R.O.I. Properties

Beth Jo Zeitzer

Beth Jo Zeitzer is the President and Designated Broker ofR.O.I. Properties, a full-service real estate advisory and brokerage firm based in Phoenix. Before founding R.O.I. Properties, Beth Jo, served as the Director of Commercial Properties at Del Webb Corporation where she handled $96 million in real estate transactions and a 600-acre commercial property portfolio which included: regional and neighborhood retail centers, business, medical and professional offices, industrial parks, and light industrial spaces.

She is experienced in commercial development including planning, entitlement, infrastructure delivery, budgeting and financial oversight, marketing analysis, sales and marketing, contract negotiation, design review, and construction monitoring. Beth Jo is a licensed attorney in Arizona and California and a licensed real estate Broker in Arizona.

An Arizona resident since 1971, Beth Jo graduated from the University of Arizona with a B.A. in General Research (with Real Estate and Marketing emphasis). She is also a graduate of the University of San Diego Law School, where she was the Research Editor of the Law Review and the recipient of the Hahn Award for Excellence in Real Estate.

A Tale of Two Curves: Shifting Focus from Pandemic to Economic Recovery

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At the beginning of April (which sure seems like ages ago), we posted a brief synopsis of our overall view of commercial real estate in Phoenix: CRE, Post-COVID. With nearly three months since the implementation of restrictions and just days into reopening businesses, we thought it was time to take a look at how the economic situation has evolved—and where we may be headed next.

Real estate, both commercial and residential, will always lag the overall economy. When you hear economists and analysts discussing the recession and eventual economic recovery, you will often hear them talk in terms of long and deep vs. short and shallow as we return to baseline performance. While recent months have been focused on flattening the pandemic curve, the attention is now focused on what the economic recovery curve may look like. The Brookings Institute recently outlined five different scenarios: Z-shaped and V-shaped (faster recovery, the most optimistic), U-shaped (drawn out recovery, somewhat pessimistic), W-shaped (what happens if we need another round of closures in the fall), or L-shaped (it will take years to recover, similar to the Great Recession of 2008-2009). The determining factors, Brookings says, include household ability and willingness to spend, state and local government finances, the health of businesses, and the amount of lost human capital. You can read the full article here: The ABCs of the post-COVID economic recovery.

The state of Arizona, the city of Phoenix, and the commercial real estate market in particular, are affected by all of those different factors in various ways. Even with the relaxing of restrictions, it is unknown what will happen with unemployment and related items such as bankruptcies and foreclosures. Another question is whether the exodus of Californians and businesses—a boon in the past few years—will continue. (If Elon Musk’s recent brush with authorities is any indication, the answer is yes.) At the moment, we have continued to see the same volume of California buyers coming here to acquire properties on an investment basis.

Because the commercial sector lags the economy, the overall situation has not changed as much as one might guess. With the disappearance of spring high season, hospitality has been impacted dramatically, and there will be a significant question about whether many hotel and restaurant properties can reopen or need to turn to alternative uses. (For more details on restaurants, please see our post Challenges Are Baked in for Phoenix Restaurant Real Estate.) Retail projects are likely to be seeing more mixed-use opportunities, with a blend of condos, apartments, offices, restaurants, and shopping—much the way Scottsdale Fashion Square has evolved as a village-type concept. Initial indications are that our nationwide experiment in working from home may have long-term implications for the office sector, with footprints contracting and shared spaces and subleases increasing. Coworking spaces, an industry darling in recent years, have a tough row to hoe until social distancing is no longer necessary or preferred by independent business people. Meanwhile, the industrial sector seems to be cruising along just fine.

With restrictions lifting, and assuming that further outbreaks can be managed without the drastic measures of the past few months, it’s not too soon to start preparing mentally and financially for a variety of recovery scenarios. If you are looking for a reason to be optimistic, the pent-up demand could help the Phoenix economy heat up a bit more than usual over the summer—hopefully tiding us over to when snowbirds, tourists, and business travelers migrate to the desert Southwest again in the fall.

