WESTERN SNAPSHOT, JULY 2008

Phoenix Retail Market

Finkel

The investment sales business on Phoenix’s shopping centers has slowed. It’s agreed that the gap between what buyers want to pay and seller’s expectations has not moved much for the last 3 to 5 months, therefore yielding less volume. In addition, vacancy has increased, if not soared, at many developments. Let’s finally acknowledge that a key component is not only fewer properties to work with, but fewer of those that are not injured and are priced accordingly.

The first market correction that needs to take place is to price properties on the true value of the offering. Older properties with high vacancy and local tenants are not worth the same cap rates as new, fully leased properties to national, long-term tenants. Risk and reward are not uniform like the market was accepting the last 3 years; there are differences in properties.

The second correction is that landlords must improve occupancy by lowering rents and getting a handle on CAM charges. Tenants need to be encouraged to lease and to stay for many years. The need to contact current tenants early and strike lease extensions — potentially with tenant incentives — is vital. If not, the price will reflect this problem.

The third correction is that buyers must become accustomed to adding more equity into their projects. Yes, it is time for buyers to look at more than 25 percent down on many projects. The deals are too tight, and the risk is not worth the reward.

Where is the Phoenix metro retail sector going? The view here is that the Arizona market resembles California in 1995-1996, not the slumping conditions experienced nationally in the early 1990s. Prices dropped on California properties across the board, leveled off for about 18 months, then started an aggressive movement upward. Arizona should follow this pattern, and all investors in the next 12 to 18 months will reap the rewards. There will be some well-priced properties that are leased up correctly and will make a solid portfolio addition. It’s easy to see that the market is loaded with cash ready to be placed at the right time on the correct property. Arizona is a fertile ground for this investment.

Order-takers will be leaving the industry, and fast-flippers will be slow to return. Amateur developers have been so beat up, and it will be a while before they come back. Real estate investment will be viewed as it was meant to be. If one analyzes the property in detail, has a longer hold, puts permanent financing in place upon closing, the risk will equal the reward, just like it always has for the owners who value investment ownership for the longer run.

Arizona will be an exciting place in the retail real estate industry next year; for now, it is time to get organized, line up your relationships with clients and brokers, and prepare for the change in 2009.

Ron Finkel is the senior managing director and designated broker for Retail Brokers, Inc. (RBI) based in Scottsdale, Arizona.

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