By Melissa Bordow
In real estate, as in love, beauty is in the eye of the beholder. So when you ask major players in the Valley’s office-condominium market how attractive it is, you’ll get wildly divergent answers.
On one hand, brokers, bankers and economists can tell you what the numbers say: Office-condo sales have lost velocity, slowed by a struggling housing market and banks that have reined in credit to commercial and residential borrowers.
On the other hand, you have developers who know that even during slow economic times, there always is growth on the Arizona horizon. They see beauty in the Valley’s long-term prospects and say they are committed to a long-term relationship.
Growth that occurred three years ago during the freewheeling days of the housing boom, they say, has produced enough roof tops in far flung areas of the Valley to still require their services.
What happened
Four years ago, office-condos were an up-and-coming niche market, and real estate advisory firm Grubb & Ellis touted Phoenix as “the office-condo capital of the nation” in a survey of 41 cities. With plenty of property available and under construction, Phoenix was “ground zero” for office-condos, according to the survey.
Today, construction has slowed and transactions are down, figures compiled by commercial brokerage firm CB Richard Ellis show.
“It’s kind of like a bouncing ball, what goes up must come down,” says Kelley Ahrens, a director in the brokerage side of CBRE’s office-condo division. “It’s down now, but like a ball hitting cement it will bounce back up.”
According to CBRE’s figures, between 2005 and 2006, developers added 3.69 million square feet of office-condo space for a total of 10.93 million square feet.
Calculations show absorption that year was about 3.3 million square feet. By the fourth quarter of 2007, with 2.63 million more square feet added, absorption was 1.4 million square feet. By the second quarter of this year, only 360,000 square feet was added to inventory, with about 330,000 square feet sold.
Figures from commercial brokerage firm Lee & Associates show the vacancy rates are hovering around 29 percent in the East Valley and 24 percent in the West Valley. Scottsdale vacancies are at 17 percent.
“Is the market overbuilt? I would consider it overbuilt, but not grossly,” says Andrew Chaney, an associate at the firm. “You need to get that vacancy number down close to 12 (percent) or the mid teens before you get people excited to build.”
Developers and brokers say less activity is due in part to banks tightening credit and underwriting requirements.
“It’s just harder to come by capital,” Ahrens says. “Developers still believe in the office product. It’s getting someone on the financial side to believe in the product.”
Valley bankers, on the other hand, say they are willing to lend, but potential buyers must show they have a viable business plan with enough potential earnings to withstand the economic downturn.
“If I have a real good, strong buyer, I’m going to finance that office-condo,” says Kevin Kinerk, vice president of Western National Bank.
There simply is not the same demand, as many small businesses that bought office-condos were affiliated with the construction and housing industries, Kinerk says.
“The last thing they’re going to do right now is buy a piece of real estate,” he adds.
In the last six months, Kinerk says he’s approved financing for 20 office-condos, about half of what he approved in the first six months of 2007. Valley wide, transactions dropped from 410 in 2007 to 130 in the first two quarters of this year, according to CBRE figures.
Troy Toolson, vice president of Valley Capital Bank in Mesa, agrees that well-established businesses that meet due-diligence requirements should be able to get a loan. Startups, though, may have a tougher time.
“We’re really positive about office condos, particularly end-users, right now. It’s just the tough economy. People are a little gun-shy right now, but there are loans available,” Toolson says.
Bob McGee, president of Southwestern Business Financing Corporation, a nonprofit corporation that partners with banks to administer Small Business Administration loans to commercial borrowers, says conventional lenders are analyzing businesses more closely and asking for more equity, historic cash flow and cash flow to debt service.
Location, location, etc.
Office-condo developments that were strategically placed and well constructed still are luring small business owners who want to own their own space.
Sales are occurring in areas where housing is built-out, but necessary amenities have yet to reach, developers say.
“It’s a good time to be strategically aggressive,” says Terry Tobey, senior vice president of business development for UTAZ. Pinal County and Queen Creek, she says, are prime locales for office-condos designed for the professional doctor, dentist or insurance agent.
“Not everyone is in a recession,” Tobey says. “There is no recession for death and taxes and health. People still need to go to the doctor.”
And they would prefer to do so, she says, close to home.
The medical end of the office-condo market has held up better than most, Tobey says, and UTAZ has projects under construction across from the Banner Ironwood Hospital under construction at Combs and Gantzel roads in Queen Creek, and Mercy Gilbert off the 202 Freeway and Val Vista Drive, among others.
“We’ve always picked great locations and we are still getting people wanting to purchase,” she says.
Siting an office-condo well is the key to maintaining sales, agrees Steve Beck, a vice president at COBE Development.
COBE does extensive research on an area’s demographics,schools, hospitals, traffic patterns, freeway systems, and potential growth before building. That has helped thecompany absorb 20,210 square feetthis year, says T.J. Zaharis, vice president of sales and marketing, an increase of 50 percent from 2007.
“As the market has its ups and downs, location will always pull you through,” Beck says.
www.cbre.com
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