In Phoenix, the only place to go is up. Commercial real estatetransaction velocity came to a virtual standstill last year withtotal dollar volume equating to less than 10% of the propertiestraded in 2005. In Q4 of 2010, investment sales velocity began toincrease, a trend that will continue through 2012. However, onlytwo types of transactions are expected to dominate the investmentarena this year: trophy and trauma sales. Trophy assets, includingclass A office, retail and multifamily properties in primarylocations with strong occupancies and operational performance, willtrade at near-market rates. Meanwhile, trauma assets, B and Capartment complexes, multi-tenanted retail assets and officebuildings under duress, will trade at a significant discount. Inmost cases, trauma properties that were either foreclosed upon orwere the subject of potential short-sales that owners and lenderssat on last year, will now have to be moved to the market.Apartments

Although it posted dramatic improvements in fundamentals lastyear, the Phoenix apartment sector continues to account for thegreatest share of known distress in the marketplace. Nonetheless,property fundamentals were bolstered by above-average job creation,which is expected to continue through year's end. In addition,multifamily construction will drop to its lowest level in more than15 years and single-family foreclosures will push many formerhomeowners into rentals. An estimated two-thirds of homeowners withmortgages in the metro area owe more than their homes are worth,which will continue to encourage strategic defaults and expand therenter pool. Class A units accounted for most of the absorptionlast year, due in part to renewed job growth in the typicallyhigher-paying professional and business-services sector.

Following a 260 basis-point reduction in 2010, apartment vacancywill slip another 120 basis points in 2011 to 8.5%, approachinglevels last reported in late 2007. Yet many owners who entered themarket during the boom period used high levels of leverage and havesince encountered difficulties meeting debt-service obligations orrefinancing maturing debt based on reduced valuations. Nearlyone-quarter of the CMBS loans outstanding in the metro area are nowat debt-service coverage ratios of less than 1.0, while the marketwide median price per unit has slipped 35% since 2007. Over thepast year, many investors have re-entered the Phoenix apartmentmarket, targeting REO listings and well-located, high qualityassets offered at attractive prices compared to just a few yearsago. While more lenders have started to clear their books ofreclaimed assets, many will stabilize high-vacancy properties andaddress deferred maintenance ahead of taking them to market. Thistrend may become more pronounced in 2011 in light of expectationsfor above-average job growth and declines in vacancy rates,limiting price discounting.

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