The State of Commercial Real Estate: Phoenix Multifamily

Earlier this year we were a sponsor the IREM CCIM Economic Forecast which explored where Arizona commercial real estate is heading in the next year. We were inspired by this conference to reach out to some local experts and get their insight on the state of commercial real estate.

In the first installment of the series we spoke to Jim Kasten, owner and designated broker at  Kasten Long Commercial Group in Phoenix.

Thank you so much for giving us some insight, Jim – let’s dive in:

Q: What types of commercial real estate do you focus on? What area of Arizona do you focus on serving?

A: We have focused on multifamily primarily in metro Phoenix since 1998.

Q: What is the current level of business activity in your area?

A: Multifamily activity is strong and vacancy rates are near all-time lows for the Valley. In 2014, there were a total of 347 apartment transactions. This included 202 sales with 10 to 99 units representing $271.5 million and 145 apartment sales with 100 or more units representing $2.74 billion.

Q: What is happening (or will be happening) in your area that will impact commercial real estate?

A: There have been a number of new apartments built and more to come. In 2014, there were a total of 5,456 units completed. At 2014 year-end, there was a total of 33 projects under construction representing 8,554 units plus 49 projects in various stages from initial rezoning to final permitting – representing an additional 11,563 units. At some point, the extra supply may put rental rate and occupancy pressure on the existing “B+” to class “A” properties. Most of the new product is upscale – almost condo quality with rents between $1.50/sf to more than $2.00/sf (including add-on fees for common area and water /sewer).

Q: Do you predict commercial real estate activity will be in one year… stronger, weaker or about the same?

A: Stronger. We are just seeing the beginning of the California investors returning to our market.

Q: What are some patterns in commercial real estate that you see emerging in the next few years?

A: With the net population expected to increase plus the strengthening of the local and national real estate market improving, the demand for apartments will increase. This will drive rental rates and values up. This will be especially true for the class “B” and “C” properties. The new construction should fill the demand from the increased population for the higher-end tenants, but no one is building properties with the lesser rents, typical of the “B” and “C” class properties.

Another pattern or trend we are seeing is the repositioning of the “C” properties into “B’s and also taking a “B” property and adding upscale features. In both cases, rents, and therefore values, have been increased significantly. This is the new “fix and flip”.

Q: Can you comment on any other types of commercial real estate in your area?

A: Retail – Small retail strips without anchors are finding it more difficult to attract quality tenants who need the anchors to drive traffic. Due to the competition of online retail, there is less demand for retail product and the trend of retailers is to downsize space size and inventory. Many more tenants of these spaces are now personal service or health and fitness related companies. Vacant big box and community strip mall properties are being transformed and converted to religious facilities or medical as the demand for urgent care and other specialty medical use increases.

Office – Single office tenants are now seeking smaller square footage and fewer private offices, opting for more open, shared space for collaboration and part-time users. We are now seeing older, cheaper space being filled with call centers requiring limited space per employee. Corporate headquarters and service centers for financial and insurance companies are occupying many larger spaces near the population growth centers and business districts.

Industrial – Industrial users are looking to newer, safer growth areas of the valley for relocation and expansion. Some are attempting to move closer to their employee residential base with less congested rail and highway transportation access.

Q: Do you see a connection between residential real estate patterns and commercial real estate patterns in your area?

A: Yes, we focus on apartments but we are sensitive to the rental housing market. At present, occupancy in both houses and well-run apartments is about 94%. If owners of rental houses start selling, this could result in more tenants seeking apartments.

 

Q: What can realtors do to spur movement for commercial properties?

A: The apartment market is strong but there are some proposed Federal laws that may dampen the investment climate. Being proactive with your senators and congressmen might be of great benefit. Some of the issues include eliminating a stepped-up basis on inherited real estate, significant increases on capital gains taxes and eliminating 1031 tax-deferred exchanges.

 Q: What advice do you have for residential agents if a client brings a commercial deal to them?

A: The most important thing to remember is that an agent should always serve the client. Typically, commercial agents should not try to find their clients homes and likewise, residential agents should not try to do commercial real estate.  Each discipline is requires resources and expertise specific to what they know best. Residential agents should obviously refer their clients that have commercial needs to a qualified commercial agent. The commercial agent should also be skilled in the specific discipline.

Thank you again to Jim for answering our questions. If you have ideas or questions you’d like to see featured in out next article, let us know in the comments!

Fine print: The above are the opinions of Jim Kasten and do not reflect the opinions of AAR and should not be considered an endorsement by AAR.

Tags: Commercial real estate, multifamily, Phoenix commercial real estate