If ever there were a year to acknowledge the men and women who helm our commercial real estate companies, the past 12 months would be it. Since the pandemic began, there have been high levels of bankruptcies and some distress, albeit not as much as those funds formed for the purpose of snapping up bargains would have liked to see. Whatever the level, though, the past year has been a challenging one as COVID upended the economy, caused the deaths of half a million and counting Americans and rewrote some fundamental rules about the industry (WFH comes to mind here). It is a testament to these industry leaders that CRE is emerging from the health crisis, just a little battered and worse for the wear—but nothing that a booming recovery can’t fix. We selected this group, as we do every year, based on their business acumen, how well they treat their employees and the type of culture and environment they set at their firms. While the former was on clear display this year, as you read on you’ll find the other attributes did not fall by the wayside. Which is the mark of true leaders.
Is Greater Phoenix Housing Demand Trending Back to Normal?
The most significant development in March for Greater Phoenix housing was the decline in the overall supply-demand index during the last 2 weeks of the month, after peaking at 514.9 on March 11. (For perspective, a measurement over 110 indicates distinct seller advantage—so we remain in a historic seller’s market.) The currently high index metric is a result of both critically low supply and demand that is slightly above normal, by historical standards. At the current rate of decrease, however, housing demand could reach a normal level within 2 months and drop below normal by June. The emphasis, of course, is on the word could. There are several factors in play that may affect the situation:
- In addition to slowing demand for residential properties, the supply level in the Arizona Regional MLS appears to have stabilized. New listings have been added to the MLS at an average of 2,124 per week since the beginning of 2021, which is still below the seasonal expectations of 2,300–2,500. Any inventory increases are being snapped up quickly: 50% of properties are going under contract within 5 days of listing.
- 2020 saw a surge in vacation rentals released onto the market in response to COVID-19 travel restrictions. This year’s X-factor is is the expiration date for many homes in forbearance and the foreclosure moratorium (currently, June 30th), which could result in supply increasing. Will demand stay constant with potentially increasing inventory?
- The Federal Reserve has expressed its commitment to keep interest rates low. At the moment, inflation levels remain low, leading to public statements by the Fed that a rate increase is unlikely till 2023 or even 2024.  Historically, telegraphing a slight bump in interest rates can actually cause a flurry of buying activity, as would-be homeowners want to get ahead of the hike. It’s a delicate balance, though, as a more significant rate increase can suppress buying activity and appreciation.
- Affordability is another factor that could suppress demand. As of the most recent data, 49% of all listings in the Arizona Regional MLS are selling over asking price, with average sales price per square foot for March 2021 up 24.4% over last March.
- Due to coronavirus restrictions, it was challenging for homebuilders to add significant new inventory last year. While they’re in the process of catching up, lumber costs are a drag on activity: adding about $24,000 to the cost of the average single-family home in the U.S.
- As noted in our previous post, “Examining the Intersection of Commercial and Residential Real Estate,” residential demand also exists in relationship to the multifamily sector. High home prices have driven many potential homeowners into renting; in turn, that has forced rental rates up more than 20% vs. the same time last year. If home demand slows, supply increases, or housing prices moderate, a portion of current renters could be incentivized to purchase.
R.O.I. Properties represents investors, owner-occupants, lenders and fiduciaries in buying, selling and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in properties (mainstream or distressed properties), we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.
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Adaptive Re-Use Trends in Phoenix: Hospitality and Retail
After a challenging year in 2020, hotels and retail are experiencing a wave of adaptive re-use in Greater Phoenix and across the country. As of January 2021, Trepp estimated that, on a national basis, hotel prices had fallen 36+% and retail even further at 41+%—so the resulting bankruptcies, non-performing loans, distressed properties, receiverships, and defaults have not come as a surprise. While the Phoenix metro has not seen the depth of distressed real estate assets as in other parts of the country, we are seeing creative investors repurposing well-located hotel and retail properties throughout the Valley—a trend that we are seeing throughout the country as well…
Adaptive Re-Use in Retail
Regional malls offer Main and Main locations, significant square footage and ample parking. Foot traffic, however, is what drives business. In retail, the challenging times have driven a wide range of clever solutions in neighborhood shopping centers and regional malls, such as adding multifamily properties with lifestyle centers, office uses, or using vacant stores for competitive video gaming (a.k.a., esports), self storage, data centers, and municipal facilities such as libraries and courts. “Medtail,” a hybrid of retail and healthcare, offers particular interest given the nation’s aging demographics. High ceilings and large open spaces make big box stores a good fit for warehouses and fulfillment centers—as seen by Amazon’s strategic moves into those spaces even before the coronavirus hit.
