for most commercial buildings is 39 years. When buildings are constructed (or renovated) many companies incorrectly use the 39-year depreciation life, even though parts of a building should be depreciated over a much shorter period. Special use items, such as floor coverings, fixtures, and specialty electrical and HVAC equipment, often can be depreciated over a shorter term. It is best to complete a cost-segregation study in the year a building is acquired, although the IRS does allow adjustments to prior depreciation deductions. If the proper amount was not claimed in prior years, depreciation not previously claimed is now allowed as a deduction in the current year by filing Form 3115.

Section 179D Energy Efficiency Deduction
This popular deduction allows the owner of a commercial building to qualify for deductions of up to $1.80 per square foot for buildings that are constructed or renovated to reduce total annual energy use.

The primary beneficiaries are owners or lessees of commercial property and certain residential buildings. Government buildings, such as schools and universities, courthouses, jails, and office buildings, also may qualify. However, since government entities do not pay tax, the deduction can be transferred by written delegation to a tax-paying entity, such as an architect or engineer.

Qualified property owners are able to claim the $1.80-per-foot deduction for buildings constructed or renovated to save 50 percent or more of total annual energy costs as determined by national engineering standards.

Energy savings must be achieved by constructing or retrofitting any of the envelope, interior lighting, or heating, cooling and hot water systems. A building not meeting the 50 percent savings requirement may still qualify for a portion of the deduction. Before the 179D deduction can be claimed, the property owner must obtain independent certification of energy savings from a professional engineer or third-party contractor using software qualified by the Department of Energy.

Arizona Business Magazine June 2010

Green Workplace

Forty Ways to Go Green In The Workplace

Everyone involved in office space — owners and property managers as well as tenant office managers and employees — has a shared responsibility for reducing the environmental impact of our business activities. In commemoration of Earth Day’s 40th anniversary, here are 40 ways to make the office a greener place to work.

Owners
1. Include reasonable sustainability provisions in standard lease agreements, and try to accommodate tenants with their own green criteria.
2. Require your management staff to follow sustainable procedures as much as possible, and to report on what they are doing.
3. Ask your property manager and other service providers what steps their organization is taking to be sustainable, including what they ask their own vendors, to ensure the sustainability of your supply chain.
4. Keep current on public policy mandates regarding green buildings, including tax credits and other incentives as well as building codes and other requirements.
5. Be knowledgeable of costs and financing alternatives relating to energy and sustainability improvements, and weigh these factors against potential financial benefits.
6. Conduct a complete commissioning of mechanical, electrical and plumbing systems once every three years to ensure they operate as they were designed to do.
7. Install bike racks to encourage emission-free commuting.
8. Institute a building-wide recycling program, and if possible, establish an area for sorting recyclables before they leave the building.
9. Budget for tenant sub-metering, subject to applicable laws and lease agreements.
10. Invest in roofing materials that reduce heat absorption by using highly reflective materials or vegetation.

Property Managers
1. Replace traditional base building light bulbs with high efficiency/low mercury lighting.
2. Install carbon dioxide detectors to ensure enough fresh air is circulating.
3. Don’t over-ventilate: It’s important to have enough fresh air, but outside air must be heated or cooled to inside temperatures, increasing energy use.
4. Follow a consistent schedule of checking and replacing filters.
5. Sub-meter equipment for better data on where energy is being used, so that when there is an unexpected rise in energy, the problem can be isolated more easily.
6. Use cleaning supplies and restroom paper products that meet EPA’s Environmentally Preferred Purchasing guidelines or are certified by organizations such as Green Seal
7. Ensure that parking-lot lights are shielded to focus light on the ground instead into the sky or neighboring properties, avoiding light pollution.
8. Follow integrated pest management principles that pose the least risk to people and the environment at the most economical cost.
9. Utilize high-efficiency irrigation technologies.
10. Work with municipalities to permit motion-sensitive lighting in emergency stairwells.

Office Managers
1. Set office copier defaults to print on both sides of paper to reduce paper waste.
2. Post recycling receptacles in central locations as well as at individual desks.
3. Use motion detectors to control lighting in storage and other rooms that are used infrequently.
4. Install task lighting at employee workstations so that late workers do not need full lighting throughout the department.
5. Consider recycled and recyclable materials when renovating space or replacing furniture.
6. Require interior build-out contractors to follow sustainable practices, particularly in ensuring the air quality of adjoining areas where employees are working.
7. Use low Volatile Organic Compound (VOC) paint and formaldehyde-free furniture and carpet in offices to ensure that air quality is not compromised.
8. Investigate the installation of software that automatically turns off copiers and printers at a certain time, and make sure standby modes are set correctly.
9. Consider programs that allow employees to work from home part of the time, reducing carbon emissions from commuting and potentially limiting space needed per employee, thus reducing the amount of space to heat and cool.
10. Design space to maximize penetration of natural light into your space.

Employees
1. Bring lunch from home to reduce cafeteria and restaurant waste.
2. Print documents only when necessary, and use double-sided printing when possible.
3. Learn which plastic lunch items are and are not recyclable, and wash food particles from recyclable containers before depositing
4. Use a coffee mug and reusable water bottle instead of paper cups and disposable plastic bottles.
5. Turn off your computer at night and unplug the adaptor—even an idle adaptor draws energy.
6. Bring your laptop to meetings to avoid printing out presentation materials.
7. When working late, use task lighting at your desk instead of lighting an entire floor.
8. Take mass transit or carpool to work if possible; or better yet, walk or ride a bicycle if you live close enough to the office.
9. Place plants in your office space to help absorb indoor pollution.
10. Turn out conference room lights when meetings are over.

If each person does his or her part, these practices will greatly reduce costs for everyone and ensure a healthier, happier workplace as well as helping the environment. Have a happy fortieth birthday, Earth Day!

Robert Best, executive vice president of energy and sustainability services at Jones Lang LaSalle, contributed to this report.

ATA Profile: Mark Grenoble

Mark Grenoble
President, Enchantment Group
www.enchantmentgroup.com

Not many professionals can say they grew up in their industry. Mark Grenoble is one of the few who can. He has worked in some capacity in the tourism industry since he was a teenager, and aside from a few years in real estate, he has never left the industry.

From humble beginnings as a hotel banquet waiter, Grenoble has risen to the ranks of president of the Scottsdale-based Enchantment Group, a company that provides spa and resort property development and luxury hotel management services. He founded the firm with senior executives of Enchantment Resort and Mii amo, a destination spa that has been ranked No. 1 in the world by Travel & Leisure. Yet, Grenoble doesn’t think his story is very unique.

“There are so many stories just like mine; started at 15, 16, 17 and have grown up in the business, have a passion for it and enjoy it,” he says. “I like the resort side of the hotel business even better. Everyone wants to be there. The business is fun in general. Most people in this business are very passionate about what they do.”

That passion has helped Grenoble etch out a successful career in an industry that has undergone many changes during his 25 years and counting. All his hard work and dedication has not gone unnoticed. Last year, Grenoble was named the Tourism Champion of the Year at the Arizona Governor’s Conference on Tourism.

Though he thoroughly enjoys the industry and his role within it, Grenoble is very frank about the future. Recent challenges have plagued this industry and Grenoble’s role in the Arizona Tourism Alliance is to educate the public on the value of tourism.

“Our leadership in the industry needs to be active and advocate. We need to educate business leaders and elected officials on the value,” he says. “We’re a major industry in the U.S. and the state. Millions are employed nationwide. It’s an industry that is an economic driver; it’s a career path and we need to educate people on the value of it.”

Tourism is a huge part of the state’s economy, especially in smaller, rural communities. Sedona is one example. The city does not have a property tax because tourism funds services for the town.

“Tourism drives the economy for the town and real estate values. It adds a quality of life. Sedona has a population between 10,000 and 15,000 people. All the activities, art galleries, etc. — as a resident you would never be able to do that without the tourism aspect of it,” Grenoble says.

