Phoenix Business Journal - by Jan Buchholz Friday, February 26, 2010
The multifamily investment market in Phoenix chugged along during 2009’s Great Recession. The number of sales transactions increased from 60 transactions in 2008 to 68 in 2009, according to Scottsdale-based Orion Investment Real Estate Solutions. Total volume increased from $557 million to $611 million.
But here’s the bad news: In 2007, by comparison, there were 193 transactions adding up to almost $3.5 billion.
Orion’s 2009 summary reports are sobering for other property types, too.
There were 42 office transactions in 2009 totaling $195 million. There were 81 sales totaling $962 million in 2008, and 190 sales totaling $3 billion in 2007.
On the industrial front, there were 14 sales in 2009 amounting to $105 million. That compares with 51 sales totaling $619 million in 2008, and 78 sales topping $939 million in 2007.
As for retail properties, 22 were sold in 2009 for an aggregate of $139 million. In 2008, there were 44 sales totaling nearly $440 million, and in 2007 there were 68 sales totaling $531 million.
For more: www.orionires.com.
Residential brokerages expand
Two residential real estate brands have expanded in the Valley. Long Realty Co., based in Tucson, opened two new franchises, including one at Central Avenue and Camelback Road. Formerly associated with Windermere Real Estate, that office will be called Long Realty–The Marsh Partners Central Phoenix.
The other new franchise is located at Fifth Avenue and Goldwater Boulevard in Scottsdale. It will be known as Long Realty –The Marsh Partners.
Re/Max Professionals also has opened a shop in Phoenix, at Central Avenue and Camelback Road. The designated broker and co-owner is Frank Russo.
For more: www.longrealty.com and www.remax.com.
Shop Phoenix
Two California-based real estate investment firms are putting out the message that they are shopping for commercial properties in Phoenix. Los Angeles-based BH Properties said it is seeking retail and industrial acquisitions.
“We are contacting our favored brokers with as much information as possible to assist us in our search for acquisitions in the Southwestern U.S.,” said Steve Jaffe, BH’s executive vice president. “BH is now particularly interested in the Phoenix region with its fast-growing businesses.”
BH research concludes that retail sales will increase by 25 percent in Phoenix during the next five years, compared with an increase of 20 percent in other large markets. Despite the tough economic conditions locally, BH also believes the local population will grow by more than 500,000 in the next five years.
According to its news release, BH has a portfolio of 75 properties in 16 states.
Meanwhile, KBS Realty Acquisitions, based in Newport Beach, Calif., recently announced the hiring of Christopher Aust as senior vice president of acquisitions for Arizona.
“Arizona and the Southwest are increasingly important acquisition markets for KBS, so it is absolutely vital that we have someone on the ground with significant
local experience and relationships to maximize that potential,” said William Milligan, the company’s Western U.S. regional president.
For more: www.bhinvestments.com and www.kbsrealty.com.
Finding work down south
Several Valley companies are working on projects in Tucson.
Phoenix Business Journal - by Jan Buchholz Friday, February 26, 2010
The Wendy’s or Chase Bank down the street could provide one of the best real estate investment opportunities around, given that credit markets remain in the deep freeze and the situation may not improve for some time.
A transaction in which a franchisee or corporation sells its real estate, then signs a long-term lease enabling it to stay in the property, is called a sale/leaseback. Such deals can involve multiple sites or a single location, and they can prove lucrative for both the seller and the investor.
Sale/leaseback transactions represent only a fraction of the real estate market, but some real estate professionals say they could gain traction this year as business owners look for creative ways to generate cash.
Baby boomer retirees with nice nest eggs might be interested in this kind of investment because there is no property management involved. Most are triple-net deals, meaning the tenant pays for taxes, insurance and maintenance, and there’s constant cash flow — sometimes for many years.
For example, “Walgreens does 30-year leases with a fixed rent,” said Tom Wheelwright, CEO of ProVision PLC in Tempe.