Challenges Are Baked in for Phoenix Restaurant Real Estate

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Of all the businesses affected by the coronavirus, restaurants in Greater Phoenix and throughout Arizona have been among the hardest hit. Our customary spring tourist season vanished without a trace, and the stay-at-home orders in mid-March limited restaurants to takeout, delivery or drive-thru service only. While some were able to make the best of a bad situation, many others could not—often for reasons beyond their control. In recent weeks, several high-profile Phoenix restaurants have announced they have closed permanently, including Barrio Cafe Gran Reserva, Caveman Burgers, and Lilac Bakery in Phoenix, and Mark’s Café in Tempe. Equally disheartening, many lesser-known restaurants fall into 20 to 25% of small businesses that Phoenix’s Economic Development Department recently projected will not survive the COVID 19 crisis.

 

Even with the loosening of restrictions to again allow dine-in service as of May 11, it is not just a snap of the fingers to get back up and running. Supplies need to be bought, servers need to be hired or rehired, and already-strict hygiene procedures need to be ramped up to meet new guidelines. For many restaurants, just the simple math of accommodating social distancing with dramatically reduced numbers of patrons may not pencil out, leaving them waiting for an unknown full-opening date.

 

What Comes Next for Phoenix Restaurants and Real Estate?

 

From a commercial real estate perspective, Phoenix was arguably saturated or even overbuilt in restaurants. Indeed, it was identifiable as a risk area before the COVID-19 pandemic and would have been negatively by a future recession. In many cases, either a marginal concept or an abundance of nearby competition made these businesses already tenuous.

 

Looking forward, the question becomes: “How many shuttered restaurants will there be, what happens to those vacated restaurant spaces, and how might it affect commercial real estate as a whole?” Interestingly enough, many of the same qualities that make properties attractive for restaurants make them attractive in general. These are factors such as good visibility, easy access, and locations in highly populated areas with solid demographics. As a result, we are already seeing some of these properties put to alternatives uses, such as neighborhood-oriented medical services or clinics. While the locations and demographics are the major positives, it can be expensive to convert and improve restaurant properties for a new commercial real estate purpose.

 

While the larger restaurant chains and brands may be better capitalized overall, the surviving local restaurants may have one advantage: the community’s desire to support their neighborhood businesses, particularly as we emerge from the crisis and attempt to reenergize the economy. This effect will likely be strongest for restaurants in signature neighborhoods in the Valley.

The Phoenix commercial real estate market is tricky right now, and that is particularly true for buying, selling, or leasing restaurant properties. To put an expert advocate on your side, contact R.O.I. Properties at 602-319-1326.

Swelter in Place: COVID-19’s Impact on the Phoenix Luxury Home Market

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Thanks to the economic boom, Greater Phoenix home sales in the $500,000-plus range have been robust over the past few years. Like nearly every sector of the economy, however, the effects of COVID-19 are silently spreading into the luxury real estate realm as well. Depending on the specific price range, we are generally seeing growth in active listings, while the mid-month closings for May indicate the number of sales will drop further from the levels we saw in March and April.

Luxury Home Closings in Maricopa County

Price Range March April Through May 14
$500K-$1M 1,030 775 189
$1-$2M 197 145 26
$2-3M 44 19 3
$3M+ 22 14 2

In particular, homes in the $1-2 million range seem to be sitting on the market for longer periods. Why would this be the case? These are often homebuyers who still need to borrow to purchase a home—unlike many buyers in the higher brackets—and jumbo loans are hard to find currently, as discussed in our recent post, Financial Focus: Securing a Mortgage During COVID-19. In addition, this segment may be more sensitive to what’s happening from an economic standpoint: upper managers concerned about job security or business owners wrestling with revenue decreases. Until the smoke clears, they’re simply staying put.