One positive thing that has occurred as a result of this downturn, he adds, is that communities, and even some elected officials, are willing to invest in tourism dollars. They have begun to understand the value of it and the long-term benefit of the cities and the state as a whole.

Grenoble also was instrumental in adding a communications position to the Arizona Hotel & Lodging Association, a move that proved itself to be an excellent resource during last year’s trying times. The position bridged the gap between the industry and the public, and helped communicate the value of tourism.

“We’re trying to engage the public, elected officials and our membership, all the constituents of the tourism industry. We need to understand what we’re doing as an industry,” Grenoble says.

One way that Grenoble hopes to accomplish this is to include outside industries in tourism advocacy. The goals and missions for all industries is to bring economic stability to the state, and the best way to do so is to recognize the value of each industry and work together.

“We’re all intertwined, and that’s why we need to build alliances and bridges with those outside industries,” he says.

Another cause that Grenoble thinks could be helpful in aiding the tourism and travel industry in its recovery is a regulated school calendar that doesn’t begin until after Labor Day.

“It’s had a very positive uptick in taxes for states that have mandated school start after Labor Day,” Grenoble says.

He is currently lobbying supporters for this, but he remains focused on the main goal of tourism helping lead the state out of the economic downturn.

“I think the state has a lot going for it and I see the lights at the end of the tunnel,” Grenoble says.


Arizona Business Magazine

February 2010

The Worst May Be Past, But The Valley’s Housing Troubles Are Far From Over

When the final tally is concluded and the numbers checked and double-checked, the surprising result will show an almost record year for Phoenix-metro home purchases in 2009. That should produce a sigh of relief to the many who sense the Valley’s residential market has hit bottom and it’s time to look ahead to recovery.

Not so fast, interject the naysayers. There are so many problems that still need to be overcome, the local housing market could end up bouncing along the bottom of the cycle for years, if not suffer a secondary bout of recession.

The sticking points deflating the recovery bubble are numerous: more Americans falling behind on mortgage payments, intractable unemployment, a shadow inventory of homes and another wave of exotic adjustable-rate mortgages coming due over the next two years. All that could overwhelm the strong gains seen in the housing market in 2009.

The residential housing resale market in Phoenix has experienced a substantial uptick, reports RL Brown, who publishes the RL Brown Housing Reports. In October 2009, resales totaled 8,167 units as compared to 5,697 units for the same month the year before — a 43 percent increase in resale activity.

“At 8,000 homes a month, that comes wonderfully close to the important 100,000-unit-a-year market, which the Phoenix market first crossed back in 2004, when 112,000 units were sold,” Brown says. “That number took a surprisingly long time to attain, with resales at 75,000 in 2002 and 87,000 in 2003, and then just as difficult to maintain. In 2006, resales fell to 90,000 units and by 2007 hit 58,000 units.

“We are selling inventory above historical levels,” Brown avers. “That’s a demonstration of recovery.”

However, Jay Butler, an associate professor of real estate at Arizona State University, unearths some underlying problems in all that activity, in particular the fact that the resale of foreclosed properties, which had been running at about 60 percent of the resales, is what’s boosting the market.

In that hot-hot-hot October 2009, 30 percent of the recorded sales activity was foreclosures and another 30 percent to 35 percent was due to investors or lenders selling REO (bank-owned real estate) property back into the marketplace, which indicates that more than 60 percent of the resales were due to failed mortgages. When asked what the historical level of resales due to foreclosure activity was, Butler answered 3 percent to 5 percent.

The Buyers
Still, with all those homes being bought, whether they were foreclosed upon, new or simply the result of a straightforward transaction between a healthy seller and healthy buyer, the important point is the inventory of homes for sale was heading in the right direction in October.

“Unfortunately, there’s a negative interpretation to that phenomenon as well. Probably a third of all resale units being purchased are by investors,” explains Elliot Pollack, founder of the economic consulting firm Elliott D. Pollack & Co. “And investors tend to purchase homes they can fix up and resell. In fact, about 50 percent of all fix-up homes are bought by investors as compared to 25 percent of all move-in homes. Many of those homes bought by investors will come back into the marketplace.”

The other large group that has been buying up single-family properties has been the first-time homebuyers lured into the market by affordability, low interest rates and the Obama administration’s $8,000 tax credit. The target of this demographic group, in a sense, is not much different from the investor hordes — cheap homes. Since inventory in this category has been whittled down, that leaves an inventory of more expensive properties.

With the lower tier of homes moving to new buyers and investors, in a normal market this trend line would eventually result in average home prices increasing as home purchasers start moving up to bigger, more expensive homes. The trouble is, the Phoenix residential market remains wildly out of sync.

Earlier in 2009, Pollack predicted the Valley would end the year with an extraordinary number of vacant properties, perhaps totaling 50,000. By November, Pollack was quickly re-tabulating, and now expects 80,000 vacant properties, or about 9.8 percent of the market. Historically, vacant homes only made up 2.3 percent of the market.

“This is a big, continuing supply of properties,” Pollack says.

“Phoenix is still a long way from getting back to a market that is structurally normal.” – Jay Butler, Arizona State University

Bad Options
That number could get even bigger in 2010 due to resets on adjustable-rate mortgages.

Earlier in the last decade, during the heyday of exotic mortgages, one of the more popular loans was the Option-ARM, which initially offered the borrower four monthly payment options all with low teaser rates that would eventually reset. The borrower generally made payments less than the accruing interest, which resulted in negative amortization, or the unpaid portion of the interest added to the principal balance.

Most of these loans were written in 2005 and 2006, with five-year resets. Starting this year and going into next year, these mortgages will reset with higher rates and at a range unaffordable to most holders of Option-ARMs.

Securitzed Option-ARMS (about 70 percent of all Option-ARMs are securitized) total $189 billion, and of that $134 billion will be recast in 2010 and 2011, reports Alla Sirotic a senior managing director at Fitch Ratings.

“This is a product that will see one of the highest default rates,” she adds.

And Butler maintains: “This will be another subprime-type trampling of the mortgage market. Some people say this is where a lot of the foreclosures are. Some say it won’t be as big an issue because a lot of people will be able to refinance. It depends on what they reset to and interest rates are low right now.”


Arizona Business Magazine

February 2010

Measuring CityScape’s Impact On Downtown Phoenix

CityScape, a $900 million multi-use project nearing first-phase completion in the heart of Downtown Phoenix, will finally fill the so-called “hole in the doughnut.” Located on a 3-block tract centered at the zero-zero intersection of Central Avenue and Washington Street, CityScape is seen as the catalyst for long-overdue development in the city’s core. Key players in this project, the biggest private-sector undertaking ever in Downtown Phoenix, use such phrases to describe its impact as:

“It’s going to put the heart back into Downtown Phoenix.”
“It’s going to redefine Downtown, giving the area a critical mass of retail and amenities.”
“It’s really going to help change the face of Downtown Phoenix.”

Dave Kreitor, deputy city manager for the City of Phoenix, has helped guide the Downtown area through an unprecedented period of growth, but there was always a hitch. “When I was economic development director 15 years ago, we talked about those blocks being the hole in the doughnut,” he explains. “We would never be truly effective with our Downtown redevelopment activities until that area was developed.”

Spanning Washington Street to Jefferson Street, and Second Street to First Avenue, CityScape is a 1.8 MSF project featuring a 27-story tower that will be home to myriad retail outlets, prestigious law firms and other businesses. The development’s first office tenants are expected to move in by March, with retailers showing up in April. The bulk of the tenants should be up and running by July.

Kreitor expects CityScape to create a center of activity that will relate well to nearby US Airways Center, Chase Field, the Phoenix Convention Center, Arizona State University’s Downtown campus and the core office market.

Leasing Up
As of late November 2009, leasing activity was on target. Jeff Moloznik, development manager for RED Development, says nearly 75% of the 575,000 SF of office space, and 75% of the 180,000 SF of retail space, were leased. Rates PSF were being negotiated with retailers individually, depending on the tenant, Moloznik says.