Wheelwright, a wealth manager and certified public accountant, likes the relatively low risk of sale/leaseback deals, especially for 1031 exchange clients who might be ready to retire. A 1031 exchange allows an investor to trade one piece of real property for another and defer the taxes.
“A duplex or fourplex might be good for building equity, but it’s not good for cash flow. A 1031 investor could trade a multifamily property for a sale/leaseback property and have cash flow through retirement,” Wheelwright said.
Without a property to exchange, sale/leaseback deals often are driven by high-net-worth individuals with cash. But some private real estate investment trusts also are getting in on the practice, said Chad Tiedeman, a senior associate at Phoenix Commercial Advisors.
Tiedeman, who is marketing a portfolio of Wendy’s restaurants in Philadelphia, represents 75 national retailers. He and his team often handle deals involving newly constructed properties, such as a recently completed Big O Tires store in Mesa.
In that deal, an individual from Washington state paid $2.4 million for the property. The lease is for 10 years and is guaranteed by Goodyear Tire & Rubber Co. The buyer purchased it directly from the developer, Focus Group LLC of Scottsdale.
The added benefit for buyers is they can depreciate the property on their income tax returns, Wheelwright said. Returns on investment for these types of deals are averaging between 7.5 percent and 8.5 percent, according to Tiedeman, but it’s the cash flow that’s the main draw.
Sale/leasebacks can take many forms. A corporation such as Discount Tire or Tutor Time day care centers might sell some locations to generate capital or to meet other objectives. In late 2007, for example, Applebee’s sold 187 restaurants across the country for a total of $300 million, then leased the properties back from the new owners. The transaction gave Applebee’s instant cash on hand.
Similarly, a franchisee who owns his real estate might decide he needs cash to expand, buy equipment or remodel, and the only way to get that cash these days is with the sale/leaseback model.
Some companies, franchisees or developers might only be willing to sell a ground lease. In such cases, the business retains ownership of the structures on the property, but sells the land underneath it to the investor and then leases it back. This is less expensive for the investor, but still provides some cash for the business.
“A ground lease can be an attractive deal because you don’t necessarily need $1 million to $2 million to acquire one,” said Bob Broyles, senior vice president of Colliers International in Phoenix.
Long-term ground leases might start at $300,000, he said.
Tiedeman and Broyles are part of a small cadre of brokers specializing in single-tenant sale/leasebacks.
“There may be a half-dozen of us in Phoenix,” Broyles said.
Jamie Medress, an agent at Marcus & Millichap, is one of them. His specialty is listing properties, and he still makes cold calls to make that happen.
“We certainly don’t call everybody, but we will with certain businesses that have multiple locations,” he said.
Small-business owners with multiple locations might not be aware they could access cash through a sale/leaseback.
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
-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
Commercial property owners often have a greater ability to turn around a distressed financial situation than individual borrowers. They can bring in new tenants, they have more access to capital and credit, and they can find investors and business partners, said Craig Hannay, president of Phoenix-based Hannay Investment Properties.
Lenders are taking a more flexible and active approach when it comes to troubled commercial mortgages, said Bob Young, first vice president of investment properties for CB Richard Ellis in Phoenix. Like their residential brethren, an increasing number of Phoenix commercial real estate loans are underwater because of the market and economic slides, he said. Banks have been criticized for not modifying distressed home loans.
David Larcher, executive vice president of Vestar Development Co., said at a real estate forum in Phoenix this month that as many as half of the commercial mortgages in the Valley are underwater.
Banks will become increasingly willing to rework commercial loans as the sector continues to struggle, said Beth Jo Zeitzer, president of ROI Properties in Phoenix. The changes that are made, she said, likely will come in the form of interest rate reductions and term extensions.
John Randolph, a real estate and finance attorney with Phoenix law firm Sherman & Howard LLC, cited two recent cases in which lenders started to foreclose on commercial buildings, but delayed those proceedings to give the borrowers more time to restructure loans. He would not provide specifics, citing client confidentiality.
