Commercial Real Estate Update

Hear how the commercial real estate market looks in 2016 and get advice on how to invest in the market. Jon Rosenberg, president of the commercial real estate firm LevRose, and Mark Stapp, executive director of the Master of Real Estate Development program in the W. P. Carey School of Business at Arizona State University, will discuss the market and investing in it.

Transcript:

Ted Simons: Arizona's commercial real estate market ranges from office space hotspots in Mesa, Chandler and especially Tempe, to statewide industrial vacancy rates that aren't quite as robust. Here now to break down Arizona's commercial real estate market is Jon Rosenberg, president of the commercial real estate firm Lev-rose, and Mark Stapp, executive director of the master of real estate development program at ASU's W.P. Carey School of business. Good to have you both here. Thanks for joining us. Define commercial real estate.

Jon Rosenberg: Well, pretty much anything that's not residential. So office, retail, industrial, and then multi-family, which is residential but it's more investment real estate.

Ted Simons: Overview of what we saw last year and so far, this year?

Jon Rosenberg: Overview last year was good. This year so far looks like it should be a little better than last year, probably our best year post-recession. You look in each market segment and each one of them is growing strongly in their own way.

Ted Simons: Slow but steady growth, I hear that a lot in a variety of economic sectors. Why the slow part?

Jon Rosenberg: I think talking about each segment I think if you look at the office segment, the slowness was the due to the fact that a lot of buildings were set to be developed prerecession and were continued to be developed during the recession so now, they're finally getting to the point of filling up. We're at a point of job numbers, 97% of what they were, that were lost during the recession. So we're starting to see the absorption take place and getting the vacancy rate down to a good number. Retail, same thing. Slow. You saw housing stop. Retail typically follows rooftops, so when that happens, the retail does not fill up.

Ted Simons: Let's get back to the office that Jon mentioned and it sounds like Rural in Tempe, that is a super-hot market there. Is anything else even close?

Mark Stapp: You know, obviously, that's the geographic core of metro Phoenix and there's a bunch of drivers. There's some other submarkets as you get around the air park, there's some of the office space that's along I-17 because we see some of the insurance business, some of the recent news there. And, you know, certainly downtown Phoenix is improving greatly as well but those are the core employment centers.

Ted Simons: And as far as light rail, I know Mesa has got light rail there, is that making an impact as far as commercial real estate is concerned?

Mark Stapp: It's having an impact in urban form. And so you see a number of national trends about commercial real estate, and one of them is this densification, urbanization, and it's providing a framework for development to focus around. And that's really a reflection of how metro Phoenix is maturing because we've got generational changes, which is another one, this emerging millennial population is having an effect. You have how people are working, because technology is working. Light rail and transit play into both of those trends substantially. It's a lifestyle kind of thing.

Ted Simons: Gotcha. You had mentioned retail. Are we seeing some of these strip malls that have been ghost towns for so long, are they starting to come to life?

Jon Rosenberg: They're starting to. I think what you're seeing in most of those are the types of businesses that are really going to be more servicing the residential around there. You're seeing a lot more restaurants, you're seeing a lot more food, salons, spas, nails, dry cleaning, so servicing. Those are starting to fill back in.

Ted Simons: Restaurants are kind of a prime driver aren't they? They're doing pretty well.

Jon Rosenberg: They sure are. They create neighborhoods.

Ted Simons: Is that a surprise?

Jon Rosenberg: I don't know if it's a surprise. I think people want the experiential neighborhood. So I think what you're seeing in downtown Phoenix, Central Corridor, Downtown Scottsdale, Tempe, Gilbert, a lot of restaurants are driving them.

Ted Simons: As far as the hottest, from the report that I looked at it looks like multi-family housing might be the hottest sector out there. Talk to us about that.

Jon Rosenberg: I don't think there's been a greater demographic in history for multi-family than there is today. You've got millennials that are--I think in 1960 the statistic was 65% of 18 to 32-year-olds were married. Today, that number is less than 25%. So they're living in that urban core a little bit more, they're getting married later. So apartments are strong and probably going to be for a while.

Ted Simons: Is that affecting other sectors?

Mark Stapp: Well, I'm going to add something to that, too, because baby boomers at the same time are down-sizing so you see the combination of both of those population segments driving demand. And multi-family -- I get asked the question all the time is this a bubble? And I don't think so because we continue to grow and there's other factors in the market that have retarded the single family housing segment and some of it is choice, some of it is constraint but that's really driven the multi-family and again, it's back to lifestyle.

Ted Simons: So that's the hot spot, we talked about some hot office spots. Industrial vacancy rates, the report described them as fickle. What's going on out there?

Mark Stapp: Well, industrial is, you know, built for very specific purposes sometimes. And so you look at different segments, we had a very hot industrial market for some of the large distribution and fulfillment centers that have slowed down. We've seen a lot more demand for the small and midsized industrial, and I think that's a really good sign because it reflects the fact that the economy is adding smaller businesses that are growing and we see companies needing to move out of space but, you know, real estate's big, clunky stuff and once it's there, it's hard to do anything with it. And so as the industrial market emerges, you're going to see I think some more demand fill that space up.

Ted Simons: Are we going to see maybe like the 303 in the west valley, is that where the industrial market might be the strongest?

Jon Rosenberg: Eventually. Airport is obviously strong. We're seeing it in parts of Tempe and parts of Phoenix, Scottsdale Air Park is busy. So you know, I think eventually, you're going to get that and to Mark's point, some of those midsized 20 to 100,000 square foot boxes that are filling up right now is probably suppressing a little bit of the five to 10,000-square-foot spaces.

Ted Simons: As far as healthcare and medical would seem to be optimistic wouldn't it? Is that wharf -- what you're seeing?

Jon Rosenberg: Great tenant. If I'm looking to buy a building, that's a great tenant. They spend a lot of money in tenant improvements; they don't like to move a lot. It's servicing the neighborhood. So again, it's really population driven. Also, it's where the employees are, where you want to buy your properties.

Ted Simons: And I would imagine we've got the children's hospital, Phoenix children's hospital, new trauma center, you've got the ASU biodesign institute, this whole biomedical corridor near Mayo. Promising?

Mark Stapp: Oh, very promising. When you look at the infrastructure that's put in place, it's a big focus for the city of Phoenix, the relationship with ASU and the Mayo clinic. When you look at the distance to the airport because a lot of this are people that are coming here for very specific reasons. Accessibility to the airport, very quick, very easy. We've got a lot of available land and a very strong emerging market there. We're really lucky because of that relationship with Mayo.

Ted Simons: Last question. Biggest concern as you see for the commercial real estate market?

Jon Rosenberg: Well, I think kind of the Amazon -- I don't know if we want to call it Amazon-ification of the world, we're seeing a lot of services, a lot of things can be bought online. So I think from the retail market you want to avoid those types of tenants or buildings are too strong on that that have that risk, from the office market, you know what I would keep an eye on are service type, law firms, medical, as you mentioned, accounting, things like that that are really going to service, you know, the influx of people that are moving to the state.

Ted Simons: All right. Very good. Gentlemen good to have you here, thanks for joining us. Tuesday on "Arizona Horizon." Hear about a range of issues impacting women veterans. And we'll talk about a program designed to keep middle schoolers on track to graduate. That's at 5:30 and 10:00 on the next "Arizona Horizon." That is it for now. I'm Ted Simons, thank you so much for joining us. You have a great evening.

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