Office
Jerry Roberts, leasing broker of CB Richard Ellis, says CityScape office space is going for low-to-mid $30 PSF, depending on the length of the lease. “The pre-leasing went better than almost any building I’ve ever been involved with.”

The pace of leasing CityScape office space would be considered very successful in any real estate market, let alone the market of the last two years, Roberts adds.

One of the tenants, Squire Sanders and Dempsey, a law firm with about 110 employees, is moving across the street from the Renaissance II Building. Robert Matia, a partner at Squire Sanders, says the floor layout at CityScape is ideal for the reduced amount of space needed for secretaries.

“Lawyers coming out of law schools have spent so much time on the computer that they prefer to type their own first draft on many documents,” Matia says. The law firm will occupy 72,000 SF on 3.5 floors, with room to expand.

Represented by CB Richard Ellis, the brokerage process for Squire Sanders went smoothly. “We knew RED Development was a great group to work with,” Matia says. “They were anxious to have us there and were accommodating to our needs.”

Retail
Don Keuth, president of Phoenix Community Alliance, says CityScape creates synergy for the area. “It sends a tremendous statement about Downtown Phoenix, that it is a vital place where investments can be successful.”

He applauds RED Development, which is also the brokerage firm for the retail portion of CityScape, for making the project a reality.

Among the challenges was providing enough easy-access parking, especially for retail customers. “We accomplished this by creating an open and inviting below-grade parking environment that allows visitors to intuitively find their way from their below-grade parking stall to their retail destination,” Moloznik says.

Retailers include CVS Pharmacy, Urban Outfitters, Lucky Strike upscale bowling, Sam Fox Restaurants, Designer District, The Breakfast Club and Gold’s Gym.

The key to maintaining and enhancing a successful Downtown, Keuth says, is to get more people to live in the immediate area. “We need to create a reasonably affordable housing option so young professionals can live here and enjoy the area,” he explains.


Arizona Business Magazine

January 2010

First Tower Of CityScape Development To Open Soon

A new 308-foot office tower notches the skyline of Downtown Phoenix. Hunt Construction Group recently topped off the 27-floor, 600,000 SF tower with its attached 3-story, 45,000 SF retail structure and 5-level underground parking garage, which opens in February.

When completed, the 1.2 MSF CityScape development will include a second tower featuring a 250-room, 400,000 SF boutique hotel; an additional 135,000 SF of retail, including a grocery store and pharmacy; a revamped, greener Patriots Square Park with retail elements; and two underground parking garages.

The RED Development project extends across 2 city blocks bordered by First Avenue and First Street, and Washington and Jefferson streets. A second-level pedestrian bridge will connect the 2 blocks.

Planning/Zoning
Planning began in early 2006. Keith Earnest, vice president of development for RED Development, says the permitting and zoning process went smoothly with no major obstacles.

“The City of Phoenix really wanted this project to happen Downtown, and they teamed with us to make it happen,” he says. Only minor zoning amendments were made due to old alleys that traversed the land, which was made up of multiple parcels.

Some infrastructure work was required. For the electric, RED Development trenched back to the Garfield substation — about 6 city blocks and under the light rail system that wraps around two sides of the project. Water lines also were replaced due to their age.

Originally planned to span 3 city blocks, the project’s condominium tower was put on hold due to the current real estate market.

Strong Foundation
One of the deepest excavations in the Downtown area in some time, approximately 275,000 cubic yards of soil materials were excavated to a depth of more than 65 feet. The dig uncovered many interesting artifacts:

  • A bowling alley with more than 150 buried bowling balls from the 1940s.
  • Below-grade bank vaults.
  • Foundations from the historic Hotel Luhrs built in 1887.
  • Remains of prehistoric pit houses of Native American farmers who lived in the Valley between A.D. 1 and 1450.

The depth requirement of the hole was to accommodate the extra-thick mat footing for the elevator cores in the two towers. Surprisingly, RED Development says it didn’t encounter any problems, such as hitting water pipes or storage tanks.

The biggest challenge was designing and constructing the project to go on-line at different times and still be functional, says Robert Tindall, chairman of Callison Architects, the architectural firm over CityScape.

The rest of Phase I, which includes the new park with surrounding retail, is currently under construction by The Weitz Co. and will open June 2010. Phase II, the South Tower (hotel) and its retail structure, is slated for completion in June 2011.

Precise coordination and timing are needed to meet these tight schedules. For example, Hunt built temporary shoring walls to allow the office tower (and the portion of the garage under it), to get underway while utility relocation under Central Avenue proceeded concurrently. The remaining part of the garage, which extends under Central Avenue, was built later. In addition, parts of Phase II have been built ahead of time; for example, the elevator cores that will serve the future hotel tower already have been incorporated into the garage.

Construction Details
The office tower is a complete concrete post-tension structure, and was cast using a flying formwork system, which allowed for larger concrete pours. This method resulted in pouring a floor of concrete each week. The retail portion of CityScape — a 3-story, fireproofed steel structure with concrete topping slabs — was attached to the concrete frame of the office tower.

A unitized curtain wall system, designed for speed of construction, was used as the skin on the tower. Coupled with the flying formwork method, multiple trades were able to work on the tower floor-by-floor and enclose the structure at a much faster pace.

“Within a month of finishing the concrete, we were done with the glass on the building,” says Brent Leif, construction manager for Hunt Construction Group.

As of October 2009, the project consumed 8,500 tons of rebar, 63,881 cubic yards of concrete, 507 tons of steel and 206,000 SF of glazing. The tower was built with 8,159 lites of insulated high performance glass and 1,744 aluminum panels.

Designing CityScape
CityScape is tied into the Northwind Downtown district cooling system. Other sustainable features include high-performance, reflective glass, and a curtain wall system that was engineered to a high PSF standard for water infiltration. A raised “mesa level” will connect the North and South towers, and was carefully positioned to provide optimum shade throughout the year as a pedestrian haven.

The tower features a street-level lobby enclosed with a structural glass wall and a second-level lobby, which are connected by escalators. Lobby finishes include Bianco Dorre floor tile with noisettle limestone accents, Torrean wall stone, custom-ribbed light Emperador stream wall stone, and accent walls of ribbed Bendhiem glass. The ceiling is a mix of decorative painted sheetrock and suspended wood panel ceiling panels.

Steps on the exterior of the office tower add interest and texture to the facade, according to the architect. Retail was designed around the perimeter of CityScape to activate the street level of the project.

Colors for the project include beige and reddish browns “for a more contemporary and fresh feel that emphasizes CityScape is the new heart of Downtown Phoenix,” notes Tindall.

“This project not only provides a nice skyline statement, but links the various sections of Downtown that have been isolated for years,” he says. “We have created the connection between the sports, civic, cultural and municipal (venues), creating the new business and financial center for Phoenix.”

www.callison.com
www.cityscapephoenix.com
www.huntconstructiongroup.com
www.phoenix.gov
www.reddevelopment.com


Arizona Business Magazine

January 2010

Who To Watch: John Chadwick

John Chadwick
President, Southwest Area
Pulte Homes

John Chadwick knows there have been better days in Arizona’s home-construction industry. Last year was a challenging time for homebuilders and he believes this year will test their mettle, as well. But he’s convinced that builders with sufficient resources will find opportunities as the state’s residential real estate sector begins to crawl out of a deep hole.

Chadwick is Southwest area president for Pulte Homes, the largest homebuilder in the nation and one of the largest in Phoenix and Tucson. Looking back on 2009, he references well-documented woes – deteriorating consumer confidence and job losses that sapped demand for housing and sparked an increase in foreclosures. Noting the impact of the real estate slowdown on the industry’s families, Chadwick says, “the contraction has led to painful and necessary reductions in our work force the past year.”

Looking for a toehold in a rocky economy, homebuilders are constantly assessing consumer needs and making adjustments in designs and floor plans and price, Chadwick says.

“Despite difficulties in market conditions, Pulte still performs at or near the top of the industry,” Chadwick says. “That’s because our strategy remained the same – providing high-quality products, providing buyers with affordable housing options and maintaining a strong commitment to customer satisfaction. Those are the things that make the greatest difference in the long term – a willingness to stick to strategies.”

