Phoenix-Area Commercial Real Estate

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A new survey of real estate brokers shows that the Phoenix-area commercial real estate market is shaky, but improving. Mark Stapp, director of the Master of Real Estate Development program at the Arizona State University W. P. Carey School of Business, will discuss his survey.

Ted Simons: All new survey of real estate brokers shows the Phoenix area real estate market is slowly improving. For details we spoke with Mark Stapp, who directs the master of real estate development program at ASU's W.V. Carey school of business. Mark, good to have you here. Thanks for joining us.

Mark Stapp: My pleasure.

Ted Simons: The current state of the commercial real estate market in Phoenix is --

Mark Stapp: Shaky but optimistic.

Ted Simons: What does that mean?

Mark Stapp: You know, we see signs of recovery. We're making progress. But there are systemic issues in the economy that make the situation not quite so certain. So real estate is symptomatic of the over all economy. You see segments in the commercial market that are positive but because there are so many remaining issues in the economy with employment, changes in the retail industry, the changes in our population makeup, those kinds of things make it uncertain.

Ted Simons: Is this specific to Arizona or other regions seeing the same thing?

Mark Stapp: Some of them are seeing the same thing. I think we have a particularly difficult recovery that has occurred. We're not seeing growth in areas we have historically seen it in with defense, aeronautics, microelectronics, things of that nature. We're seeing growth in other areas like biomedical and medical. But some of our traditional areas of employment we're not seeing growth.

Ted Simons: Why are those areas not seeing accelerated growth? What's happening out there?

Mark Stapp: Some of them have to do with changes in spending on a national level. Some of it has to do with shifting segments of the economy. Some of it has to do with our own growth issues. We are not some of the other metropolitan areas. We're having continued difficulty in -- not just driving jobs but driving higher wage earning jobs. That does things like support retail, arts, culture, things of that nature.

Ted Simons: You said slow growth approaching a tipping point. What does that mean?

Mark Stapp: We have been in recovery mode for quite a while. The good news is we weren't building that much new commercial space. So the growth we have seen has been absorbing within the marketplace generally. We have seen some new development which is really the result of either specific tenants so they are buildings being developed specifically for one tenant much like with state farm in Tempe. Yet there's other product that's obsolete and may not really be suitable for this changing economy.

Ted Simons: You mentioned state farm. Obviously things are happening down in Tempe along town lake. Where are the hot spots for commercial real estate? Where are the not so hot spots?

Mark Stapp: You know, so hot spots obviously Tempe has seen a lot of attraction. We're beginning to see growth in places where we want to see growth as a mature metropolitan area. So that's infill development. People rail on us for being a St. Paul capital of the world which we are not really, it's a misnomer, but the fact that we're seeing a lot of growth call it inside the loop is a very positive for us. I think some of it is a result of the cost of growing on the periphery now. There's not a strong enough residential growth market to support growth in the periphery. But we're also seeing a desire to be a little more transit oriented. So you're seeing a lot of development around transit line which is a reflection of really good public policy and infrastructure investment from many years ago.

Ted Simons: Let's go to some of the rubrics in your report here. You mentioned home land prices, what are you seeing?

Mark Stapp: You know, they are fluctuating. The home building industry is still trying to figure out what to do. It's not very strong. Until we figure out on a national level what we're doing about lending and what the public policy is going to be regarding lending and the restrictions on banks, it's probably not going to be very strong. I don't see interest rates going up quickly.

Ted Simons: Homebuilders still buying land?

Mark Stapp: Yes but being very particular where they are buying it. It's not that there's no home building but it's again very much focused on infill. We see some in the southeast valley, some in the northwest valley.

Ted Simons: Interesting. Apartments. What are you seeing as far as vacancy rates and rents?

Mark Stapp: So here's the thing. We have seen a lot of apartments under construction the last year or two. The pipeline is even bigger than what we have seen. I think that that's positive. We may see another six to 8,000 units coming online in the next year and a half, two years as these other projects get under way. That I think is good because that additional absorption of space will keep rental rates down. Keep downward pressure on them. We have not had the wage growth as I mentioned which means affordability becomes a really big issue for us. So we get more units in the marketplace it's going to help keep rents affordable.

Ted Simons: As far as big box stores, vacancies, rents, what are you seeing?

Mark Stapp: We don't see a lot of positive news fort big box retail space. You've seen a lot of that space converted to other uses over the last five, six, seven years. Retailing itself is going to a tremendous dynamic change with what they call Omni channel retailing. Both online and mobile retailing. In technology, footprints getting smaller. Distribution outlets changing. Retail industry is changing quite a bit.

Ted Simons: Sounds like a tenant Mark to me.

Mark Stapp: I think it is a tenant market for sure in some areas you see that the case. Yet you see places like Scottsdale fashion, which are still very dynamic and very much viable product type.

Ted Simons: As far as -- you started with the idea of shaky but optimistic, what is needed to goose the commercial market in the Phoenix area and Arizona in general? What has to be done?

Mark Stapp: It's jobs. It's all jobs. But it's not just jobs in number. It's jobs with higher wages that go to it. We hear from economists all over the country in particular but here I think that that's particularly true. The other thing is in order to get those -- we don't have the best brand from a global and national perspective. We're in a position now where I think we can define a brand, not have it be defined by default. We need to pick that thing that differentiates us from other economies. Helps us attract employers and keep employers that are already here and get high quality employees.

Ted Simons: I can't let you leave without asking, what is that thing?

Mark Stapp: You know, there's a couple resources we have. I would say that I'm going to go out on a limb, we could brand ourselves as the health and wellness metropolitan area. We have the open space. We have the climate. We have new infrastructure. The good news is we're not burdened by old infrastructure, not burdened by a building stock that reflects older uses of space. Now, on one hand we like to see that was we want the character but we're well positioned to be the 21st century city. I think we need some really substantial public policy around driving a brand and brand recognition, a promise that would help.

Ted Simons: Interesting stuff. Thanks for being with us.

Mark Stapp: My pleasure.

Mark Stapp:Master of Real Estate Development Program Director, W. P. Carey School of Business at Arizona State University;

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