Phoenix Business Journal - by Mike Sunnucks Friday, February 26, 2010
Commercial real estate values in Phoenix have plummeted along with home values. Vacancy rates are high and falling rental rates are taking their toll on office, retail and industrial property owners.
Real estate experts say the commercial recovery will be slow, as values have dropped 25 percent to 50 percent since the end of 2007, when the recession started.
“We’ve definitely seen values come down significantly,” said Bob Young, senior vice president of the CB Richard Ellis real estate brokerage firm in Phoenix.
Young said hotel, retail, office and industrial properties in metro Phoenix have depreciated by as much as half of their prerecession values. Apartments have seen the smallest declines among the commercial segments, he said, while shopping centers in outlying cities and some central areas have been hit the hardest.
Young estimates downtown Phoenix office buildings have lost 20 percent to 30 percent of their value since the economic recession began.
Like their residential counterparts, a significant number of commercial mortgages are underwater, biting into landlords’ and building owners’ bottom lines and ability to sell.
Phil Steffen, managing director of the Phoenix office of FirstService PGP Valuation, pegs local commercial value declines at 30 percent to 40 percent. He said a commercial real estate recovery will be spurred by the same things needed for a housing rebound: improved consumer and investor confidence.
Steffen said most of the commercial appraisals being done now are related to distressed properties and financing, as in the housing market.
“Most of the valuation services we have been performing have been related to distressed asset management,” he said. “However, traditional underwriting for new financing has become far more restrictive in terms of equity requirements and debt coverage, and values are subject to increased scrutiny.”
Still, Young said some financing is available for the right transactions and right purchasers.
Appraisal experts contacted for this story wouldn’t comment on specific properties, but Young said stalled, unfinished development projects — such as the Centerpoint Condominiums in Tempe and Hotel Monroe in downtown Phoenix — are not dragging down values of neighboring buildings.
Depressed commercial values have made it tougher to close sales. Less demand for space and more tenants going out of business are squeezing landlords’ bottom lines.
Tenants that might be looking for space could see some benefit, however, as lower values and other economic fallout give commercial landlords very little leverage.
“It’s a great time to be an office tenant in metro Phoenix. Overall rental rates have declined severely from the peak of the expansion period in 2006, 2007,” said Patrick Wilson, an analyst with FirstService PGP, the valuation arm of the Colliers International real estate brokerage firm.
“Rapid development during the expansion period, coupled with increasing unemployment in the area, has crippled the office market and led to vacancy rates between 18 percent and 25 percent throughout Valley submarkets,” he said. “These high vacancy rates have left owners little negotiating power.”
Wilson also said retail has been hit hard by the recession and the lack of housing and population growth in the Valley. He pegs retail vacancy rates at between 8 percent and 13.5 percent, compared with prerecession rates as low as 3 percent. Shopping centers face vacancies, with bankruptcies and store closings ranging from restaurants and bars to big-box stores.
Wilson said there could be some improvement on the retail front this year and next. He said space is not being added, but some retailers are looking at expanding.
“National retailers are beginning to indicate an appetite for expansion within 2010 and 2011. Dollar General, Walgreens, Target, Chipotle and Burger King are among several retailers that have announced 2010 store openings,” Wilson said.
Get Connected
FirstService PGP Valuation: www.pgpinc.com
CB Richard Ellis: www.cbre.com
Falling from grace
Average commercial value declines in Maricopa County overall, 2007-09:
-50% Industrial properties, 50,000-plus square feet
-46% Retail properties, 10,000-plus square feet
-44% Office buildings, 10,000-plus square feet
-20-30% Downtown Phoenix office buildings
-38% Apartments, 20-plus units
Source: Orion Investment Real Estate Solutions, www.orionires.com