Another key factor in Pulte’s survival and its increasing market share is its diversified lines of business.  Pulte acquired Phoenix-based Del Webb in 2001, and last summer paid more than $1 billion for Centex Homes.

“Centex targets the first-time home buyer,” Chadwick says. “Pulte is targeted to the first-time move-up and move-up buyer. Del Webb delivers lifestyle communities principally to the active-adult buyer.”

There is hope for homebuilders with strong financial backing, Chadwick says. Thus the Centex acquisition and Pulte’s purchase last year of the 480-lot Rancho del Lago in Vail, southeast of Tucson. It now is a Del Webb active-adult community.

“There will be more to come.” Chadwick notes, adding that he is optimistic about the outlook for Arizona’s residential market.

“On a competitive basis, the Southwest – and that includes Phoenix and Tucson – has returned to affordability,” Chadwick says. “Price declines in housing have positioned Phoenix and Tucson for long-term growth relative to other Western states. They have a great quality of life and strong employment prospects and that makes those markets attractive on a long-term basis. Clearly, we are still in a challenging market environment, but I am encouraged by some signs that a recovery is in sight.”

Those signs include stabilizing prices, an increase in existing-home sales, demand for appropriately priced homes in good locations, a slowdown in foreclosures and a welcome reduction in inventory, he says.

“There is far less new-home inventory in the market and that is a great indicator of an improving supply-and-demand environment,” Chadwick says. “For builders with the resources, yes, 2010 will bring new opportunities to them.”

www.pulte.com

Arizona Business Magazine

January 2010

An End in Sight

Hit Harder Than The Rest Of The Nation, The Valley’s Economy Is Starting To Show Faint Signs Of Recovery

Don’t dust off that party hat just yet, but there are early signs that the worst recession in the Valley’s history is easing its stranglehold on the economy. To be sure, as fall approaches and the recession’s two-year mark looms in December, Phoenix residents and businesses still struggle with plenty of economic problems. But economists and business leaders see hopeful signs.

Conventional wisdom says the housing market will pull the Valley out of the recession, after having led it down that path in the first place. Lee McPheters, economics professor at the W.P. Carey School of Business at Arizona State University, sees that milestone unfolding right now. The Greater Phoenix Blue Chip Real Estate Consensus Panel estimates 8,260 single-family housing permits will be issued this year, McPheters says. That’s down dramatically from the 57,360 issued in 2004, but McPheters says the forecast also calls for 12,600 permits in 2010, establishing 2009 as the bottom for that economic indicator.

New-home sales may have hit their low point the first half of this year and sales of existing homes, or re-sales, are bouncing back, according to McPheters.

“We are on track here to have easily over 75,000 re-sales for 2009, and it could be closer to 100,000 because there’s lots of inventory out there,” McPheters says. “At least half of that is bank-owned foreclosures but, nonetheless, re-sales are quite robust.”

There were 110,000 re-sales in 2005 during the Valley’s housing boom.

“New permits and sales of new homes seem to have bottomed out and re-sales have been going up,” McPheters says. “Those seem to be pretty strong trends, but still at a low level.”

What McPheters is saying is that good news in the housing sector alone does not constitute an overall recovery.
“There is nothing in the makeup of the Phoenix economy at all that would provide the stimulus for any independent recovery,” McPheters says.

Metropolitan Phoenix is still plagued by continuing job losses, declining personal income, decimated retail sales, declining home prices, home foreclosures, weak commercial real estate construction and more. The shrinking labor force likely won’t bottom out until the second half of next year after recording a historic three-year stretch of job losses — 2008, 2009 and 2010.

“By the time all the job losses have been recorded, Phoenix will have several hundred thousand fewer workers, and it probably will be 2011 before there is any kind of vigorous recovery in retail sales,” McPheters says.

In the meantime, 96 percent of the economists in the national Blue Chip Economic Indicators newsletter expect the national recession will end in the fourth quarter of this year. McPheters sees the national downturn drawing to a close with a modest turnaround and he thinks Phoenix will follow suit.

“Nationally, at the end of 2009, we will stop talking contraction and start talking about indicators that are more positive,” McPheters says. “Then there will be a period of slow growth. Phoenix probably will follow that, but remember that we have been harder hit than the rest of the country.”

Still, there is more to the Valley’s economy than statistics. Local business leaders are encouraged by what they see.

“From my perspective, we have seen a dramatic increase in headquarters activity,” says Barry Broome, president and CEO of the Greater Phoenix Economic Council.

Businesses primarily from the Northwest and California and, to some extent, Boston and New York, are either researching the Valley or making definitive plans to move their headquarters here, he says. Broome expects 10 to 15 headquarters to relocate to Arizona over the next 18 months and Phoenix will land some of them.

Broome also sees “new, sophisticated capital” moving into the Phoenix market. Investors are deploying the money now and plans are being written up for commercial real estate and science and technology projects, he says. Existing companies poised for growth are attracting capital infusions, Broome adds.

“This is not the cheap Las Vegas capital coming into the Valley where they buy it, zone it and flip it,” Broome says. “Now we’re seeing private equity firms that have 50 to 100 years of reputation in the U.S. and the world that didn’t get burned in this downturn. They are coming out of the Northeast markets, which we have not seen before.”

Bruce Coomer, executive director of the Arizona Association for Economic Development, is amazed at how busy city and county economic development departments are in the Valley and around the state.

“I don’t think there are any in Metro Phoenix cities that are not extremely busy,” Coomer says. “They are telling me that they are having trouble keeping up with the work.”

Although cities are likely conducting outreach programs, Coomer believes staffers are scrambling mainly because companies are approaching them.

Economic developers, Coomer says, “have got some big deals in the wings. That tells me companies, site selectors and developers know that sooner or later the recovery is going to come and they all want to position themselves. They want all their ducks in a row and all their due diligence done so they can pull the trigger and be on the front lines in a short period of time.”

Richard Hubbard, president and CEO of Valley Partnership, sees two encouraging signs within the business community.

“Commercial development companies have come face to face with the difficult decisions they have to make, be that layoffs, stopping projects or filing for bankruptcy,” Hubbard says. “A lot of those decisions are being made.”

Hubbard also is pleased with decisions made by sources of capital.

“Lending companies — whether that’s banks, private institutions or individuals — who have taken back property through foreclosure are starting to bring that property to market at reasonable prices,” Hubbard says. “They’re cutting their losses and deciding they can’t hold onto the property anymore. That will allow these companies to move forward.”

Hubbard says he also is encouraged that the housing market is well into the process of working its way out of the recession.

“The home-building industry has been suffering for a long time and they made their tough decisions a year ago,” Hubbard says. “Now it’s time for the commercial industry to follow suit.”

The Arizona economy and Tucson, Southern Arizona’s economic engine, continue to suffer from the same maladies as Greater Phoenix, says Marshall Vest, an economist at the University of Arizona’s Eller College of Management. Vest sees no hopeful signs of a statewide recovery for the time being. The only positive for Tucson is that its housing boom was not as strong as Phoenix, and its economy was not dragged down as far as the Valley’s, he says.

Vest sees the national recession receding in the third quarter.

“Arizona and Tucson will lag behind the nation by at least a quarter or two,” Vest says. “So Arizona should bottom out by the end of the year or the first quarter of next year and start its recovery at that time.”

The first sign of a statewide recovery will be a peak in the number of initial unemployment insurance claims, followed by stabilization of the labor market and then an uptick in retail sales, Vest says.

Flagstaff dominates the Northern Arizona economy. Marc Chopin, dean of the W.A.

Franke College of Business at Northern Arizona University, says the city has been logging double-digit declines for sales tax revenues and bed, board and beverage tax receipts. Building permits for single-family homes and additions and alterations to existing homes also have been declining, he says.