Nonetheless, every market presents opportunities for both buyers and sellers. For buyers who are well capitalized and not as dependent on financing, the softening of sales and uptick of supply may provide more negotiability. Also, because the usual strong spring season did not occur, we may not experience the normal pattern of properties going off market after Memorial Day.

For sellers, there is still a window of opportunity—based on high comparables and relatively low supply—that may be closed in another 6 months. Note that the luxury homes that are selling well in Phoenix are those that are tricked out and have been completely renovated. There is little appeal in taking on a remodeling project when there’s a risk of your contractor going out of business before the job is complete, or cost-overruns when consumers are really buckling down.

The final factor, which impacts both buyers and sellers, is that many owners and renters of out-of-state second homes may need to stay put. Areas such as Coronado are requiring 14-day quarantines, resulting in canceled leases and more people hanging tight in the Valley heat. That could mean more would-be buyers staying home, as well as more sellers needing to wait till the fall while they swelter in place.

Whether you want expert guidance in finding your dream home or downsizing into the perfect property for your lifestyle today, contact R.O.I. Properties at 602-319-1326, or [email protected].

Housing Trends to Follow: Decreasing iBuyers and Releasing Short-Term Rentals

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Today’s discussion is about two related housing trends emerging in the residential market that we expect to have an impact on supply and demand in the coming months—and that buyers and sellers both should pay close attention to. Inventory levels currently remain very low and demand is still strong, but as the COVID-19 situation evolves, both elements will be in flux. So, what are the two trends, and how might they affect the market?

Trend 1: Decreasing iBuyer Activity

First are the so-called iBuyers. In recent years, companies such as OpenDoor, Zillow, Redfin, and Phoenix-based Offerpad have been a major player in the under-$400,000 segment of the residential housing market. Offering the promise of easy, “one-button” home sales, the appeal was clear for a certain demographic of sellers who did not want to take the traditional real estate route—even if it meant lower sales prices and higher service fees.

The market, however, became significantly more challenging for these players this spring. In March, Opendoor and Redfin suspended their iBuying operations, and in mid-April, Opendoor announced that it was laying off 35% of its staff. With iBuyers diminishing their activity, the inventory in this segment is building.

Since that time, some of the ibuyers are returning to various markets, including the Greater Phoenix Area.

Trend 2: Increasing Inventory from Airbnb and Single-Family Short-Term Rentals

The second trend is a bit more difficult to measure. MLS statistics do not specifically identify and track how many Airbnb and similar single-family short-term rentals are coming to market. It is clear, however, from sheer listing volume (particularly of fully furnished homes) that it is indeed happening at scale. An AZ Central article on May 2 calculated a 40% reduction in short-term rentals in the Phoenix area as tourism became essentially nonexistent. While some owners have chosen to convert to long-term rentals, there are indications that many others are cutting their losses and selling.

For owner-occupant buyers, this change in the market represents potential opportunities. Since these short-term rentals needed to be kept in good condition, it may be a chance to pick up a move-in-ready property that has already been renovated to a certain extent. (For tips on purchasing in the current market, see our recent blog, What to Expect When You Are Buying a Home in the Coronavirus Age.)

For sellers, adding these two housing trends together represent a rare gift: The chance to list properties before a significant amount of inventory hits the market—and before the lifting of foreclosure restrictions and the likelihood of bank-owned and distressed properties emerging, as well. Strategically priced homes are selling fast and the buyers are serious, as we noted in Should I Sell My House Now, to Get Ahead of the Market?

Whether you are buying or selling, R.O.I. Properties can help you navigate the challenges presented by today’s fast-changing market. Please contact us at 602-319-1326.

The Window of Opportunity to Achieve Highest/Best Pricing in Class C Multi-Family Properties

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The commercial real estate market continues to experience headwinds, and Class C multi-family rental properties are starting to feel them the strongest. There are a number of factors behind that dynamic. Because these tend to be more affordable units, the target audience is, unfortunately, more subject to layoffs and other types of job loss—which means many owners are not achieving full rent payment on their rent roll.