Azim Hameed, another real estate and banking attorney with Sherman & Howard, said banks will try to extend mortgage terms for commercial borrowers who might be able to offer some cash in exchange.
“The loan modification usually includes a partial repayment of principal by the borrower to the bank. In exchange, the borrower gets an extension of the term of the loan for six months or a year,” he said.
Such deals can be worked out, Hameed said, because a partial principal repayment increases the bank’s liquidity. Extending the term of a loan gives the borrower time for the economy to turn around and the opportunity to find new sources of cash to repay the loan, such as new equity investors, a new loan or a perhaps a property buyer.
Arizona’s three dominant banks — Bank of America, Well Fargo Bank and JPMorgan Chase & Co. — say they want to work with both commercial and residential borrowers.
“Wells Fargo is working with commercial borrowers to restructure their loans and provide an opportunity for them to weather the current economic downturn,” said Dean Rennell, president of Wells Fargo Arizona Business Banking.
Rennell said Wells looks at tenants and vacancy rates when considering modifying commercial loans on rental properties, and the owner’s financial viability for owner-occupied properties.
He said lenders have more flexibility in adjusting commercial mortgages than home loans because home mortgages are highly regulated consumer transactions that frequently are owned by investors who dictate the terms. The banks are servicers of those mortgages, so they may not be able to rework or restructure the loans.
In contrast, he said, a commercial real estate loan usually is owned by the bank, so it can renegotiate terms.
Other real estate experts agree that because home loans were securitized and have been sold among banks and investors, lenders currently holding home mortgage notes are less willing to agree to modifications.
Zeitzer said that’s because lenders have more to lose when a large office building or shopping center goes into foreclosure than a single home in Peoria or Buckeye. She said short sales seem to be a more efficient means of working through distressed home loans.
Get Connected
Hannay Investment Properties: www.hannayproperties.com
ROI Properties: roipropertiesaz.com
Camelback Tower, at 6900 E. Camelback Road, and Camelback Executive Park, at 6991 and 6981 E. Camelback Road, are scheduled for trustee sale April 1.
Those properties and two other parcels, including the former Orchidtree Apartments, were assembled by ICP in 2006 to create a glitzy mixed-use project dubbed the District at Camelback. Now, however, ICP Chairman Tom Donahue concedes the proposed development is dead.
Scottsdale Mayor Jim Lane said he’s not surprised to hear of the foreclosure action, adding that he figured the District at Camelback was a project whose time would never come.
“I know the properties that were involved have been troubled for some time, but I didn’t know there was a foreclosure coming up,” said Lane, who did not want to point fingers at the developer for failing to deliver. “There’s a few thousand developers who have encountered problems. My role is not to criticize. The fact is that, at the height of the market, developers could hardly make a mistake.”
Despite troubles with these properties, Donahue said ICP remains actively involved in Valley real estate. He is confident that ICP will hold on to the two office complexes facing foreclosure.
“We’re currently in negotiations with the lenders, and no, I don’t think we’re going to lose those assets,” he said.
Reached at his offices in Whitefish, Mont., Donahue said he still has two Scottsdale employees and is moving to salvage the company’s Valley assets and pursue new opportunities here and on the West Coast.
He said ICP still owns the Veritas luxury townhouse project at McCormick Ranch. It’s not finished, and ICP is in a legal battle with the original lender, MidFirst Bank of Oklahoma City. Donahue argues that MidFirst did not fully fund the $15.5 million construction loan it promised.
MidFirst initiated foreclosure proceedings on Veritas on Feb. 6, 2009, but records at the Maricopa County Assessor’s and Recorder’s offices still show ICP as the owner.
“We’ve been going back and forth for about a year, but I think we’ll have this resolved in four to six weeks,” Donahue said.
Calls to MidFirst Bank were not returned by press time.
Another asset that ICP has held on to, albeit tenuously, is the Lincoln Center office complex at 6900 E. Lincoln Drive. It was noticed for foreclosure in September 2008 by Wells Fargo Bank, but Donahue said his firm retains ownership and is making plans to redevelop the property.
