Lenders Still Not Sold on Phoenix Market Growth

“No, no, no,” was the recurring response from lenders on a ground-up speculative office deal in Phoenix. It was a no on all three accounts: the Phoenix market, speculative office and ground-up development. George Smith Partners’ Scott Meredith led the charge, looking to secure $105.5 million for the 250,000-square-foot speculative office portion of the Watermark Tempe, a ground-up mixed-use development on Tempe Town Lake. Despite the hesitance from lenders, Meredith was able to secure the financing for the developer, Fenix Development, by educating lenders on the health of the market, recent growth and office activity.

“Speculative office at this stage of the cycle made a lot of people nervous,” Meredith, SVP at George Smith Partners, tells GlobeSt.com. “When you compound that with Downtown Phoenix having a certain history to it, especially during the downturn when the market wasn’t doing to well, and the fact that this isn’t a gateway city, it was a challenge. It really boiled down to lenders that are either already in the market, knew the market or wanted to be in the market and understood the dynamics out there. That was step number one, and a lot of that was getting people to come out to the market and spend time there and see the project.”

In addition to educating lenders on the recovery of the Phoenix market, lenders were also concerned about speculative office in general. “There still is a concern in the market of doing spec office at this stage in the cycle, so we have to come up with an alternative structure to mitigate that risk, and we did,” says Meredith. He wouldn’t disclose the details of the structure, other than that the $105.5 million deal included $25 million in mezzanine construction financing and an $80.5 million senior loan.

There are other speculative office deals in the Greater Phoenix market that have secured financing, so the trend may be changing. “I don’t know, but I hope so,” says Meredith when asked if this is a changing trend. “I hope it represents a positive trend. The demand is there. We are working on other projects in Phoenix and talking to other developers about other projects. It feels like this is a good market to be going into right now.”

Tempe specifically is a strong office market, and there is demand for quality class-A space, like the Watermark. “Tempe happens to have a very low vacancy rate right now, and once we pointed out the demand drivers, it was a much more comfortable conversation,” explains Meredith. “In general, spec office is always a challenge, and in this stage of the cycle, it is harder. Tempe just happens to be a an exception to that rule.”

Investors are only just arriving in Phoenix, seeing ample opportunities, and it is likely that lenders will follow. But, only time will tell. “It feels like a different Phoenix,” says Meredith. “The boom-bust cycle may have been busted.”