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Real Estate Market Poised for Slowdown in Activity
January 21st, 2008
For companies involved in almost any segment of the Valley ‘ s real estate market, the years 2002 to 2006 were akin to a long and lavish party, a nonstop celebration of building, spending, expanding and, at times, exaggerating.
But early in 2007, some players -- particularly companies involved in residential real estate -- started sobering up to the fact that home developers had overbuilt, prices had become artificially inflated and the national subprime mortgage fiasco would affect almost every segment of the economy.
Perhaps 2008 will represent the hangover as home builders, real estate agents, lenders, commercial brokerage firms, real estate investors and developers step back and take a sober look at what conspicuous consumption has wrought, especially in
"With $1 out of every $3 generated in metropolitan Phoenix’s economy attributed to housing, the ripple effect has resulted in reduced job growth for the home building, title, escrow, brokerage, mortgage and construction sectors," said Chris Toci, chairman of the Arizona Chapter of the National Association of Office and Industrial Properties. "As a result, we are beginning to see office vacancy levels creep up."
Toci also noted increases in subleases and "shadow vacancies," in which companies continue to pay rent on space they no longer occupy.
Although the housing market was the first to reveal serious underlying economic problems, the commercial real estate industry has been affected and likely will continue to see significant downward shifts that could result in an economic abyss.
"Residential real estate is already in a recession, and other sectors are appreciably slowing down. But an overall economic recession will make it more difficult and longer for the industry to pull out," said Jay Butler, director of Realty Studies at
Still, the news isn’t all bad in every real estate niche. 2008 may not be great, but it may not be awful, either.
Commercial
Some of the largest transactions in the city’s history were recorded in 2007, including the sale of the Bascom apartment portfolio ($427.5 million),
Industrial sales volume was especially strong in 2007. By Sept. 30, $710 million in industrial sales had closed. The estimated year-end total is $850 million, according to CB Richard Ellis. That would be a significant increase from 2006, which saw $674 million in industrial sales.
Experts say that trend could be moderated somewhat next year, with several million square feet of product scheduled for completion in 2008 and 2009.
Office sales volume was nearly $2.6 billion at the end of September and is expected to finish the year at about $2.9 billion, a bit beneath 2006’s record of nearly $3.1 billion, according to CB Richard Ellis.
"Industrial and office should continue their growth in 2008, but at a sluggish rate, picking up momentum at the end of the year and into 2009," said Mike Fitz-Gerald, managing director of Colliers International-Greater Phoenix.
Even in a robust economy, many of the larger "trophy" sales wouldn’t be expected to cycle through again in 12 months. But now, the market is faced with much tighter lending standards and higher costs for taking on debt, making the really big buys less likely.
"Interest-only money has dried up, and what money can be had has more due diligence associated with it," said Crocker Liu, McCord chair and professor of real estate at
What might be interesting to watch is whether more foreign investors take a liking to
"With the dollar so beaten down, foreign investors are able to get U.S. real estate at what they consider a bargain with the exchange rates," said Craig Coppola, principal at Lee & Associates. "There are a lot of different countries who are in the
Residential
The benchmark Standard & Poor’s Case Shiller Home Price Index, released Dec. 26, showed home prices in
"No matter how you look at this data, it is obvious that the current state of the single-family housing market remains grim," said Robert Shiller, an economist at MacroMarkets LLC.
In addition,
It may be a long, painful recovery, said Beth Jo Zeitzer, president of ROI Properties, which specializes in cleaning up and listing foreclosed properties on behalf of lenders.
"We’ll continue to have fallout through 2010," Zeitzer said. "I think the bottom is 2008 and could be as soon as six months."
Even that prognosis is rife with opportunities, she said.
There are bargains for would-be home buyers who have good credit and aren’t saddled with houses they cannot sell. Meanwhile, land is selling for rates far lower than a couple of years ago.
"Ironically, the current widespread distress among home builders will create significant activity in the residential land segment in 2008, as opportunity funds and other opportunistic investors see a chance to buy land from home builders looking to unload their land at the bottom of the market," said Mark Dioguardi, a real estate attorney with Dioguardi Flynn Jones LLP of Goodyear.
infill Development
Although many industry observers assert that if it isn’t out of the ground now, it won’t be coming out in 2008, others see opportunities along the light rail line under construction and in urban infill sites.
"Demand in the mixed-use infill niche will continue to grow for the foreseeable future," said
Robert Lyles, a partner in Starpointe Communities, agreed.
"Infill development will do well because it is positioned within an existing retail or commercial setting, which means the traffic already exists and therefore exposure is more easily gained," he said. "Rather than waiting on rooftops or drawing people out to the perimeter, you’re simply pulling in or redirecting existing flow."