“I don’t expect things will turn around for some time,” Chopin says. “Construction, I expect, won’t recover for some time. About a quarter of the homes in Flagstaff are second homes. Until there’s a recovery under way in Phoenix, from which many of our second-home owners come, the second-home market in Flagstaff is unlikely to recover.”

www.aaed.com
www.cba.nau.edu
www.ebr.eller.arizona.edu
www.gpec.org
www.valleypartnership.org
wpcarey.asu.edu

Changing Course

Law Firms Are Altering Their Strategies To Cope With The Recession

The downturn in the economy that is affecting all businesses has not spared law firms. Like all other businesses, law firms have been forced to cope with fewer and thriftier clients. Specifically, law firms have had to deal with sharp reductions in transactional and real estate work, large increases in litigation and bankruptcy matters, and clients who are often unable to pay for legal services. Providing legal services to clients that may declare bankruptcy in the near future has become commonplace.

Law firms have responded to these trying times with various strategies. Many law firms have primarily focused on reducing costs through hiring and compensation freezes, recruiting cutbacks, and event cancellations. Other firms have started to transition transactional attorneys to bankruptcy or litigation work.

Not all strategies, however, are created equal. The reduction of costs is always a worthwhile aim, but when conducted without strategic vision, it can leave a firm with frustrated employees and choke off any avenue for organic growth. The transfer of attorneys to other divisions certainly creates revenue for the firm by keeping otherwise inactive attorneys productive, but the work product can suffer. For example, transactional attorneys will not necessarily provide the highest level of service to a client with litigation or bankruptcy needs.

Firms that take a different approach may be best suited to not only survive the current economic difficulties, but to emerge on the other side as stronger firms. This approach is simple: Focus on the client. While all law firms profess to keep the client’s interest at heart, in these times, paying more than lip service to that ideal is the key to success. Now more than ever, many clients are not able to afford full service legal representation. Obviously, providing the highest quality legal service to the client is always the first priority, but providing value should be a close second. Focusing on the client and its specific needs allows attorneys to add value by identifying and zeroing in on the particular requirements of that client. Once the particular needs are identified, it is simple to eliminate any superfluous services that do not add value, and to concentrate only on the services that really move the client closer to its ultimate goal. This focus keeps the representation more efficient, less costly, and will ensure that the client is satisfied with all of the legal services provided.

One major example of how an increased focus on the client is more important than ever is the looming prospect of bankruptcy. Recognizing that a bankruptcy could be on the horizon for a client is very important to shaping any legal strategy. Most importantly, a bankruptcy provides unique legal challenges and opportunities that need to be addressed in a timely manner. Identifying the possibility for a bankruptcy, and when it might occur, allows the lawyer to properly gauge which long-term strategies will be ineffective, and how to use the limited time and resources as efficiently as possible. Moreover, a possible bankruptcy underlines the client’s absolute necessity for value from legal services. Particular attention from the attorney at the outset of a representation can identify a possible bankruptcy, shape the representation, and let the law firm know which services will be most valuable to the client under the circumstances.

With the need to adjust to the current economic difficulties paramount for all law firms, smaller firms may be the best equipped. Like the tugboat and the ocean liner, smaller firms are more nimble and able to focus resources to needed areas more quickly than larger firms. Most importantly, small firms often provide a higher level of personal attention and a greater focus on the client’s needs. Focusing on the client is the best way to ensure success for both the law firm and the client.

Charles J. Morrow also contributed to this article.  He is an associate at Galbut & Galbut. He can be reached at cmorrow@galbutlaw.com.

money, cash, hundred dollar bills

This Isn’t the First Crisis The Valley’s Banking Industry Has Faced

The Valley has come a long way over the past 25 years, and the banking and financial sector is no exception. Challenges, crises and legislation brought about dramatic change that has created a new era in banking and finance. In the mid-80s local banks dominated the sector, while regional and national banks were nonexistent. The Valley was home to the “big three” — Valley National, First Interstate Bank of Arizona and The Arizona Bank.

The financial sector was real estate driven, with a considerable concentration in housing and commercial real estate development. Second to real estate were the “Five C’s” of Arizona’s economy: climate, cotton, citrus, cattle and copper.

The savings and loan and real estate crises of the late-80s were the turning point in the Valley’s banking sector. At a time when Arizona’s “big three” were suffering, large banking corporations invaded. Bank of America’s first “real” presence in the Valley was assimilating five different savings and loans in the state.

In summary, there have been many milestones over the past 25 years that have shaped the banking sector. Such milestones include sustaining itself through the S&L crisis and the severe commercial real estate downturn of the late-80s; recovering from the infamous Lincoln Savings and American Continental debacle; weathering the “dot-com” implosion of 2000; and passing the Interstate Banking Act that led to dramatic industry consolidation of local banks into regional, national and global banking organizations. More recently, the securitization boom in both the residential and commercial real estate market revolutionized real estate lending.

Today’s “big three” — Chase, Wells Fargo and Bank of America — control the vast majority of deposits statewide and a much more dramatic concentration of banking resources overall. But more importantly, small and mid-size banks have reemerged. 
There is also now more proactive leadership in the business community.

Arizona and the Valley have a more diverse economic base due to the dramatic progress of our investment in education, as well as the high-tech, defense, life sciences, health care, biotech, telecom, optics, hospitality, entertainment and transportation industries. We now have an “alignment” of stakeholders, including the public, business, academic and philanthropic sectors, and therefore stronger initiatives for more diverse economic development, such as sustainable systems, solar and renewable energy and land management.

That said, in 2009 we are again faced with many economic challenges that will no doubt continue to shape our industry and affect how we operate. Banks need to grow wiser and smarter in serving their communities and Arizona’s businesses. We are resource constrained from a state revenue standpoint and by expenditures driven by our phenomenal population growth and federal-mandated programs. Arizona is a high-growth state and we need to strike the right balance between infrastructure “catch-up” and smart and balanced growth. The banking industry has and will continue to support a more knowledge-based and service-oriented economy.

What does the future hold for the banking and financial sector? Banks will need to play a transformational leadership role in public issues, specifically economic diversification and development, as well as public finance. The industry must become a recognized leader for innovative approaches to capital formation and connecting intellectual capital with financial capital.

We must also promote a diverse array of financial institutions from small local community banks and mid-size niche banks to larger regional and global institutions that promote cross-border trade finance and strategic alliances.

There is no doubt that the next 25 years will bring as many challenges and reforms as we have overcome in the past, but our state’s banks will regain their strength; the strong will survive, consolidate the weak and prosper with our state’s growth. And as Arizona’s banking industry continues to grow stronger and smarter, we foster confidence as we reaffirm the leadership role in Arizona’s economic foundation.

Real Estate - A Changing Landscape

Some Of The Troubles Facing The Real Estate Sector Today Ring Familiar

The landscape of the Valley’s real estate market in the mid 1980s was vastly different from today, but, as most developers are painfully aware, many of the challenges are markedly the same. What is different today is the solid foundation that has been built over the past 25 years, which has helped the Valley remain an extremely attractive place for businesses and residents to call home.

Twenty-five years ago, the biggest challenge in the market was tied to the fact that we had virtually no transportation infrastructure. Commuters today might have more traffic to contend with, but at least we have more freeways. In the mid-80s, drivers had long and incredibly laborious commutes to an employment base that was quite limited in variety. Of course, 25 years ago, a commute into Phoenix from Surprise, Goodyear, Gilbert and El Mirage was unheard of.

The Valley’s expanded transportation infrastructure has opened up all of these new submarkets and allowed for an effective and functional distribution of goods and population. The I-10 was finally completed through Downtown Phoenix in 1990. The Scottsdale Airpark has grown into the second-largest office submarket in the Valley. Highway 51 and the loops 101 and 202 were constructed.

Our metro area has now grown so large in size and population that companies and retailers have multiple locations and stores. Larger warehouse facilities were built on the west side of the metro area near the I-10 transportation corridor. We began to see mixed-used projects of a large scale. The Phoenix industrial market benefited from steady job growth, great positive inward migration and affordable housing.

In addition, the Arizona Department of Real Estate has played a major role in planning future growth, establishing land values, encouraging competition and adding substance to our educational trust fund. The growth of local, competent developers in every development discipline has also contributed to shaping the sector.

