The real estate industry in the Grand Canyon State continues on the road to recovery, with more job growth expected this year and certain sectors such as multifamily housing reporting a robust upturn. Neighboring states Nevada and New Mexico also are recovering from the downturn of the past several years with an uptick in building activity.
“If all goes well in 2011 and 2012, Arizona expects to have 2.5 percent job growth, resulting in 60,000 new jobs,” says Bob Hutt, a founding partner and managing director of development, Southwest, for Phoenix-based Alliance Residential Company, a fully integrated ownership, development, and management company. “That compares to 1 percent growth in 2010, up from a negative 7.9 percent in 2009.”
Global demand for commodities will fuel the state’s copper and other mineral resource industries, adds Kenneth Abrahams, executive vice president at Tucson-based Diamond Ventures Inc., one of the leading real estate development and investment companies in the state. “Arizona’s strong foundation in biomedical and pharmaceutical industries also will continue to expand, as will specific logistics-related industries and businesses,” he says.
In southeastern New Mexico, construction is being completed by URENCO USA on a more than $3 billion facility that will enable the United States to have a domestic source of enriched uranium for the country’s commercial nuclear power plants. The facility is the only facility of its kind in North America and is fueling residential and commercial growth, says Dale Dekker, a principal with Dekker/Perich/Sabatini, an Albuquerque-based firm that provides architecture, interiors, planning, structural engineering, and landscape architecture services. Also under construction in south-central New Mexico is the $212 million Spaceport America—the world’s first purpose-built, commercial spaceport—funded by the state and the surrounding counties through a special tax assessment, says Dekker. “When finished this year, it will be the operational home of Virgin Galactic and other commercial space pioneers, all capitalizing on New Mexico’s rich aerospace heritage and established infrastructure, restricted airspace, low population density, and high altitude.”
After a long struggle, the American Southwest’s real estate industry appears headed for a brighter future. Most of the bad news in Arizona, New Mexico, and Nevada is past; business leaders and developers are feeling more confident.
As always in Arizona, the future is bright, says Douglas W. Fredrikson, founder and chief executive of Douglas Fredrikson Architects Inc., a firm specializing in golf clubhouses, community centers, hospitality facilities, custom homes, and sustainable design.
“Although the economy has taken an especially large bite out of Phoenix, I am seeing more positive progress, mostly in the renovation of existing buildings either as reuse or repositioning,” says Fredrikson, whose firm is renovating Sedona’s Enchantment Resort. “Hotel renovations and restaurants, new or reuse, are at the forefront, as well as senior living. The good design firms that have managed to survive are starting to acquire more and more work based on their solid reputation in design and sustainability.”
Jason N. Hadley, chief executive of Scottsdale-based Hadley Design Group Inc. (HDG), says he expects Arizona’s residential, commercial, office, and industrial real estate markets to continue to stabilize, but the unknowns will be the default and foreclosure rate on residential and commercial properties.
“Access to capital markets for both businesses and investors will be key this year,” he says. “But I believe that the worst is behind us in Arizona and that 2011 will be an improved outlook for real estate. Real estate investment has always been a significant part of Arizona’s economy, and I believe that its retrenchment has been curbed.”
The role of alternative energy in the Arizona economy has continued to gain momentum, says Hadley, with health care–related services and development and higher education and technology sectors also being bright spots. “Apartments and assisted living are leading in the residential sector, with industrial and transportation-related development getting traction as Arizona concentrates on the development of inland ports and foreign trade zones,” he says. “For HDG and our joint venture partner Atwell LLC, single-family residential has continued to be a mainstay of our practice in Arizona with multiple ongoing projects for national, regional, and local homebuilders and master developers.”
Also seeing signs of stability in the Arizona economy is James R. Hatfield, senior vice president and chief financial officer of Phoenix-based Pinnacle West, whose affiliates include Arizona Public Service, which serves more than 1 million customers, and SunCor Development Company, a developer of residential, commercial, and industrial real estate.
In the metropolitan Phoenix area, he points out, housing prices and commercial building occupancy have stabilized over the past few quarters, and excess housing in the Phoenix metropolitan area is starting to be absorbed.
The demand for housing continues to grow slowly, but faster than new supply being added. “We expect this situation to continue for at least two to three years,” says Hatfield. “On the commercial side, vacancy rates are expected to peak at very high levels in 2011, but the trends in demand for both office and retail space are positive again after several quarters of decline.”
This year will be a good one, agrees Amanda Shaw, president of AAM LLC, one of Arizona’s largest homeowners’ association management companies with 320 associations under management. “I don’t think it’s going to be any worse than it was in 2010. I think we’ve learned how to deal with foreclosures,” says Shaw. “Our communities, our real estate agents, and our builders know how to market against them; everybody is geared for dealing with the situation, so we expect no surprises.”
Shaw says she thinks the state economy probably bottomed out in the fourth quarter of 2010. “We are seeing an improvement in our active adult communities, which are holding their own,” she says. “In traditional communities, there has been a pretty substantial flip in foreclosures that had sold fairly quickly. While we are certainly not in a good market like several years ago, we are holding our own.”