“We’re having discussions right now with new capital sources,” he said.
Despite Donahue’s optimistic prognosis, he confirmed that several ICP properties slated for development have changed hands since the economy went south.
The Orchidtree apartments at 68th Street and Camelback Road, which also were part of the District at Camelback plan, went back to the lender after ICP forced renters to move out to make way for a ground-up luxury condominium project. The 8.6-acre parcel has been vacant for three years.
In a deal that attracted little attention, Chicago architect David Hovey, who developed the acclaimed Optima at Camelview Village condos up the street, purchased the Orchidtree property in July 2009 for
$16 million — compared with the $36 million ICP paid in 2006.
Calls to Hovey’s Optima headquarters in Chicago were not returned by press time.
Another lost parcel is 6828 E. Camelback Road, a small office building that was sold at auction in January 2009 by lender
National Bank of Arizona. In that case, buyer TD Note LLC of Paradise Valley paid the same $2.5 million price that ICP paid for the property in 2006. Arizona Corporation Commission records show the members of TD Note LLC are Daniel D. Diethelm, Gila River Ranches LLC and El Fondo LLC.
ICP also lost a Chandler property to foreclosure. The 33 acres at the southwest corner of Kyrene Road and Gila Lane were sold in March 2009 to Corporate Holdings II LLC for $8.75 million, more than ICP paid for the land in June 2007. ICP’s lender was First National Bank of Olathe in Scottsdale. A search of Corporation Commission records found no listing for Corporate Holdings II LLC.
Donahue said he doesn’t regret losing that property.
“We gave that property back to the bank,” he said. “It was going to be a massive office and industrial concept, but the basis turned out to be too high.”
If you’re wondering about the accuracy of online home-valuation site Zillow .com’s estimates, a study published by the Appraisal Institute says your guess is as good as Zillow’s.
The Washington, D.C.-based institute’s quarterly publication, The Appraisal Journal, includes results of a study by University of Texas-San Antonio business professors Daniel Hollas, Ronald Rutherford and Thomas Thomson that compared actual sale prices with both homeowners’ estimates and Zillow’s valuations, called “Zestimates.” more…
Desert Viking, the developer of a big townhouse project in downtown Chandler, has resumed construction after receiving a $10.2 million loan from Wells Fargo.
Work stopped last summer. more…
WASHINGTON - New signs emerged Wednesday that the economic rebound is sputtering. Sales of new homes hit a record low last month and mortgage giant Freddie Mac said it will need more federal aid and might never repay it.
Against that backdrop, the government is trying to prop up the housing and job markets. Federal Reserve Chairman Ben Bernanke reiterated the need to continue record-low interest rates for “an extended period.” And the Senate passed a bill to give tax breaks to companies that hire the jobless. more…
Economic recovery is a ways off for Arizona’s beleaguered banking industry. Stung by more bad loans, Arizona-based banks continue to suffer from rising delinquencies, declining capital and poor earnings.
About 84 percent of the state’s mostly small banks ended 2009 with a loss, up from 74 percent in 2008 and 39 percent in 2007, according to the latest progress report issued this week by the Federal Deposit Insurance Corp. more…
A downtown Phoenix 1931 bank building that was entangled in Mortgages Ltd.’s collapse appears headed for foreclosure.
The 12-story Professional Building at 15 E. Monroe St. is scheduled to be auctioned on April 20, according to a notice of trustee sale filed at the Maricopa County Recorder’s Office. The notice is the first step in the foreclosure process. more…
The federal tax credit for homebuyers boosted new-home sales in metro Phoenix last year. But the expiration of the credit looms, and new-home sales and building have slowed again. more…
Scottsdale Quarter will take a few steps forward with Nike opening this fall.
Nike is planning a two-level store of 18,000 square feet east of the Apple and H&M stores, said T.J. Drought, Glimcher Realty Trust director of leasing. more…