But the major challenge today, like that of 25 years ago, is an abundance of available space coupled with a very low level of tenant activity. Based on typical annual absorption rates, new speculative construction will take another two-to-three years to occur. Dramatically reduced valuations are another major problem affecting all of commercial real estate. No one knows what anything is really worth. This, coupled with the lack of capital for permanent financing, has brought development to a halt and continues to negatively impact values. Add high unemployment, slow retail sales and difficulty in home sales, and you have a very long pause that seems vaguely familiar to the situation of the 1980s.

However, pauses end. There is definitely a bright future ahead for Valley real estate. Unlike the 1980s, today we have excellent infrastructure we can build upon to rise out of this crisis much more quickly and effectively. What’s more, people will still want to move here. We will benefit from relocated businesses and jobs as other states tax and regulate their economies to the extreme. This slowdown is temporary. But we have to remember that Arizona will continue to attract businesses and residents, and we must stay poised to develop opportunities for them as they become more available.

merger

The Wave Of Bank Mergers Has Changed The State’s Financial-Services Landscape

The banking industry has plenty of troubles, but in Arizona, the least of its problems is the aftermath of recent mergers. Bankers and industry observers say the state’s financial-services landscape hasn’t significantly changed because of the consolidations. Other than the usual branch closings and potential employee layoffs, they don’t see a big shakeup looming. One expert, however, wonders if continuing mergers nationally will lead to a banking system dominated by giant institutions that no one can afford to have fail.

There have been five bank mergers in Arizona since last summer. JPMorgan Chase & Co. acquired Washington Mutual, Wells Fargo & Company acquired Wachovia Bank and National Bank of Arizona absorbed Silver State Bank branches in Arizona. Mutual of Omaha entered the local market with its acquisition of First National Bank of Arizona, and US Bank acquired Downey Savings & Loan branches in Arizona.

“If you take a look at Phoenix and compare it to other communities, we have a large number of financial institutions,” says Lynne Herndon, Phoenix city president of BBVA Compass, formerly Compass Bank. “If you paint it with a broad brush, while there have been a significant number of mergers, this does not necessarily have the impact one might think.”

The impact would have been much greater in a smaller market, where the number of financial institutions dropped precipitously, Herndon says. But the mergers have generated a few ripples.

Herndon and Doug Hile, chairman and CEO of Meridian Bank, note that the elimination of a handful of players perpetuates the return to more traditional lending standards recently prompted by Arizona’s real estate meltdown and the ensuing recession. Hile also sees a higher concentration of retail deposits flowing into larger banks and shrinking market share for smaller banks.

“Most of the smaller banks are not in a position, or even have an opportunity, to acquire those deposits,” Hile says.

Dwindling market share is somewhat detrimental to community banks because it means Arizona’s large banks are just getting bigger, he notes.

While large banks rule the retail banking realm, community banks are the backbone of commercial banking and likely will remain so, Hile says.

“Business customers often want to have contact with the decision makers at their bank and that’s how small banks operate,” Hile says. “In that regard, the (small) banks that are healthy will have an opportunity to acquire new commercial customers.”

Alex Wilson, senior lecturer at the Eller College of Management at the University of Arizona, has a different point of view. “Your number of choices in commercial banking is disappearing,” Wilson says. “And creativity is lost as it becomes more corporatized.”

Wilson laments two potential outcomes of bank mergers — the weakening of a sense of community and the loss of institutional knowledge when middle and senior management are laid off. “

Well-run big banks know enough to try to reinstate that as quickly as they can,” Wilson says. “Badly run big banks lose that.”

Customers more concerned about fees, interest rates and having a variety of banking products to choose from are assured that competition is alive and well despite the mergers.

“There are still plenty of banks in Arizona and there is still plenty of competition,” says Marshall Vest, an economist at the Eller College of Management. “I don’t think we’re at the point where we have just one or two major players that will dictate fees and rates.”

Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, agrees: “We have a lot of competition. We always have. This is a very popular place for banking.”

Mergers probably have strengthened Arizona’s banking industry, Rotellini adds. “The banks that remain are healthy because of the merger-and-consolidation process and are a testament to our federally insured banking system,” Rotellini says. “Banks that were not healthy were acquired by healthier banks and that was done without any disruption in business.”

But as Wilson watches mergers roll out coast-to-coast, he wonders about the ultimate outcome. “

We’re probably heading for a world of three super national banks and probably a handful of little community niche banks,” Wilson says. “The good-sized regional banks are disappearing from the spectrum very quickly. As a result, (Bank of America) will be there, Wells (Fargo) apparently will be there and there will be Citi (Citigroup). I don’t know who will be left standing. The only ones left may be those little community banks.”

Citigroup, a global behemoth with multiple lines of business in financial services, is struggling and Wilson points to it as an example of the kind of risk that comes with an ever-expanding corporate waistline.

“In normal times, I would say (getting bigger) deepens the balance sheet and creates more international presence,” Wilson says. “But in the face of what is happening … I’m not sure you can make that statement. If one of these biggies falls, the ground is going to shake severely. Bigger is more efficient, but it is not necessarily better.”

| www.azdfi.gov | www.compassbank.com | www.ebr.eller.arizona.edu | www.meridianbank.com |

money line

Stabilizing Asset Prices Is Key To An Economic Recovery

The declines in asset prices are sweeping around the globe like a giant tsunami tumbling everything in its wake. Equity prices are down 47 percent from their highs, commodities 53 percent and, of course, residential real estate 25 percent. Industrial production, retail sales and personal consumption expenditures are all showing losses year-over-year and do not appear to be decelerating in any meaningful way.

In the first quarter of 2009, the negative feedback loop — the lower prices go the lower they will go — is being exacerbated by the erosion of confidence and the availability of credit. If this weren’t enough, the lack of accountability and transparency in the system is further eroding investor confidence, thereby curtailing capital spending and stifling employment.

As the monetarists and fiscal policy makers rush to shore up the banking system, they have, for the most part, missed the mark. Long ago, the highly levered global economy transitioned from a banking-dominated regime to one that hides behind securitized lending. The off-bank balance sheet structures such as SIVs (structured investment vehicles), hedge funds, CDOs (collateralized debt obligations) and the like fueled the explosion in asset prices as they levered up the system exponentially. As we are finding out the hard way, no real underlying economic value was being created, other than prices would surely be higher tomorrow, which reinforced speculative non-productive behaviors.

The false promise that rising prices alone create wealth is being unmasked as the de-levering of credit and speculative excesses unwind. The plea from Congress that banks need to start lending fails to recognize that the highly leveraged off-balance sheet bank, the Shadow Bank, is dead. The credit creation in the Shadow Bank was 30- or 40-to-1, versus 10-to-1 for the banking system most of us are familiar with. It is not that the 10-to-1 folks don’t have problems; it is that they simply do not have the capital to restructure all the 30-to-1 junk that is choking the system.

It’s about the capital
Nouriel Roubini, a highly respected economist and chairman of RGE Monitor’s newsletter, has estimated that the charge-offs and write-downs may reach $3.6 trillion before this cycle bottoms out. Bloomberg Financial, which has been tracking these charge-offs, recently reported that the number has reached $1 trillion, or about one third of Roubini’s best-guess number. In October 2008, the Federal Reserve reported that the U.S. banking system had about $1.4 trillion of capital, hardly enough to deal with the massive write-downs Roubini, Goldman Sachs Group and others see on the horizon.

The obvious simple solution is to figure out how to stop asset prices from declining further. Although this has been attempted over the past many months, the seemingly uncoordinated efforts have failed. The TARP (Troubled Asset Relief Program), which explicitly gave the U.S. Treasury the authority and money to purchase assets with the intent of stabilizing prices, instead saw those monies going into the checking accounts of banks. However well-intentioned the program was, it did little to stem the tide in the deflationary spiral, leaving us deeper in debt and virtually in the same position as when the legislation was enacted.