Although specific micro-location and sector opportunities will arise this year and next, the real estate recovery in Arizona awaits a resurgence of the levels of population growth that historically have been responsible for the state’s flourishing economy and strong job growth, says Abrahams. “The office and industrial real estate sectors will benefit from the availability of affordable housing and affordable and ready-to-occupy business space,” says Abrahams. “Arizona is a relatively inexpensive place for most business to operate, and as a result of the ready availability of housing and business space, Arizona will get more than its fair share of businesses relocating out of other congested and high-cost business environments.”
Diamond Ventures is planning only a few development projects in the near future. “We will be concentrating on contract-build projects and continuing opportunity-oriented acquisitions of already developed real estate in the Southwest region,” Abrahams adds.
One bright spot is that the multifamily supply is approaching all-time lows, and development is drastically reduced, says Hutt. “We’re also seeing occupancy in the low 90 percent range,” he says. “You need to stop the development pipeline and then to fill up the cup. I think the worst is behind us; we have stabilized nicely in the multifamily market. We were expected to absorb 13,000 units in 2010 with only 336 units permitted.”
Looking ahead, Hutt expects rent growth in Arizona’s metropolitan neighborhoods, particularly in urban areas where there is less competition from single-family homes. “There’s more stress on outlying suburban areas because of competition for single-family homes,” he says. “There were a lot of foreclosures in the suburbs, while less in the interior. In the urban areas, rents tend to be higher and are recovering more quickly.”
Alliance may start some 2,500 multifamily units this year in core, Class AAA locations. “They will be urban infill sites where there is not a lot of competition and strong employment in these locations, particularly where you are not competing in the single-family rental market,” he says.
Still, Arizona is overly dependent on growth and housing, notes Jim Pederson, chairman of the Pederson Group, a Phoenix-based development firm. “As long as housing was booming, Arizona’s economy was booming,” he says. “We need to diversify our economy because it’s disproportionately affected by these downturns.”
The next 12 months will be a year of reckoning, he adds, noting that in the 1990s, the Resolution Trust Corporation (RTC) forced financial institutions and developers to deal with the situation. “We don’t have the RTC pushing product out in the market today,” says Pederson. “The reckoning has been delayed. Even now, there is a lot of denial out there, particularly if you don’t have a third party putting pressure on banks and developers.
“Both the borrower and lender need to be realistic in terms of how market conditions have affected rents and values,” says Pederson. “In most instances, an acceptable middle ground can be achieved if the project is performing and the developer has a good track record.”
In neighboring Nevada, the Las Vegas real estate market has begun to stabilize, thanks to improved gambling and visitor volumes, says Danny A. Callejo, founder and president of Las Vegas–based Terzo Inc., a real estate consulting firm that provides investment, planning, and development services. “An opportunity exists to promote public/private partnerships in renewable energy, green building, and transportation,” he says. “This will help diversify our economy and reposition Las Vegas on a regional, national, and international level.”
Renewable energy, mining capacity, and transportation logistics are bright spots, he adds. “Aside from the fact that we’re still suffering from an overhang, I believe the real estate market has potential if projected properly, says Callejo, who is also chairman and chief executive of the Las Vegas Railroad Society, a nonprofit organization dedicated to promoting the history, exhibition, and future of railroads; he is developing a 200-acre (80-ha) railway science and technology center in Las Vegas.
“An improved outlook will greatly depend on the political willingness to embrace the necessary changes to help diversify our market offerings, which will allow Las Vegas to continue its leadership internationally,” he continues. “Real estate retrenchment is very possible if we do not build and promote an adequate environment focused on community redevelopment to drive long-term economic sustainability.”
In nearby New Mexico, officials not only expect that both horizontal and vertical launch technologies will thrive at the Spaceport, says Dekker, but also that together with an increase in tourism and education opportunities, the facility will open up a whole new economic development strategy to support the commercial space industry in the Las Cruces and southern Rio Grande region.
Dekker adds that the Rail Runner, a heavy-rail commuter train that parallels the Rio Grande from Belen to Albuquerque to Santa Fe, has transported more than 3.1 million passengers since beginning operations in 2008. Development interest in sites around the Rail Runner stations in Albuquerque and Santa Fe is high, Dekker says. “Regional transportation plans are being developed that link the Rail Runner stations to multimodal mass transit systems to encourage less reliance and dependence on the single-occupancy vehicle,” he adds.
Multifamily housing is at record-high occupancy rates in the Albuquerque metro area, and a lack of appropriately zoned land and a rigorous development process should ensure that occupancy rates remain high. Student housing is also strong. “The University of New Mexico has entered into a public/private partnership with American Campus Communities to develop 864 beds of upperclassmen student housing on land adjacent to the various UNM sports venues on the south campus, as well as an additional 1,000 beds of underclassman housing on the central campus,” says Dekker.
With such activity, the outlook for Arizona, New Mexico, and Nevada is much brighter today than it was two years ago. But nothing is certain. Arizona, for instance, will need to continue employment growth, attract industry, and concentrate on education and attracting an increasingly educated workforce, says Hadley. “The low cost of living, return to affordable housing, as well as the weather and quality of life in Arizona make it an ideal spot for recovery and growth this year,” he adds.