Recent adaptive re-use events in Greater Phoenix include:
- During the first week of March, the property manager of Phoenix’s first indoor shopping mall—now called Christown Spectrum —announced plans to add residences, a hotel, entertainment and high-rise business offices on the 98-acre site.
- The Paradise Valley Mall, which recently received approval from Phoenix City Council to rezone. The lifestyle-oriented redevelopment plan includes a mix of residential and commercial buildings, including apartments, office space, a grocery store, restaurants and retail stores.
- Mullin360’s conversion of a Sam’s Club in Casa Grande to a 27-acre auto park.
Converting Hotels into Apartments and More
Hotels are also seeing a wave of investor interest for rezoning and adaptive re-use of properties. The New York Times recently noted a trend of hotels converting part of their spaces into ghost kitchens.
The concept of converting hotels into apartments, low-income housing or multifamily units is not new—indeed, the legendary Westward Ho in downtown Phoenix made the switch way back in 1980. Economic troubles have led to a new look at the opportunities available in idled hotels and motels.
Long-term-stay hotels are particularly suited to the task of becoming small apartment units, since they have kitchens as well as bathrooms. The side benefit of this trend is the Valley’s need to house more people more affordably. Currently, the vast majority of multifamily product is Class A units, which are unaffordable for a significant segment of the population, so the conversion of limited service or long term stay hospitality spaces into Class B or Class C apartments is a win-win for the housing market as well. Vivo Living, which began converting hotels into apartments in late 2019, recently added three more hotel conversion projects to its national portfolio, including a 130-unit former Ramada Inn in Mesa. Numerous other affordable housing developers are acquiring and converting similar long term stay or limited service hotels into affordable housing units.
Their business model is one that we may see more of going forward: retrofitting older motels with open-air corridors and staircases that big hotel brands view as obsolete—but which are well-located and offer a comparable footprint to many multifamily properties. The challenge for would-be developers is that it’s not just as simple as putting a new sign out front and signing up renters. It’s essential to have the city planner on board with code changes, for example.
We anticipate seeing further distressed assets in hospitality and retail asset classes, which ultimately may encourage an uptick in transaction activity once prices reach the right level for investors. The pent-up demand for travel and entertainment could prove to be a significant traffic driver to new, innovative concepts.
In the meantime, investors can look at potential receivership opportunities where hotels or retailers are in default—and look for ways to repurpose and breathe new life into those spaces.
R.O.I. Properties specializes in representing investors, owners, lenders and fiduciaries in buying, selling and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you need help investing in distressed properties, or need distressed property services, we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.
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Net Lease Deals Expand to New Asset Classes in Greater Phoenix
We have recently seen a resurgence in interest in single-tenant net lease properties in the Greater Phoenix market, and an expansion in investor interest in the commercial asset classes where this deal structure is utilized. A financial tool that was formerly focused on retail properties such as pharmacy stores (Walgreens, CVS, etc.) or fast-food chains (Jack in the Box, Burger King, etc.) has been extended: For example, new interest has sprung up for net lease deals for office and industrial properties, and even non-profit tenants, or special use assets such as schools and nursing homes. (This represents a significant change from the last time we discussed net lease properties, when they were struggling in the early months of COVID-19: Net Lease Properties Reveal Their Riskiness.)
As the economic picture gets stronger, a net lease can represent a secure, recession-proof strategy for investors who are seeking stable income. Providing steady cash flow is how net leases earned the nickname “mailbox money.” In the simplest terms, a net lease (also known as a triple net lease or NNN) means that a tenant pays all of the taxes, insurance, and maintenance costs, in addition to their rent—operating the property very much like an owner. The term of the lease and the credit of the tenant tend to be the driver in such deals, vs. the actual asset class or form of the real estate.
In some cases, owners of property utilize NNN deals to recapitalize their interest, providing for the sale to an investor, with a long-term leasehold interest. This enables the owner to recapitalize but retain possession.