Price stability
In order to encourage investment and spending, we must first have price stability. Asset prices do not need to rise to get the economy moving, nor should we expect that they must. The value of the enterprise over time will be clear and will be priced accordingly. The benefits of price stability encourage investors to take on risk and give lenders the confidence to lend. Rapidly rising or falling prices merely confound and confuse even the biggest risk takers among us and that, in large measure, is why we see return of principal trumping return on principal.

All is not lost, however, as interest rates are down, mortgage re-financings are up and the stock market has attempted to battle back from some very bad economic news. The first half of 2009 is proving tough going. But we are guardedly optimistic that the second half will show signs of stabilizing, laying an important foundation for recovery in 2010. The stock market has its own twisted personality, but if it can move above the October lows the more optimistic we are that better times are ahead.

Pulte Homes - Best of the Best 2009 presented by Ranking Arizona

Best of the Best Awards 2009: Real Estate Residential

Real Estate Residential Honoree: Homebuilders: 12 developments or more

Pulte Homes and the Communities of Del Webb

Pulte Homes and the Communities of Del Webb - Best of the Best Awards 2009 presented by Ranking Arizona

Photograph by Duane Darling

Building on a reputation of quality home construction and commitment to superior customer satisfaction, Pulte Homes and the Communities of Del Webb provides customers a home buying, building and living experience second to none. With more than 90 years of combined experience, Pulte Homes is positioned for success in Arizona with neighborhoods such as Anthem Parkside and Anthem at Merrill Ranch, Bella Via, Stetson Valley, Festival Foothills, Cabrillo Point, Red Rock and Vista at Fireside at Norterra. The company’s Del Webb communities, such as Sun City Anthem at Merrill Ranch, Sun City Festival, Fireside at Norterra and Fireside at Desert Ridge, Solera at Johnson Ranch and Sonora, are known for their unparalleled amenities and programs for residents.

Pulte’s Arizona presence includes two Phoenix divisions and one in Tucson, as well as the Pulte Building Systems Division in Tolleson.

16767 N. Perimeter Drive, Scottsdale
480-391-6000
www.pulte.com

Year Est: 1956
Developments: 89
Principal(s): John Chadwick
Price Range: $100Ks – $800K+


Real Estate Residential Finalist: Architects: Residential

Carson Poetzl Inc.

Carson Poetzl Inc. is a fullservice architectural firm with a rich history and focus dedicated to high-end custom residential architecture. It approaches the highest level of design and service by closely working with builders, interior designers, landscape architects and engineers. It offers a wide range of talents that are represented in designing styles ranging form cutting-edge contemporary to historically accurate. It tailors each project around the clients’ needs and desires, while working to create a blended harmony between the architecture and its surroundings.

7522 E. McDonald Dr., #G, Scottsdale
480-905-1712
www.carsonpoetzl.com


Real Estate Residential Finalist: Nurseries: Plants/Trees

Moon Valley Nursery Inc.

An Arizona native, Les Blake started Moon Valley Nurseries in 1995. Realizing a demand for affordable planting services, Blake implemented the “You Buy It and We Plant It” strategy for marketing trees and plants. The strategy was an instant success. As the volume of sales increased, so did the demand for quality trees. Blake expanded the growing operations to maintain the supply needed to keep up with increasing sales. This promoted a higher level of quality control and increased cost effectiveness. Moon Valley Nurseries has nine Arizona locations, serving all cities in the Valley.

18047 N. Tatum Blvd., Phoenix
602-493-0403
www.moonvalleynurseries.com


Best of the Best Awards 2009 presented by Ranking Arizona

Keith Maio President and CEO National Bank of Arizona

CEO Series: Keith Maio President and CEO National Bank of Arizona

Keith Maio
President and CEO
National Bank of Arizona

Assess the current state of the banking industry in Arizona.
It looks pretty tough. The economic environment is difficult. What we deal with in Arizona is that we have a real estate-dominant economy, so many of the local banks are heavy in real estate lending. And — as we all know and see and live in our homes every day — assessed values and real estate valuations have declined dramatically, and that puts pressure on banks. That’s starting to trickle through to the consumer segment and small business segment. Everybody is feeling impacted. That being said, I would tell you that the banks in Arizona, the vast majority, are highly capitalized. So they’ve got the capital base to weather the storm.

In terms of the storm, are you seeing any light at the end of the tunnel?
I haven’t seen the light yet. I know it’s there, but I haven’t seen it yet.

How has the turmoil at the nation’s largest banks affected Arizona-chartered banks?
I think it’s a little bit anecdotal in nature. Some of the problems that the big banks feel are not felt directly by the more local, Arizona banks. Local banks tend to be a little higher capitalized, which is a good thing, and their exposures are more direct-lending exposures versus securities investments and off-balance sheet vehicles.

At the end of the day it’s all about credit contraction, so it impacts people different ways. But the local banks are more direct lenders, so it’s what happens directly in their market.

Do you think that’s a positive thing?
I think it’s a positive thing, other than the fact that we have been impacted so badly in Arizona relative to the rest of the country. So that makes it tougher. But at least when you have direct exposures, you are able to assess on an individual basis what that exposure is.

We are hearing more about the role off-bank balance sheet structures have had in the sharp decline in capitalization among the larger national banks. What type of exposure to such off-bank balance sheet structures do local banks have?
Local banks don’t have much exposure there, and what it allows those banks to do is to assess their risk on a transaction-by-transaction basis, rather than market valuations on pools of securities. So it’s a little easier to assess their risk. Local banks have a little bit more capital to weather the storm, but their exposures on the lending side tend to be a little bit greater than the large national banks.

What challenges and opportunities does the current financial crisis hold for local banks in general, and National Bank of Arizona in particular?
Having been through this before, I think there is an opportunity — and as a CEO you’ve got to always look at the long run, not just the short run. You need to manage what we’re all in the middle of today, but you need to keep an eye on the long run. In getting through this, these tough times actually make people and good organizations better. You’ll learn, ‘What could I have done better before,’ and people who want to improve will improve.

Organizations that can improve end up much better off in the long run. And generally, anytime you have a market disruption — which this is — there’s turmoil in the market and there’s disruption. However, over the long run it presents market-share opportunities to banks. I think that’s an opportunity a lot of us have in the long run — to resettle what the market shares look like at the end of this. For the survivors, it’s a very good thing.

At the end of the day it’s all about credit contraction, so it impacts people different ways. But the local banks are more direct lenders, so it’s what happens directly in their market.

Do you think that’s a positive thing?
I think it’s a positive thing, other than the fact that we have been impacted so badly in Arizona relative to the rest of the country. So that makes it tougher. But at least when you have direct exposures, you are able to assess on an individual basis what that exposure is.


We are hearing more about the role off-bank balance sheet structures have had in the sharp decline in capitalization among the larger national banks. What type of exposure to such off-bank balance sheet structures do local banks have?

Local banks don’t have much exposure there, and what it allows those banks to do is to assess their risk on a transaction-by-transaction basis, rather than market valuations on pools of securities. So it’s a little easier to assess their risk. Local banks have a little bit more capital to weather the storm, but their exposures on the lending side tend to be a little bit greater than the large national banks.

What challenges and opportunities does the current financial crisis hold for local banks in general, andNational Bank of Arizona in particular?
Having been through this before, I think there is an opportunity — and as a CEO you’ve got to always look at the long run, not just the short run. You need to manage what we’re all in the middle of today, but you need to keep an eye on the long run. In getting through this, these tough times actually make people and good organizations better. You’ll learn, ‘What could I have done better before,’ and people who want to improve will improve.

Organizations that can improve end up much better off in the long run. And generally, anytime you have a market disruption — which this is — there’s turmoil in the market and there’s disruption. However, over the long run it presents market-share opportunities to banks. I think that’s an opportunity a lot of us have in the long run — to resettle what the market shares look like at the end of this. For the survivors, it’s a very good thing.

