Arizona’s economic strength and growth the next 100 years depend on the creation of new buildings, commercial development and new infrastructure
A high-speed train between Phoenix and Tucson. Toll roads on I-10 and I-17. A new shopping mall. Three outlet centers. A major development in West Phoenix. New casinos.
Solar manufacturing plants. A light rail that extends from Phoenix to Gilbert. A new interstate — I-11 — linking Phoenix and Las Vegas. State-of-the-art sports facilities.
Reality or wish list?
As Arizona looks ahead to its next 100 years, the future of the commercial real estate industry hinges on new infrastructure to keep the state’s economic engine churning while meeting the demands of a growing population.
Since the recession unloaded on the commercial real estate industry in the mid 2000s, it’s been an uphill climb for those in the industry, including general contractors, architects, engineers, subcontractors, developers and brokers.
“We will see a population shift to urban areas with a focus on transit- oriented development,” predicts Bryan Dunn, senior vice president at Adolfson & Peterson Construction. “Commercial property will need to be re-purposed into alternate uses due to the glut of vacant space in the real estate market.
“We will need to find creative ways to own and operate buildings in the future. There is a growing demand for public/private partnerships for municipal and educational facilities, similar to what has been done in Europe,” Dunn says.
AZRE Magazine asks some experts in commercial real estate how they see the industry changing in Arizona over the next decade and beyond. Here are their responses:
Planning and Development
“In the next 10 years, Arizona will finally adopt Tax Increment Financing (TIF) to remain competitive in the business world. The new normal is for less reliance on homebuilding as a jobs industry. Two more high rise office buildings with mixed uses on the lower floors will be built in Downtown Phoenix. In the next 100 years, high-speed rail
will run between Phoenix and Tucson in the Sun Corridor and a new, man-made lake/reservoir will be created north of Phoenix to collect upstream snow melt and serve the needs of Metro Phoenix.”
— Jon Froke, Planning Director, City of Glendale
“During the next 10 years, smaller developments that require less off-site infrastructure and result in lighter commitments from homebuilders are likely. Infrastructure requirements/costs will be lower and financial commitments will be smaller, both of which are desirable to financiers and homebuilder shareholders recovering from the recent downturn.
“In the next 100 years, development and homebuilding will undergo some of the most rapid changes ever. In Metro Phoenix and the Tucson area, densities will undoubtedly increase dramatically; we will grow upward rather than outward, as large metropolitan areas eventually do. The materials builders use will change dramatically, looking and feeling different. There will be stronger and lighter materials. Although hard to imagine, many unique, innovative homebuilding products that will be used the homes of the future have already been developed, we continue to wait for them to be rolled out to consumers.
“The continued development of solar technologies is going to have huge impact on all types of commercial development in Arizona. Imagine buildings – retail, office, industrial, homes – not needing to be hooked up to the grid because they produce all of the energy necessary for their usage. The development of “net-zero” facilities in this market, where sun is plentiful, will have a dramatic positive effect on Arizonan’s lives.”
— Jim Belfiore, President, Belfiore Real Estate Consulting
Brokerage
“The beginning of the change is going on right now. The exchange of ownership has and will have an impact on our industry in the next 10 years. In the RTC days it took about 15 years to fully recover, this current cycle will take 5-7 years to process all of the inventory and for the next wave of owners to re-trade the properties. Banks, special servicers and the FDIC will be in charge of real estate for the long term and all of the assets that are currently under their control won’t make it back into private hands in total for 10 years.
“The medical use of retail space will be in full force, everything about this makes sense, retail buildings, namely big box spaces, have the power, the lower rents and the parking already in place to handle a medical user. This will create truly mixed-use locations.
“Internet sales fulfillment centers will hit a critical mass, even if and/or when the state begins to charge them sales tax, even at a much lower rate. Phoenix is well located, we have a growing economy and it makes a lot of sense that those are now starting to pop up here.
“In the next 100 years, buildings will be far more energy efficient, materials to build buildings will be so much more advanced than we can even imagine. In commercial buildings, there will be more bodies per square foot, more technology, less employees, smaller office size requirements. Thousands of new businesses will be created.”
— Pete Bolton, Managing Director/Executive VP, Grubb & Ellis
“Real estate growth over the next decade will be far more restrained than in the boom period in the 10 years before the onset of the recession. During that time, commercial property inventories routinely expanded by anywhere from 3% to 5% annually, driven by growing tenant demand for space and rents that steadily pushed higher. A return to that environment is unlikely anytime soon.
“Forecasting out over the next 100 years presents a pretty daunting challenge … but all of the demographic trends show Arizona will remain a growth market over the next century and population growth will spur demand for both commercial and residential real estate. Beyond demographics and quality of life factors, we believe global economic patterns will support growth in Arizona.”