 

On the other side of the equation, the owners of Class C properties are getting squeezed. These properties are often financed through community and regional banks, which may not provide foreclosure forbearance.  These loans are different than those funded by GSEs or other federal agency loans, where foreclosure moratoria are in place.

 

Class C properties have experienced significant appreciation in the last several years, and there is current market demand from local as well as California buyers.  This may change, as market conditions fluctuate, but a unique opportunity to take advantage of higher pricing exists now, for the following reasons:

 

  • The Greater Phoenix market is still working off of higher pricing, fueled by high comparable sales and low cap rates. This is the strongest factor in favor of selling sooner rather than later, as long as that is what fits your strategic plan.
  • There is ample 1031 Exchange money seeking to place in the Greater Phoenix Market, assisted by the extension of deadlines for nominating and closing on up-leg properties in a 1031 Exchange. For more details, please see our recent post, 1031 Exchange Transactions: New IRS Deadline Offers ‘Rona Relief
  • Multifamily demand is still historically strong in Greater Phoenix, and there are still investors looking for desirable properties and opportunities—particularly if they are simply trying to get ahead of the inevitable recovery.

 

Although the commercial real estate market tends to move fairly slowly, CoStar is anticipating U.S. apartment vacancy rates to hit record highs in the coming months, and there are approximately 15,000 multi-family units currently under construction.  This is an occasion where pushing forward disposition plans may make a long-term difference for sellers to capture current equity.

 

If you own a Class C multifamily property and want an advocate on your side to achieve the highest pricing and smoothest deal, contact R.O.I. Properties at 602-319-1326.

Bridging the Gap in Lease Negotiations

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While we seek to be optimistic about the post-COVID-19 landscape, we also need to be realistic about how quickly the Greater Phoenix economy will recover to the strong position it was in just a few months ago. In early April, Arizona Governor Doug Ducey signed Executive Order 2020-21, which ceased evictions and lockouts of small business tenants (500 or fewer employees) until May 31. Tenants are still obligated to pay the rent that was owed, however; failure to do so would put them in default and at risk of the customary eviction or lockout proceedings once the order expires. On April 29, Governor Ducey announced the extension of Arizona’s stay-at-home order through May 15. The order included some modifications, such as the partial reopening of retail establishments starting May 4 for curbside pickup and delivery and a further loosening four days later. Dine-in at restaurants is expected to resume in May, with a best-case scenario of May 12.

 

With the deferral of rent payments and stalling of foreclosures, it will likely be next month or even later this summer before the full state of the market is clear. In the meantime, many landlords and tenants alike will be heading to the negotiating table. With lower rental rates occurring in the market, current owners may need to be more flexible on terms to avoid vacancies and retain viable long-term tenants. With COVID-19 impacting their revenue streams, tenants are seeking ways to decrease expenses, across most asset classes.

 

How do they bridge the gap? It can be tempting for tenants to overplay their leverage, but the more prudent course is to make good on their responsibilities if they have the ability. Likewise, it is in a landlord’s best interest to have their tenants survive and thrive.

 

For both parties, the best plan is to consider the relationship aspect—first and foremost, negotiating in good faith. The main priority is to sit down and proactively problem-solve, with open books and minds. This includes recognizing that the person on the other side of the table may be going through difficult times as well. If the situation is contentious, enlisting a neutral third party can help pave the way for a mutually agreeable deal.

 

Common rent concession options include lease deferrals (tacking delinquent rent onto the back end of the lease); temporary lease waivers; rent reductions for a given period of time or the remainder of a lease; or even extending a lease at a lower rate upon expiration.

 

Beyond traditional leasing deals, we are observing an increase in subleases, as office-based businesses scale back on headcount and consolidate resources. Along the same lines, there are numerous cohabitation/office sharing opportunities starting to hit the market, a trend we anticipate will continue for the foreseeable future.

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