Win-Win Net Lease Examples
As an example of the broader view of asset classes that can benefit from net leases, we have worked with non-profits to structure long-term leases that enable them to stay in place/occupancy, while the sale to a third-party investor provides for long-term funding of their programs, enabling them to “do more good”…
In a fairly unusual transaction, we worked with a lender who had foreclosed on a funeral home. The property was distressed, lender owned, or REO/OREO. While the debt structure did not work for the tenant, due to a very high interest rate, the tenant had been in occupancy and was a successful funeral home operator for 30 years. We structured a long-term lease with the tenant and sold the property to a California investor seeking a long-term income stream and an up-leg 1031 replacement property. Through the structure of this transaction, the lender was paid off in full, the tenant was able to remain in the property for less than they had been paying on the mortgage, and the investor received mailbox money…a win-win all the way around.
The Impact of 1031 Exchanges on Net Lease Deals
With the arrival of a new administration and Congress, there had been some concern about changes to 1031 exchanges having a negative effect on net leases. A recent article in GlobeSt.com, Biden’s Under-the-Radar Impact on Net Lease, strikes an optimistic note. NNN real estate deals in lower-income areas—particularly in Opportunity Zones—are likely to expand, while increased education and healthcare spending could provide a tailwind for properties in those sectors. Further Payroll Protection Program (PPP) loans could help as well. With a narrowly divided Congress and general support for current 1031 laws, industry observers believe that there may be modifications, but an elimination of the program is unlikely.
R.O.I. Properties specializes in representing investors, owners, lenders and fiduciaries in buying, selling and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. Whether you are interested in a triple net lease deal, need help investing in distressed properties, or need distressed property services, we are full-service real estate brokers who handle all commercial asset classes. In addition, we serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.
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Down Payment Assistance Programs Make Owning Easier at Trellis@Colter
You can get into a new townhome for as little as 1% of sales priceÂ
Affordable housing just became even more accessible. The new, modern townhomes of Trellis@Colter are already zoned as “workforce housing,” making them available to those in lower income brackets. Now, with the addition of two down payment assistance (DPA) programs, the out-of-pocket costs can be reduced dramatically for those who qualify.
DPA Programs Offered by Trellis@ColterÂ
The Trellis@Colter townhomes start at $279,000.  The minimum down payment for these townhomes is 3.5% of the sales price for FHA loans and 3% of the sales price for conventional loans. Thus, the minimum down payment will be $9,765 and $8,370, respectively. DPA programs are a way for qualified borrowers to get help paying for the down payment and closing costs.
First, NeighborWorks America has provided Arboles Home Mortgage, LLC (the preferred lender for Trellis@Colter) with funds to provide six home buyers with $7,500 in down payment assistance. Another DPA program is the Arizona IDA’s Home Plus Mortgage, which provides embedded down payment assistance of up to five percent of the loan amount to be used toward the down payment and closing costs.  The funds from this embedded DPA can not only cover the required down payment, but some of the other remaining closing costs, too.
By using DPA programs, purchasers can pay as little as 1% of the sales price out-of-pocket. This frees up money to buy down the mortgage interest rate, thus making monthly payments more affordable and living in the Trellis@Colter townhomes even more sustainable.
Who Qualifies for the DPA?Â
The maximum annual income is $93,350 for the Trellis@Colter DPA program and $109,965 for the Arizona IDA’s Home Plus program.  All borrowers must have a minimum representative credit score of 640.
Learn More About DPA ProgramsÂ
Daniel Thompson, Loan Officer
Arboles Home Mortgage
1405 E. McDowell Road, Phoenix, AZ 85006
602-424-5348
[email protected]
NMLS 149133 Lic. LO-1002211
Learn More About Trellis@ColterÂ
Beth Jo Zeitzer, Listing Broker
R.O.I. Properties, LLC
602-319-1326
[email protected]Â
www.roiproperties.com/trellis-at-colter
Lic: BR044331000
The Year Ahead in Phoenix Commercial Real Estate
It has been a year since the words coronavirus and COVID-19 entered the global lexicon. 2020 represented a challenging 11 months for much of the commercial real estate market, although many of the effects from the pandemic were accelerations of existing trends. (See our Great Acceleration blog series.) With the easing of restrictions—and the promise of achieving herd immunity through vaccinations and recovery from infections—R.O.I. Properties is optimistic that 2021 will see improvement in Phoenix’s economic prospects. At the same time, certain segments of Phoenix commercial real estate can expect lingering challenges, including loan defaults that evolve into distressed real estate, as well as outcomes such as REO and receiverships.
