Demand's There, But Supply's Hard to Find

PHOENIX-Frustrated by a shaky stock market, investors are showing strong interest in the Valley’s real estate investment market as they capitalize on low interest rates to scoop up quality properties that should turn a handsome profit as the economy improves.

According to a forecast report from Grubb & Ellis Co.’s Phoenix research team, REITs and private investors should remain active next year, driving down capitalization rates on low risk projects with strong tenants, long-term leases and prime locations.

But despite the strong interest of buyers, investment activity is expected to remain relatively slow in 2003, primarily due to a shortage of quality properties, the report notes. “Frustration with the stock market is making real estate appealing,” Eric Wichterman, an investment specialist with Grubb & Ellis, tells GlobeSt.com. “California investors are increasing the demand, but there is not a lot of supply” of quality buildings to satisfy investor interest.

Low-risk office projects with stabilized occupancies are rare due to high market vacancies and a few troubled office properties are on the market. “A landlord, even with a 20% vacancy can still cover his debt service,” Wichterman noted, explaining that low refinancing costs have made it possible for owners to weather the lackluster economy in hope of better times ahead.

Investors may find better opportunities in the retail sector, which will continue to remain popular with both local and national buyers, the report notes. A continued population boom in the Valley along with stabilized retail vacancy rates of around 8% will create a low risk scenario for investors in 2003. Owners of old properties, particularly those in questionable locations with uncertain tenancy, could be in for a year of frustration, Wichterman said.

On the industrial side, private equity buyers will continue to drive the Valley’s investment market with multi-tenant properties remaining the product of choice. High vacancy rates, however, should motivate sellers to lower their asking price as vacancy rates continue to rise throughout the new year, the report predicts.