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Strong Phoenix Fundamentals Point To More Growth Ahead, Not A Slowdown

The Phoenix real estate market has enjoyed a long and mostly robust recovery since the end of the last recession. That is the good news, according to Snell & Wilmer partner Nick Wood, who moderated the Capital Markets panel at Bisnow's recent Phoenix State of the Market event.

But that is also the bad news, since nothing lasts forever.

Strong Phoenix Fundamentals Point To More Growth Ahead, Not A Slowdown
Capital Markets Panel: Snell & Wilmer partner Nick Wood, who moderated, LaPour Partners President Jeffery LaPour and Walker & Dunlop Managing Director, Capital Markets Brandon Harrington

Wood said he likes to illustrate that point with a story:

Two former baseball pitchers in their 80s, Al and Jack, wondered if there was baseball in heaven. So they made a deal: The first one to die would come back and tell the other one. Six months later, Al dies. As Jack, much saddened, left Al's funeral, Al's ghost tapped him on the shoulder.

"Is there baseball in heaven?" a stunned Jack asks.

"There's good news and bad news about that," Al says. "The good news: Yes, there's baseball. The bad news: You're pitching next week."

For the Phoenix market, the recovery has been sweet. But will it end soon?

LaPour Partners President Jeffery LaPour, whose firm develops commercial properties mostly in the West, said he has heard that question a lot. 

"How much longer will that last?" LaPour said. "It has been an uneven recovery, with apartments leading the way in certain urban coastal markets and maybe Texas. As for Phoenix, the recovery is still somewhere in the middle. It's been slow and steady and it still is."

During past cycles, LaPour said, there used to be three or four companies developing the exact same things in the exact same neighborhoods at the exact same time.

"We don't see that any more. Lending is stricter these days, and the market is better for it." 

Walker & Dunlop Managing Director, Capital Markets Brandon Harrington, whose office in Phoenix has done about $1B in multifamily loans in the last 24 months, said growth has been slow and steady throughout most of Phoenix.

In that way, the market is better off than some other places, especially as growth has driven up costs.

"Other markets are in later innings, but with the affordability we see in Phoenix, I'd say we're more toward the middle in all property types," Harrington said. "There's quite a bit of runway."

Strong Phoenix Fundamentals Point To More Growth Ahead, Not A Slowdown
Capital Markets Panel: Newmark Knight Frank Senior Managing Director Mike Garlick and Parallel Capital Partners Managing Partner Matt Root

Newmark Knight Frank Senior Managing Director Mike Garlick said he believes the market still has room to run.

"But I like to get away from that question. Phoenix is different from a lot of other markets."

As an example of Phoenix's uniqueness, Garlick cited the office market. In 2007, about 3.8M SF of new office was delivered in the Phoenix market — the height of the last cycle. The current cycle is more subdued.

"So if that was the top of the market, how does the current market compare?" Garlick said. "We're going to deliver about 1.7M SF this year. It isn't the same."

What is really important are the fundamentals, Garlick said.

"Phoenix isn't just a homebuilding market any more. We're diverse. We have healthcare and tech. That is going to support more demand and more growth ahead."

Parallel Capital Partners CEO Matt Root, whose company is active in seven markets, said he has thought quite a lot about where Phoenix stands. On the whole, he is optimistic.

"Absent a geopolitical event, the market is slow and steady. We're in a moderately productive environment stacked up against a moderate interest rate environment. Consumer and business sentiment is strong. Inflation is low. From a real estate perspective, that's a recipe for more growth."

As for Phoenix, the market was relatively late in coming to the recovery, which probably will give it more time to enjoy the benefits of the current recipe for growth, Root said. 

Strong Phoenix Fundamentals Point To More Growth Ahead, Not A Slowdown
Construction and Design Panel: Kephart principal Bryce Hall, who moderated, and Ryan Cos. Vice President Molly Ryan Carson

On the Design and Construction panel, Ryan Cos. Vice President Molly Ryan Carson said Phoenix's relatively small size as a market is hardly a bad thing. It means there is a lot more room to grow.

Phoenix has only five and a half Fortune 500 headquarters," Carson said. "When I moved here eight years ago, I thought that was a disadvantage. Now I understand that it is a tremendous opportunity. 

"The market has a lot to offer companies coming in: lower costs, higher quality of life, a workforce that's exceptionally well trained. You need to sell the story. Once you get people here, and investors get here, they're hooked. People love it." 

Because Phoenix has so much room to grow, the large-scale mixed-use model is possible for placemaking here, Carson said. So is adaptive reuse, which is a fairly new thing in the market.

"Adaptive reuse is about enhancing and creating a community, and that's what Uptown Plaza and Roosevelt Road are trying to do. A rich history is extremely powerful, and Phoenix is just beginning to take advantage of its history."

Strong Phoenix Fundamentals Point To More Growth Ahead, Not A Slowdown
Construction and Design Panel: Skanska Executive Vice President Ross Vroman and Vintage Partners partner Walter Crutchfield

Skanska Executive Vice President Ross Vroman said Phoenix is driven by demographics, including in-migration from other states. There is a younger set of people moving here.

That bodes well for the future of the market — for demand across the spectrum of properties — but it also means that developers and contractors need to design properties to accommodate younger talent and the companies that hire them.

"Early involvement by the contractor is vital to a successful project," Vroman said. "The end goal is to add vibrancy to the assets. If you know from the beginning what your end game is, what experiences the property is going to offer, that's the way to build successfully in a market like Phoenix."

Vintage Partners partner Walter Crutchfield said it is not readily apparent where the Phoenix market is going, but opportunity is still here, including for adaptive reuse projects.

Vintage re-created Uptown Plaza, a shopping center built in 1955 that housed the first Piggly Wiggly in Arizona. A tired stucco-covered strip mall is now a standout example of midcentury design, he said. 

"Community and experience are important in development," Crutchfield said. "When we first started Uptown Plaza as an adaptive reuse project, we wanted people to be attracted to it. We wanted to create a place where people would say, 'that's my spot.'" 

The playbook for the future of development in Phoenix, especially retail, is out the window, Crutchfield said.

"It's a whole new world now."