Los Angeles office investors are heading to Phoenix for better yields and more opportunities. Barker Pacific Group recently purchased the Mesa Financial Plaza in Mesa, Arizona, and it is planning more acquisitions in the market, according to Michael Barker, the CEO and managing director of the investment firm. While the firm wouldn't disclose the exact sales price, Barker did say that it was able to secure the property below the asking price. This is not the firm's first acquisition in the market, but it is the first since the early 2000s. We sat down with Barker for an exclusive interview to ask why the market is attracting the firm today, how it's changed and how it stakes up to Los Angeles.

GlobeSt.com: Why are you attracted to the Phoenix market today?

Michael Barker: Today, we are seeing a growing disparity in the occupancy costs, cost of living and cost of business between Southern California and Phoenix. It has become a very attractive place for companies to outsource back office personnel that need or want to be in a lower cost environment. Google, Microsoft and Boeing in the last two or three years have taken major real estate positions in the Phoenix market. When this opportunity came to us, the pricing was such that we felt that the market was early enough in its recovery that it was attractive.

GlobeSt.com: This isn't your first investment in the market. How has it changed since you last invested there?

Barker: We are active from an office ownership perspective in several markets, and with respect to Phoenix, we have been active from time to time over the last 35 years. We were active in developing ground up in the late 80s and then saw the market getting overbuilt, and then we went back in the mid 2000s and sold out in 2007. We see the Phoenix market as being more cyclical than other markets; it is more of a boom-and-bust market because it is easier to develop there. If you couple that with the pricing, it tends to get overbuilt.

GlobeSt.com: Is Mesa Financial Plaza indicative of the types of opportunities that you are looking for in the market?

Barker: We like to do projects that are in the $20 million to $50 million range. Anything lower, the economies of scale don't make a lot of sense, especially in this market. The building was the right size, and it needs cosmetic work. The building is in excellent physical condition, and we are going to make it lighter and brighter as well as add some environmental upgrades.

GlobeSt.com: With a property like this in Los Angeles, we would be talking about creating amenities and design that would attract a more creative type of company. Is that true for a value-add office project in Phoenix?

Barker: Not as extreme as in West L.A. This building is 63% leased and it has a wide variety of tenants. It has engineering companies and software, and some of the building has been converted to more creative-style space, without the drop down ceilings and so on. We will be creating spec suites that are currently empty that we will outfit with that in mind, but not to the same extent that we would if we were in Santa Monica or Culver City.

GlobeSt.com: Are you getting better yields in Phoenix?

Barker: Yes. The answer is a simple yes. We also think that the rental increase has more potential for growth than some of the California markets. In San Francisco, we own the City Bank Building, and we recently signed leases that are more than $80 per square foot gross. If you go to Phoenix or Mesa, the rents are in the $24 to $26 gross. That is a big difference. Now, Phoenix isn't going to go to $80 per square foot, but even if it goes to $30, it is still a big increase and well below what you are looking at in the Bay Area.

GlobeSt.com: How do you protect against oversupply in a market like Phoenix where it is much easier to develop?

Barker: In order for new construction to be justified, rents have to be at a certain level to provide the basic yield on the cost of the building. In Phoenix right now, rents in general are still well below what is justified for new construction. As rents rise, there will be more new construction. As rents do rise, assuming the economy is doing okay, there will eventually new construction. Today, it is rare. When it starts, it is getting to be a point in the cycle where it is time to sell.

Instant Insights /

L.A. Investors Head to Phoenix for Yield

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