By Roland Murphy for AZBEX
For the past several years, Arizona in general and the Greater Phoenix area in particular have been among the hottest spots in the U.S. for commercial real estate development. September’s BEX Companies Leading Market Series event outlined for attendees how and why – even in this booming market – some spots are hotter than others.
Led by moderator Martha de Plazaola Abbott – principal and managing director at Gensler – a panel of three representatives from Arizona’s most booming CRE areas explained their visions, challenges and hopes for the future.
The panel consisted of:
- Brian Kearney, first VP at Catellus Development Corporation;
- Scott Phillips, VP at Carefree Partners, and
- James Smith, economic and workforce development director for Pinal County.
After introducing the panelists to the room, de Plazaola Abbott gave each presenter the opportunity to briefly discuss their master plans and major projects, update their statuses and explain their places in the future of Arizona growth.
Kearney explained the history of the Catellus/Arizona State University partnership in establishing the Novus Innovation Corridor in Tempe and brought attendees up to speed on the 10MSF-plus project’s status and future direction. At buildout, Novus is expected to generate an annual economic impact of $4.6B and include 4,100 residences, more than 1,000 hotel rooms and 4.5MSF of office space.
He was followed by Phillips, who explained Carefree Partners Investments, LLC’s big picture and long-term goals for Surprise City Center and Buckeye – Apex, which will center development on 280 acres at I-10 and SR 85 (I-11). Carefree Partners estimates, given the continued in-migration of businesses and residents from California, the immediate area will eventually see approximately 100MSF of development. The company is currently working on the Buckeye 29 master plan in the same area and will continue to pursue entitlements and water rights.
After Phillips, Smith gave a concise summary of the extensive and booming development currently taking place and planned for the near-, mid- and long terms in Pinal County. The region has exploded in the last few years, particularly with advanced manufacturing development focused on next generation vehicles, semiconductor manufacturing materials suppliers, and general building materials producers.
After the panelists delivered their summaries, de Plazaola Abbott opened the morning’s question and answer session focusing on how particular market trends and issues were impacting their specific efforts.
On the topic of Arizona’s ongoing rapid pace of in-migration, particularly from California, Kearney said long-term population growth is important to Novus as an urban infill project, but that it can withstand some ups and downs because of the “flight to urban” among the existing population.
Phillips said the trend is critical for Carefree Partners’ vision for housing, employment and quality of life growth in the West Valley. Smith echoed that sentiment, stating Pinal County’s ultimate success will be dependent upon importing qualified workers to fill the abundance of skilled jobs coming to the area.
Challenges are Universal
When asked about rising interest rates and construction costs, the panelists all acknowledged the current state of affairs is challenging but said they maintain optimism for the future. Phillips reminded the audience that while rates are rising, they are still historically low. Smith said some projects have been affected and parties are making sure all components are in order before moving forward. “We’re definitely seeing some slowdown in projects that we thought would have moved forward by now,” he said.
The key issue with rising construction costs, Kearney said, is, “It’s very difficult at any point in time in a project to really figure out what your costs are and what they’re going to be when you actually start construction. It’s causing some real challenges in pro formas and getting financing, etc. Hopefully, we’re seeing some leveling off.”
Phillips said the Arizona market is in a state of transition away from affordability and toward other assets. He pointed out California residents have traditionally paid at least 40%-50% of their incomes for housing. “We’re not getting too far away from that. It’s okay. It’s going to be okay. We’ll survive it. There will be some adjustment period, but we have huge growth. Rising construction costs will be absorbed into the new market status.”
Housing demand was another topic touched on in the questioning and one of great importance to all three panelists. As an urban infill project, housing is a key component on the Novus vision.
Smith said Pinal has traditionally been a single-family/single-lot development environment, with some municipalities having zero area set aside for multifamily. Given the growth in employment and residents, diversified housing options and increased inventory are critical, he said.
All the panelists praised the state’s attraction of technology-based and advanced manufacturing in recent years. Kearney pointed out ASU’s status as the research and engineering center for the state has made Novus and downtown Tempe the most desirable space for tech company headquarters. Phillips and Smith again said technology-based development is a key component for their target regions. They also highlighted the need for expanded job training to produce enough skilled workers and emphasized the importance of partnership and collaboration between the State of Arizona, counties, municipalities and educational facilities to develop and operate the requisite programs.
Whether trying to build a 100-unit apartment complex or a multimillion square foot master project, developers all face a common set of challenges, the panelists said. Among these are:
- Increased labor and construction costs,
- Supply chain uncertainty,
- Elongated production and development schedules, and
- NIMBYism/resident opposition – particularly in regards to multifamily development.
Despite the challenges, all the panelists expressed abundant optimism for the future. Smith teased attendees to expect more major announcement out of Pinal County in the next 12-18 months.
Phillips said, “We may see a slowdown over the next 12-18 months, but after that we’re going to take off like a rocket. We’re building more capability in the United States, and when you let the market work, it figures it out.”
Kearney agreed the next 18 months will likely be challenging on a national and statewide basis, but that Arizona is in an exceptionally strong position to weather any headwinds. “Inflation’s still going to be there. Construction costs are still going to be there. The labor shortage and all those other things are still going to be there – hopefully improving – but I don’t think there’s a better place to be than Arizona as we’re dealing with all those things. Relatively speaking, we’re in a very strong position. We’ll weather the storms and we’ll come out on top.”