Commercial Development Soft During Early 2011

PHOENIX-Colliers International’s First-Half 2011 Research & Forecast Report for land offers good news and bad news.  The good news is that demand for industrial space is increasing, as is the for multifamily properties.  The not-so-good news is that commercial real estate fundamentals overall continue to struggle, meaning limited speculative development for at least the next two or three years.

“What we have here is a mixed market,” comments Pete O’Neil, Colliers’ senior research analyst. O’Neill points out that while multifamily fundamentals are coming back and industrial vacancies are tightening, office and retail not so much.  “On the office and retail side, we have quite a bit of space available and not a ton of demand to acquire land or put new projects into development,” O’Neill says.

Both O’Neil and Colliers senior vice president John Finnegan tell GlobeSt.com that multifamily is the asset class that’s performing. Finnegan goes on to say that the asset class is performing so well a handful of deals currently in escrow will close by year-end, and multifamily will continue to perform quite nicely well into 2012, especially as more people move out of foreclosed homes and into apartments.

But not just any old apartments. “They’re flocking to quality, newly built, class A apartment complexes,” says Finnegan, who is with Colliers’ LandSource Group. “And not in the fringes – we’re looking at Scottsdale, Phoenix, Chandler and Peoria.”

The trend to infill versus the flight to fringe is interesting: Anyone examining the region’s development and activity even half a decade ago would have seen a vastly different landscape, as home builders scrambled over each other to develop in places like Avondale, Buckeye and Goodyear. Retail followed those rooftops.

But the drivers of the flight to fringe – i.e., robust job growth – are lacking in today’s economy. “Going forward, the true areas of job growth – Chandler, Scottsdale, Phoenix/downtown and the Arrowhead areas – those will be the first to bounce back,” O’Neil says.  

These are also the areas where some nice land deals have occurred so far. One transaction earlier this year, valued at $3.5 million, involved more than 18.5 acres in Chandle and will eventually hold a multifamily development. Another deal at the beginning of 2011 in Mesa involved the acquisition of 22 acres for $6.4 million. This parcel of land is zoned for industrial and office use.

Yet other land deals are taking place on the fringes. What’s interesting about these land deals isn’t so much that they’re happening, as much as those involved are buying for more than investment purposes.  As an example, Finnegan points that U-Haul acquired 78 acres at the corner of US 60 and Idaho Rd. in Apache Junction, AZ (about 10 miles east of the CBD). But U-Haul is only going to develop six of those acres.

“You’re seeing developers liking the locations, and banks saying they have to buy the whole thing,” Finnegan notes. “So we have specific users that will build maybe a portion of a property, but who are buying more to satisfy the banks.” These buyers, he goes on to say, are hanging on to the remainder of the land, and will sell it when the market recovers.

“It shows confidence in the area,” he adds. “It sends the signal that Phoenix is still a good place to do business.”