As the first quarter draws to a close, three CRE trends are gaining attention in the Phoenix market and provide examples of the ever-changing landscape to which landlords and investors must adapt.
CRE Trend #1: Default Concerns Rise
Concerns about possible multifamily defaults have been brewing for months, and we are finally starting to see notices of receivership sales. While the fall's One Camelback development was the most high-profile development to date, this CRE trend is closer to the beginning than the end. Vacancy rates are rising and average asking rents were down 3.7% year-over-year through November, the second-worst performing of the top 30 metro areas in the Yardi Matrix. The Greater Phoenix CRE market has a large amount of under-construction, undelivered multifamily inventory that is catching the interest of lenders and others. Approximately 33,000 units are planned or under construction.
CRE Trend #2: Affordable Multifamily Housing
In recent years, much of the development underway has been dominated by Class A properties, but more affordable units are beginning to appear. Public-private partnerships (also known as P3s) encourage development through nonprofits funded with bonds, public funds, or government money through the state or city. P3 initiatives have been prominent in the West Valley, which has seen a surge in affordable housing builders and nonprofits focused on Low-Income Housing Tax Credit (LIHTC) projects. The overall trend coincides with Governor Katie Hobbs' focus on affordable housing and the $49 million in support for affordable housing developers announced by the Arizona Department of Housing (ADH) in January.
A recent example is how Dominium structured financing to build two developments totaling 605 units in Glendale: In addition to $86.1 million in 4% LIHTC tax-exempt loans from Freddie Mac, the developers received a combination of P3 financing: an equity bridge loan from Merchants Bank, a construction loan from Barclays Capital, bonds from the Arizona Industrial Development Authority with U.S. Bank as trustee, and construction loans from ADH, the Maricopa County Department of Human Services and the City of Glendale.
CRE Trend #3: Ground Leasing
Finally, we are seeing an increasing number of transactions take the form of ground lease agreements. As communities mature, there are fewer prime parcels available at key intersections and attractive frontages. Ground lease agreements allow property owners to lease undeveloped commercial land to third-party investors and retain the fees. The investors can then work with a custom home developer to build a Chick-fil-A, Walgreens, or Raising Cane's.
It's important to note that this trend isn't limited to retail: Ground leases have also been used in recent weeks for medical office properties at the Arizona Athletic Grounds sports complex in Mesa and the Banner Thunderbird Medical Center campus in Glendale.
Whereas in the past many corporate owners would have demanded complete ownership of the property, many now compromise and agree to long-term ground lease interests to secure the location. Historically, there has been little investor interest in that type of deal because you only get a portion of the property, not the whole thing. But as well-located land becomes harder to come by, creativity is required. Likewise, a change in landowner mindset is also required. Rather than selling the property outright, a ground lease can become a source of long-term pension income.
Want to learn more about the possibilities of ground leasing? Ground leasing requires a combination of creative planning, thinking and legal knowledge to create a structure that maximizes the value of your real estate asset. Contact the ROI Properties team to learn more about this increasingly popular trend. [email protected] or call 602-319-1326.