This is a fast-moving market, and predicting the future is tricky if not impossible. Factors such as unemployment, stimulus payments, and moratoria on forbearances and foreclosures make it even more difficult—let alone what happens with the coronavirus. With that in mind, the current trends give some insight into our possible paths ahead. Here’s a brief overview of how we view the state of the various market sectors in the coming months:
Hospitality and Entertainment
These asset classes (along with retail) were the most immediately impacted by the pandemic. From the outset, we saw a significant increase in non-performing loans and actual and potential loan defaults for loans collateralized by hotels, motels, restaurants, theaters, gyms, and just about any element of travel, hospitality and entertainment. We believe, however, that there is significant pent-up demand for travel and all forms of entertainment, and we anticipate a strong bounce back as the year evolves. In particular, the popularity of working from anywhere (WFA) will be a benefit for travelers. It’s interesting to note that Airbnb has taken a stronger position than many hotels, simply as a result of more flexibility and the ability of guests to stay longer term. Long-term hotels are seeing a wave of investor interest for repurposing into other uses, such as apartments and low-income housing.
Retail
The bricks-and-mortar segment of this asset class has further struggles ahead after COVID-19 appears to have changed retail forever. Online ordering offers convenience and much broader options to satisfy consumers needs, at their fingertips. Locations that have embraced internet-based purchasing are in better shape than those with storefront-only. There are numerous success stories of internet native retailers such as Warby Parker, Bonobos, and UNTUCKit, which are incorporating brick and mortar locations into their strategies, as consumers like to touch/feel before buying. This year is likely to see further repurposing of properties and mixed-use solutions, such as healthcare locations within neighborhood centers, special use facilities being incorporated into big box locations, and residential components incorporated into regional shopping centers. Another example is co-working facilities incorporated into regional malls to drive retail and hospitality traffic, such as Industrious in Scottsdale Fashion Square and elsewhere across the country.
Office
While the impact on office space was not immediate, as many decisions are on hold until lease renewal, we believe that this asset class will see long-term challenges in addition to potential for distressed office properties in the coming months. Businesses are utilizing and occupying offices differently. Less in-person presence is required, but employees and employers will still see a need for collaboration, perhaps on a rotational basis, with social distancing and hygiene requirements addressed. Garden offices seem to be the highly desirable “new normal” with less “touch” common areas, etc. We believe that many employers, whether tenants or owners, will reduce the size of their footprint over time, but include more highly amenitized state-of-the-art spaces within their offices.
Industrial
Greater Phoenix industrial real estate shows no signs of stopping in 2021, as we noted recently in “A New Kind of Industrial Revolution Arrives in Phoenix.” A lot of product is under construction, particularly along the 303 and I-10. One trend to watch is so-called last-mile distribution, which caters to the need to get closer in town—today’s consumer expects everything quickly. Amazon is setting the bar high here, with distribution centers throughout the Valley.
Multifamily
After going strong for several boom years, Phoenix leads the country in apartment construction. As we have cautioned previously, the Greater Phoenix area has 20,000+/- units under construction and in the pipeline, and the market will eventually cool off. From R.O.I.’s perspective, Class A projects are the most overbuilt, but investors are still flowing in. Add it all up, and it’s difficult to predict what will happen in this space.
What to Expect When Investing in Phoenix Commercial Real Estate
Greater Phoenix continues to attract attention from investors from California and elsewhere, in addition to home-grown capital, so it is a competitive environment for buyers—and potentially a good time for sellers to exit. On a national basis, about $200 billion sat on the sidelines last year, and investors are eager to deploy it.
As a result, expectations for bargain hunting should be moderated as the market recovers. Many of the asset classes have already been hit hard, and it will be a tight window if you’re looking for distressed properties. This will likely require a targeted approach to succeed, looking for one-off deals in smaller assets and businesses that have been impacted.
R.O.I. Properties specializes in representing investors, owners, lenders and fiduciaries in buying, selling and leasing commercial real estate throughout the Greater Phoenix market and the state of Arizona. If you need help managing distressed properties—or are interested in investing in them—we are full service real estate brokers who handle all commercial asset classes, and serve as Fiduciaries through court appointments as Real Estate Special Commissioner/Special Master and REO broker. To put an expert advocate on your side, contact us at [email protected] or 602-319-1326.