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PHX is a Triumph, but Challenges Remain

Phoenix Mayor Greg Stanton, Credit: Bisnow

By Roland Murphy for Arizona Builder’s Exchange

Anyone looking for negativity or opposition to the bustling pace of development in Phoenix’s Downtown – or anywhere else in the metro area for that matter – would have found themselves in hostile territory at this week’s Bisnow Phoenix New Construction and Development event.

In fact, the only complaints to be heard were that some challenges and headwinds still remain in place and keep the pace more restrained than many would like.

Stanton Keeps Swinging

In his keynote address to the roughly 200 attendees, Phoenix Mayor Greg Stanton simply reveled in the progress the city’s development community has made since the Great Recession brought the city and state’s economies to a grinding halt.

All these successes, he said arose directly out of the city’s and region’s investment in transit and its accompanying services, such as a focus on walkability and permitting process improvements. Since its inception, the half-mile corridor around the area’s light rail lines have seen $9B in investments, a figure Stanton only expects to increase as more routes and service lines are implemented.

Despite these economic and cultural wins, however, Stanton pointed out many threats and impediments still remain, most particularly from Arizona’s state leadership. Harkening back to a theme he has raised with increasing frequency, most recently in his State of the City address, Stanton derided the State Legislature for its increased opposition to Government Property Lease Excise Tax and Tax Increment Financing incentives for development.

Arizona is the only state that prohibits cities from using TIF incentives, and, he said, “GPLET, the one tool we do have, is constantly under threat. Our downtown would not look the same if we had not wisely used the GPLET economic development tool.”

He cited the Arizona Center, which is in the midst of a $25M renovation program and will soon get an accompanying $100M residential tower, as a GPLET success story. “Arizona Center would not have happened without partnership with the City of Phoenix and use of a GPLET. Arizona Center has now come off the GPLET. It now pays taxes to our local school district of more than $4M per year. That’s a successful public-private partnership that helped reinvigorate our downtown. There’s no doubt that without that partnership, Arizona Center would never have been built.”

He continued, “Despite our success, despite the city’s wise use of the GPLET, it was further restricted during the last legislative session. I believe the Legislature needs to better understand and work with the business community. It’s not a giveaway. It’s a tool to build the better community that we want.”

Experiential Development

The first of the day’s two panels concentrated primarily on the trend of developing projects with an eye toward how they fit in with surrounding offerings and amenities to give the user a comprehensive experience, rather than merely developing to fit a single need.

“When I hear ‘experiential’, I hear people say they’re tired of the same boring recipe that’s been used for 50 years. We always need to find new ways to provide a more interesting experience,” said Laura Ortiz of Evergreen Devco.

The other panelists agreed, stressing the importance of gathering community input before entering the actual planning stages with activities such as focus groups, open meetings and surveys.

Perhaps the most cogent summary of the trend and its requirements came from Jeff Moloznik of RED Development. He said, “There’s been a real embracing of craft and authenticity. We try to create an environment for our retail and office tenants to showcase their skill and uniqueness to their consumer. From a development standpoint, we have to be very fluid, loose and organic with what we do so that no two projects are the same, because no two projects are delivering to the same tenants.”

While there is no bubble any of the panelists see in the immediate future, in Phoenix or across the country, there are some minor corrections looming. Affordability in trendy areas has become a concern, as has saturation in some market segments. Regarding the explosion in fast-casual dining, Ortiz advised attendees to watch out for rent rates and overbuild risks, as she sees the niche as a “micro-bubble”.

That necessity of uniqueness was a point of concern for panelist Terry O’Neill of SET Development. Given Marriott’s acquisition earlier this year of several hotel flags, he sees a need for variety and distinction in hospitality in hot markets.

One tool O’Neill has embraced and expects to be a production differentiator for him is the incorporation of modular hotel room construction.

“The hotels I’m going to put up are going to be built modular,” he disclosed. “While my ground crew is preparing the site, the hotels will be built off-site, and they will be delivered complete. They will arrive with everything but the TV hanging on the wall.” This flexibility, he said, will not only allow for more distinctive and situational personality in each new construction, but, “I will change my construction from ten months to four.”

Regarding risks and retail constriction, all the panelists agreed it is the mid-range, lowest common denominator segments in all service areas that are facing the greatest challenge, largely because their offerings are so repetitive.

Joshua Simon of Simon CRE used Nordstrom and TJ Maxx as comparison points for the healthy ends of the economy and markets. He said if a consumer can afford $100 for a pair of khakis, they’re probably going to be drawn to Nordstrom because the store offers shoppers an experience through its offerings and amenities. He added a shopper who just wanted a $20 pair of pants had no resistance to a downmarket shop’s no frills, in-and-out arrangement. It is the middle range shops trying to survive on sales of $45 pants that will be pinched because they are homogenous and offer neither significant value nor unique experience.

Hot Projects in Phoenix

The second panel, “Hot Projects in Phoenix,” was a bit of a misnomer, as none of the panelists could talk about anything that was not already in development. Panelists mostly focused on projects that were currently running, how they got there and other issues that have already been covered, both in AZBEX and elsewhere.

The greatest insights and information came in discussing trends impacting development other than legislative foot dragging.

For most of its current existence, Phoenix and Arizona have been viewed as cyclical economies unduly influenced by boom and bust cycles in real estate. The wake of that reality in a post-Recession world has both positives and negatives stuck in a tug of war between a burning desire to expand and diversify and a need to not get smacked around by overly abundant enthusiasm.

For its part, Phoenix and the state have finally embraced diversification and solid, multi-disciplined economic development. The downside is, national investors and institutional lenders lost nearly everything in their Arizona portfolios but their kids’ Tooth Fairy money in the last crash, and they are slow to accept both that the area has grown up and to fund wide scale, high-dollar projects.

One region in which this is particularly apparent is in the West Valley. Despite massive investment of time and treasure in economic development programs, and numerous success stories, the one thing every WV city cites as essential for its continued success – high-end office space –  can’t get nearly enough institutional funding.

Panelists cited several reasons, but they all came back around to one core issue: the hesitancy of high-value funding providers outside of Arizona to reach the same level of faith as those looking to come out of the gate running.

Larry Pobuda of The Opus Group summarized a lengthy exchange in just a few words. “The capital markets just aren’t there yet.”

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