    Vital Stats





  • Executive vice president, Zions Bancorporation, parent company of National Bank of Arizona
  • Joined National Bank of Arizona in 1992
  • Has served as president since 2001; appointed CEO in 2005
  • Current chairman, Arizona Bankers Association board of directors
  • Bachelor of Arts, University of New Mexico; graduate, Pacific Coast School of Banking
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.

Homebuilders Refining Their Services

In light of the economy’s condition, homebuilders are refining their services to meet the needs of their customers.

The Valley’s housing market continues to ride real estate’s proverbial wave, sometimes enjoying the crest, and right now just trying to survive the trough.

While the current down market isn’t good for homebuilders, it is providing homebuyers higher quality and stronger customer support to go along with the lower prices.

“Salespeople were in an order-taking mode for 10 years,” says Paula Sonkin, vice president of the real estate and construction industries practice at J.D. Power and Associates.

During the housing boom, Sonkin says homebuilders were unaccustomed to servicing the client beyond the initial point of sale. Now they are recognizing the importance of negotiating and developing relationships — new skills they have to learn as customers demand more sophisticated service.

Since a salesperson’s ability to meet clients’ changing needs generally has been subpar, homebuyers are turning to construction managers and on-site project managers who have become exponentially more important over the last year, Sonkin says.

“It’s a huge opportunity for builders, who are making sure construction managers have the people skills to communicate with the homebuyer,” Sonkin says. “Now builders and construction managers are having regular meetings with salespeople. We know the role of the salesperson has changed.”

Another example of how the slow market is good for buyers is better quality of construction. The J.D. Power and Associates 2007 New-Home Builder Customer Satisfaction Study was recently released and shows an increase in home quality since 2006. Sonkin says that’s partly because builders are constructing fewer homes, so they have more time to fix problems before the buyer moves in. According to the survey, satisfaction among homebuyers has remained high in Phoenix and across the country. Phoenix’s overall average for customer satisfaction is 107, while the national average is slightly higher at 111.

The survey shows these four builders rank first in the Phoenix market in their respective categories:

  • Overall Customer Satisfaction: Centex Homes
  • New-Home Quality: Trend Homes
  • New-Home Design: T.W. Lewis Company
  • Mortgage Originator: CTX Mortgage (serving Centex Homes)

The global marketing information services firm annually surveys people who have purchased new homes in 34 markets nationwide. The 2007 study ranks only new homebuilders who closed 150 homes in the 2006 calendar year and whose buyers submitted at least 50 usable surveys about the builder. The Valley, Sonkin says, is a highly competitive market because there are more homebuilders here than in most other places.

“If you think buying a car is a big deal, let’s talk about building a home,” says Sonkin, relaying what J.D. Power III told her 13 years ago as he was on the cusp of embarking on a new business endeavor.

“We did nothing but our homework for two years,” she says, explaining the company set out to uncover what needs existed in the homebuilding industry that the firm could help meet. As it turns out, there was significant need, and the J.D. Power and Associates New-Home Builder Customer Satisfaction Study was born. Builders can purchase the full-length version of the survey, which comes with complimentary consulting services provided by J.D. Power and Associates. Now in its eleventh year, the survey provides current information to industry leaders.

“(The study) is designed for J.D. to work with builders to better (their business),” Sonkin says, adding that the company oftentimes helps builders differentiate themselves from competitors on quality or design. “Our goal is to raise the bar in terms of customer satisfaction with consumer benefits.”

Centex Homes-Arizona started purchasing the survey four years ago.

“The (J.D. Power and Associates) brand is recognized by consumers as credible. The information captured in the survey is terrific,” says John Michell, president of the Arizona division of Centex Homes. “It validates some of the things we have worked so hard to achieve, and it puts a spotlight on areas where we still have opportunities to delight our customers. The team at J.D. Power gives suggestions on ways to improve customer service and training we provide our employees.”

Tempe-based T.W. Lewis Company, which ranks first in new-home design, does not purchase the study because it employs its own third-party surveyor, Woodland O’Brien & Associates, to poll its buyers and provide monthly feedback.

Still, T.W. Lewis Company President and Chief Operating Officer Kevin Egan says J.D. Power’s study has much to offer.

“(The study) would probably be beneficial to a homebuilder that rated poorly or one that lacks sophisticated survey systems,” Egan says. “The biggest value in the J.D. Power survey results is it validates what we’ve been doing, which is designing homes that fit our buyers’ needs and lifestyles.”

Fore more information on the companies mentioned,  please visit the corresponding websites:

www.centexhomes.com/phoenix
www.jdpower.com
www.twlewis.com

buyers market

Real Estate Companies Are Seizing Opportunities During The Bust

With dark clouds hanging over the country’s economy and property prices tumbling, many people consider the idea of buying real estate absurd. Yet Valley real estate experts contend right now is the best time to buy.

Jeff Pavone, principal of Commercial Plus in Scottsdale, says smart, experienced commercial real estate investors only buy property when the market is down and no one else is buying. Buyers today are sophisticated, have cash and are looking to pay a good price for quality, he says.

“A year ago everyone could buy real estate and get financing,” Pavone says. “But today, it’s only qualified buyers with a strong portfolio, which puts the buyer at an advantage.”

In spite of economic hurdles, Commercial Plus is still closing deals weekly and getting financing done for clients. It recently closed a deal on a property on Seventh Street and Camelback Road that sold for 20 percent less than last year. Pavone says the buyer was qualified to close, so he obtained 80 percent financing and closed right away.

UTAZ founder Craig Willett says his company stopped buying properties four years ago because prices were too high. Now they are back in the game and in negotiations to buy a number of parcels near hospitals in the Southeast and West Valley. UTAZ specializes in developing professional office villages for small businesses. Since many small business owners have a hard time getting financing, UTAZ offers a lease with option to purchase. Willett says that model used to be 15 percent of the company’s business, but is now 45 percent.

“Leasing with the option to purchase makes a lot of sense in today’s market,” Willett says.

Pollack Real Estate Investments in Mesa is also buying again after taking a three-year hiatus. Founder Michael Pollack is shopping around for multiple commercial properties from single sellers in California, Arizona and Nevada. The company’s focus is redevelopment and renovation projects. Pollack Investments currently owns, operates, manages and leases its own portfolio of more than 100 commercial and industrial properties in California and Arizona.

“Investors are getting more for their money right now than a year or two ago, so it’s a good time to buy,” Pollack says. “But it’s harder to get loans unless you have good credit and put down more money, which I support wholeheartedly.”

Pollack says great buys exist today on land in Arizona and in all sectors of real estate. However, buyers need to look hard for quality opportunities and analyze the numbers, since many sellers want the same price today that they could have gotten three years ago.

“We put a property in Mesa up for sale a couple months ago and sold it the same day,” Pollack says. “So, if a property is priced realistically and reflects the conditions of 2008, it sells.”

Local experts agree that residential property is also a good investment right now, especially homes being sold by banks and by homebuilders forced to sell standing inventory. Greg Vogel, chief executive officer of Land Advisors Organization, says many of these properties are back to pre-boom prices, so they’re a real bargain.

Phoenix-based investment firm Najafi Companies bought Trend Homes in June for $86.5 million. The deal allowed the homebuyer, which reorganized under Chapter 11 bankruptcy, to grow and expand its Valley operations. CFO Tina Rhodes says Najafi is committed to homebuilding in Arizona and looks to invest in companies with strong management teams and long-term potential.

Paradiso Development Corporation is moving forward on development plans for Paradise Reserve, a 40-acre, exclusive, luxury residential enclave bordering the Phoenix MountainPreserve on Lincoln and 40th Street in Paradise Valley. The desert retreat has 14 hillside estate lots ranging in size from one to three acres. Lot prices are $2.7 million to $5.4 million.

“The 14 lots at Paradise Reserve are the crown jewels of our project,” says Scott Schiabor, principal of Paradiso Development. “They are rare and unique, and that will help maintain their value and attract investors. A big part of our market is also immune to economic changes, so while we expect some downturn due to the economy, based on the rarity of the lots, location and our target market, we expect sales to go extremely well. For many people it is still a good time to buy real estate and make quality investments.”