A look at the decade ahead for commercial real estate - Phoenix Business Journal:

A look at the decade ahead for commercial real estate - Phoenix Business Journal:

by Chris Casacchia Phoenix Business Journal Friday, March 26, 2010

The next decade in commercial real estate likely will end on a high note as the Valley continues the boom-and-bust cycle that defines our economy — but it will be a rough road to recovery.

Similar to the resurgence of the 1990s, when excess supply led to lower pricing, the market is expected to normalize by mid-decade. But that won’t happen until soured real estate deals, buoyed by poor decisions and free-flowing liquidity, “cascade and drive commercial prices down in excess of 50 percent, similar to what we have witnessed in the residential sector,” said Christopher Toci, executive director of the capital markets group at Cushman & Wakefield of Arizona Inc.

Office vacancies, which currently stand at more than 20 percent, may take four to five years to return to normal historical medians, in the 5 percent to 8 percent range.

“We could top 30 percent before it flattens out,” said Sonoran Bank President Jim Vigars.

He expects the industrial sector to recover first, because it wasn’t overbuilt. He also foresees a rebound in single-family housing, followed by retail, which will depend on consumers coming back locally and nationally.

“It’s going to take the rest of the country to recover before Arizona is going to have a major recovery, because we’re still reliant on construction and people moving here,” Vigars said.

New opportunities, challenges
While vast commercial real estate vacancies continue to hurt the Valley, they also create opportunities to attract companies and investors that can take advantage of bargain-basement deals.

Over the next several years, as the credit market stabilizes and vacancies fill, developers will once again start new construction in Phoenix, said Susan Hyatt, project manager in the city’s Department of Community and Economic Development. She doesn’t expect today’s office and residential condo vacancies to be among the challenges facing the region 10 years from now.

“Our challenges at the end of the coming decade for downtown Phoenix will be continuing to create more dense development; keeping prices of office, retail and residential space affordable; and ensuring that downtown Phoenix remains the vibrant urban center of not only our city, but the entire region,” she said.

That’s a tall order, considering the lack of entertainment and retail options downtown and the fierce competition from Tempe, Scottsdale and Glendale to create their own “urban” destinations.

Tempe’s urban draw
“Tempe still remains the best place for urban development to continue and the likeliest place it will pick up again,” said Tempe Mayor Hugh Hallman.

The college town underwent a resurgence in the past decade with the Rio Salado project at Hayden Ferry Lakeside, the renovation of Papago Park and the development of the Metro light rail.

However, the East Valley city has plenty of challenges to address in the next decade — and they can be seen from miles away.

Centerpoint on Mill, developed by DMB Associates Inc., has been a disaster. Its two main towers, primarily residential space with minor retail components, are unfinished — a glaring example of hyped-up promises made during the boom days and liquidity shortages in the financial crisis. Hallman would like to see the stalled project remain off the market for a year or more until the economy recovers.

“Because a project goes into bankruptcy, it doesn’t suddenly have to be torn down,” he said.

Optimism in West Valley
Brian Friedman, economic development director for the city of Glendale, said it’s difficult to predict the future, “but it’s fair to say the next couple of years will be challenging for Arizona.”

However, he is optimistic the West Valley suburb will emerge from the downturn in position to take advantage of the market when it turns. In the past year, the city has landed 10 new projects, creating more than 1,400 jobs. In addition, four companies are expanding operations in Glendale, creating 400 jobs.

Conair Corp.’s purchase of KB Toys’ 619,000-square-foot warehouse in the Glendale Airpark was one of the largest industrial real estate transactions in the Valley last year. Conair, which owns the Cuis­in­art brand, now has more than 1.2 million square feet under its roof — roughly the area of Arrowhead Towne Center, which also acquired several new tenants.

Friedman said industrial space at the airpark is gaining interest.

“I predict that in this decade, we will see the western portion of the Loop 101 area, including the Glendale sports and entertainment district and Glendale Airpark, emerge as a major employment center in the Valley,” he said.

Another population bubble
Craig Henig, senior managing director of the Arizona region at CB Richard Ellis, said the Valley’s population — stagnant for the past few years — will return to growth mode in the next three to five years, spurring employment and optimism.

“This optimism will spark renewed business expansion and a new emphasis on emerging technologies, sustainability, health care and aerospace, which will lead us out of this current situation and serve as an economic foundation for the future,” he said.

In the past decade, Phoenicians watched a booming real estate sector hit unsustainable highs followed by treacherous lows, marked by record foreclosure rates, plummeting home values, the decimation of entire industries reliant on building, and a credit freeze in the desert.

This cycle will likely repeat itself in the next decade, experts say, but it won’t be nearly as dramatic, deep or widespread, Vigars said.