— Bob Mulhern, Managing Director, Colliers International
Architecture
“The design and construction industry needs to be at the forefront of determining how Arizona is developed over the next 10 years. We need to take a hard look at the lessons learned from the past 10 years regarding unconstrained growth and sprawl, as well as from the positive developments of renewed urban focus, comprehensive transportation and development plans, and increased integrated project delivery partnerships.
“Architects have the responsibility for shaping the built environment that we all experience on a daily basis and need to ensure that built environment is increasingly sustainable, functionally practical, and aesthetically pleasing. Through technological advances and communication outlets, AIA architects will be continually educating ourselves about, and be more globally aware of industry trends and improvements that can be applied locally, so that Arizona becomes the ideal place to live, work, and play. In addition to increasingly becoming the leading stewards of our built environment through sustainable design and comprehensive planning, You are going to see an increasing significance in the role the design industry plays in the overall development of our communities.
“The industry will partner much more with government and lines will be blurred in community planning, design review, and construction inspection. Public-Private Partnerships and Integrated Project Delivery methods will become the norm, and the design and construction industry will have much more at stake in what they develop beyond their immediate financial compensation.”
— AIA response from Patrick Panetta, ASU; and Chris Knorr, SmithGroupJJR
“All industries, including commercial real estate and architecture, will need to continue to evolve and adapt to emerging technologies. Specifically in the fields of alternative energy and sustainability. I believe the next few years of those 10 years a lot of attention will need to be spent on repurposing existing buildings and facilities. We will obviously need to remain flexible to adapt to the process of becoming stabilized.
“Because technology and technological advances are changing at an exponential rate, I think the next 100 years is beyond reasonable comprehension. Who would have thought 100 years ago that we would be where we are today. However, architecture and real estate haven’t significantly changed over the past 100 years, but we also have not had the multiplying pace of technology at our disposal. Who knows, things like tele-transporting may be a reality over the next century, which of course would drastically change architecture and commercial real estate.”
— Patrick Hayes, President and CEO, PHArchitecture
Legal
“For approximately the first third or half of the next 10 years, commercial real estate will need to focus on absorption and modification to meet current needs of those projects that resulted from overbuilding during prior ‘blow and go’ times in our industry. Creativity and cost-effective adaptation will be needed to recast non-performing or under-performing commercial assets into assets that can meet the needs of current real estate users. As an example, big box retail spaces that have gone dark will need to be adapted and converted into creative uses to accommodate smaller and even different users. Cities and counties may need to modify their zoning to allow for a broader variety of uses that will meet the needs of today’s users.
“One hundred years is a long time and it is difficult and somewhat speculative to attempt to predict what changes will most impact Arizona over such a long time period. However, I suspect that big box retail will downsize as Internet shopping grows over the many years to come. I also suspect that growth in Arizona will have to adjust to demands upon the availability of water and our entire culture will eventually take on a more serious and long-term water approach to and conservation.
“Arizona will need to adapt its economy to more self-sustaining business that is not so dependent upon growth and real estate development. Thus, over the next 100 years Arizona will need to modify its tax and development schemes to accommodate more industry and manufacturing. Finally, Arizona will develop more political clout in Congress and the federal government as its population grows and the state’s economy continues to mature.”
— Don Miner, Director, Fennemore Craig PC
Construction
“The impact construction will have in Arizona over the next 10 years will start with job creation. As the market comes back, the industry will be a leader in putting people back to work. We will need people to fill both direct construction jobs, and jobs that are indirectly related to construction. Every $1B spent in construction results in a total of 20,000 direct and indirect jobs. These jobs will help the middle class, the hardest hit in the last few years in terms of job loss.
“Construction is one of the top five industries nationally, and by then (10 years from now) it will be back among the top five industries for Arizona. Finally, the use of public/private partnerships will increase to meet community needs for amenities, infrastructure and growth.”
“Also, in Arizona, construction will be essential in reshaping the suburban landscape of our past into the more blended and integrated urban and semi-urban environment for the future. We are seeing new demographics that have families from multiple generations that live under one roof, and this factor along with other market forces will increase density in the mixed-use urban environment.”
— Eric Hedlund, Executive Vice President and COO, Sundt Construction
Finance
“Financing will always be a key part to Arizona’s growth. How products and services will be delivered will continue to evolve. As the market heals more competition enters into the marketplace thereby giving more investors access to capital. Assuming the economy has healed and is robust, I see a lot more choices for investors, developers and consumers in the next 10 years when it comes to the availability of financing.
“In the next 100 years? The market will always go up and down and therefore there will be more boom and busts as the decades roll forward. The difference in the future is access to information becoming more available than previous decade. The speed of that information will cause market trends to shift faster. Volatility could be more frequent.”
— William L. Spart, Senior VP, Wells Fargo Bank-Real Estate
