The current state of the Phoenix commercial real estate market can be viewed from two sides. The reality is that we are still pushing through, so to speak, amidst a haze of foreclosures, bank take-backs and monetary defaults.  But through the fog, there is a silver lining in the form of good old-fashioned opportunity.

As REO properties flood the market, there is one truth that has emerged that brightens the hearts of real estate buyers:  The Phoenix market, already a fantastic place to live and do business, has become affordable again.

In This Ring: Investors vs. Owner-Users

Demand is on the rise for all distressed property types in the Phoenix market, based primarily on competitive pricing.  Buyers are ready to invest, and there is an enormous amount of money chasing opportunities in the Phoenix market.  This leads to a highly competitive buying pool where investors and owner-users duke it out over attractively priced distressed properties.

Recently, owner-users have thrown some of the proverbial winning punches, sometimes beating out investors in distressed sale opportunities.  On the other hand income-producing multi-tenant properties remain competitive amidst investors.  This competition is a good sign for the market as a whole, as it is pushing winning bidders into shorter due diligence and closing periods, which moves deals through the market faster.  This positive activity will continue for the next few years, as distressed properties move their way through the system.

The bottom line:  When the price is right, buyers are interested.

Local Businesses: Things Are Looking Up

The recent rise in demand has had a positive impact on the Phoenix business community.  Companies know that now is a good time to buy and lease, taking advantage of current low occupancy costs.  With that in mind, many companies are moving into the Phoenix market, while some other local businesses are absorbing customer base from failing competitors, resulting in local expansions.

In many cases, investors are making deals now which will help local businesses to lease space affordably moving forward.  In the past year, Voit’s Phoenix office has closed a number of large transactions for investors, encompassing all product types.  From land to retail centers to office properties, to a 57,000 square-foot multi-tenant flex project which was acquired as a value-add upon purchasing the distressed note from a special servicer.  In most cases, the investors will be able to deliver these properties to local tenants at competitive lease rates.

Other notable businesses that are taking advantage of today’s affordable Phoenix market include Dick’s Sporting Goods, which is developing a 600,000 square-foot build-to-suit, as well as Amazon.com, which expanded its footprint over the past 24 months in the region by leasing more than two million square feet.

Each of these transactions directly benefits companies throughout the Phoenix market, bringing business opportunities to local architects, engineers, contractors, brokers, and more.

But large corporations are not the only beneficiaries when it comes to the affordability of today’s market.  Local “Mom and Pop” owner/operators are buying buildings at low prices and renovating them.  In addition, SBA financing is readily available from many lenders, offering small business owners an opportunity they may not have had in prior markets:  the chance to own their own space and control future costs.

The Flip Side: Why Local Bank Failures Help The Market

One area of the market that has demonstrated immense improvement in the past few months is the ability to complete real estate transactions.  For a portion of the downturn many companies had difficulty closing deals, but the market has begun to move again, allowing local businesses to relocate and expand.

Some of this new movement may be attributed to the various mid-sized local and regional banks which are failing in the Phoenix market.  While bank failures may appear negative on the surface, these failings actually begin a ripple effect that helps the real estate market.  When a bank fails, it is marketed by the FDIC to be purchased by a healthier bank, which is in a better position to work through distressed assets and bad loans – actions which help move real estate deals forward.

In addition, banks are now able to complete loan-to-value assessments that are based on distressed pricing.  When the market was stagnant, there were very few transactions closing, so banks had no comparable sales to consider when completing appraisals.  Now that real estate transactions are moving again, banks can more easily create valid appraisals based on sales comps from recent deals.

At the same time, banks and life insurance companies are all starting to place more debt in the marketplace. As financing becomes more readily available, transaction activity in the local real estate market will flourish.

What’s Next For the Phoenix Market?

The outlook for the Phoenix commercial real estate market is positive.  There will be a continued supply of distressed properties which will hit the market over the next two to three years as CMBS loans come to maturity and banks work out the properties on their books.  Buyers and tenants will enjoy an affordable Phoenix market for the next few years.

Darren Tappen is Senior Vice President of Voit Real Estate Services.