Phoenix, Las Vegas, Albuquerque and Santa Fe seem to be enjoying sunny conditions in most of their commercial property sectors. The hint of problems caused by the current economic slowdown only appears to be showing up in the Phoenix and Las Vegas office markets, so far.
COMMERCIAL REAL ESTATE LENDERS IN THE SOUTHWEST are anticipating increased loan volume in 2002, sparked by lower interest rates and expanding regional economies. Through midyear, southwestern economies were resisting much of the economic slowdown hurting other parts of the United States.
The Southwest resonates with American frontier history, replete with a storied array of players-some real and some the figments of Hollywood's imagination. Today, that colorful legacy has been replaced by the smooth hum of commerce and technological advance that's creating increased efficiencies and value on all levels of southwestern business and industry.
"We're not the Southwest once depicted in the cowboy movies," says Doug Esteves, director of real estate finance for Phoenix-based Bridge Financial Corporation, mortgage banker. "Frontier ideals like rugged individualism still have their place here, but we've evolved from dusty outposts into major markets with stable, growing economies."
While loan requests are up in major Southwest markets, most lenders are keeping a wary eye on the national economy and exercising more caution and selectivity in their lending. At the same time, however, most of the sources interviewed for this article report increased loan volume for 2001 over 2000, and expect 2002 to be as good or better than 2001.
To gauge commercial lending trends in southwestern markets, Mortgage Banking conducted a selective survey of four cities: Phoenix; Albuquerque and Santa Fe,
New Mexico; and Las Vegas. Mortgage banking and other commercial lending sources were interviewed to provide market information.
Those interviewed say real estate fundamentals are sound in all four areas, with virtually nothing in the way of construction overhang, solid absorption patterns and equilibrium for the most part in commercial property markets.
Phoenix, as might be expected, is a major linchpin in the Southwest economy--marked by continued population and economic growth and a diversified business base. Its smaller neighbors to the east, Albuquerque and Santa Fe, are also diversifying to expand their economic bases.
Las Vegas is a world-class destination for tourism, gaming, entertainment and conventions. But there's another, less-publicized side of the city--its nongaming business--and that's also growing.
One of the primary barometers of commercial real estate markets is New York--based Moody's Investors Service's quarterly report on the health of the nation's major real estate markets. CMBS: Red-Yellow-Green Update, Second Quarter 2001, the latest edition of the report, reviews the health of the underlying real estate that supports commercial mortgage-backed securities (CMBS). Moody's uses a color-coded approach in ranking property types and markets in terms of green (not under stress), yellow (on the cusp of imbalance and therefore fragile) and red (already under imminent stress from supply-demand imbalance).
Of the four markets reviewed in this article, Moody's includes three in its Red-Green-Yellow Update report. Albuquerque leads the way with four commercial categories in the green zone--office, industrial, retail and multifamily.
Phoenix and Las Vegas each have two commercial categories in the green zone. For Phoenix, it's hotel and industrial. For Las Vegas, it's industrial and multifamily.
In addition, Las Vegas office joins a group of 10 office markets nationally, including Phoenix, that are forecast to experience the strongest absorption in a recession because of their recession-resistant economies. Las Vegas also wins that ranking in the industrial category. Moody's hastens to add, though, that its economic expectations assume only a small likelihood of an actual recession.
On the negative side, Moody's singles out weakness in the Phoenix office market, which it lists in the yellow category. It says a rise in Phoenix office vacancy, from 12.5 percent in first-quarter 2001 to 15.2 percent in second-quarter 2001, was one of the highest jumps among the top 50 markets. However, as noted, Phoenix office joins Las Vegas office (also yellow) as among the top 10 markets forecast by Moody's to experience the strongest absorption should an actual recession occur. (The Moody's report does not track Santa Fe.)
Phoenix has a diversified employment base. Primary areas of business include semiconductor manufacturing, financial and professional services, retailing, grocery and airline.
Greater Phoenix offers one of the best blends of labor cost, quality of the local workforce and availability for both white-collar and manufacturing operations that require a well-educated and technically advanced work force, according to Los Angeles--based GB Richard Ellis in its Second Quarter 2001 Market Index report.
According to that report, Phoenix has 54.9 million square feet of office space with a second-quarter 2001 vacancy rate of 12.8 percent, up slightly from 12.2 percent in the first quarter. The industrial base is more than 199.3 million square feet, with a second-quarter vacancy rate of 8.87 percent, up from 7.54 percent in the first quarter.
Slowdown is moderate
Sources interviewed say Phoenix is experiencing some effects from the economic slowdown, but in the words of Mitchell Ballou, principal of The Alison Company, "It's been moderate with no big downturn."
The Alison Company is a deccentralized commercial mortgage banking joint venture, with partners located in Phoenix, Las Vegas and Newport Beach, California.
Jon Kreiger, senior vice president and branch manager of Horsham, Pennsylvania--based GMAC Commercial Mortgage Corporation's Phoenix branch office, agrees with Ballou. "The slowdown's had some impact on us, but not as much as other sectors," Kreiger says. "We can weather a downturn as well as any other part of the country because of our population growth."
James Dumars, senior vice president and managing director of the Phoenix regional office of Bloomington, Minnesota--based NorthMarq Capital Inc., commercial mortgage banker, says there's been a "slight increase" in office vacancies but no impact on the other main (real estate) food groups. "The economy is healthy and we haven't seen many layoffs," he says.
Clifford DuBois, president of the Phoenix branch office of Tucson, Arizona--based Catalina Mortgage Company Inc., mortgage banker, says the biggest impact of the slowdown has been on smaller dot-coins with 50 to 100 employees.
"They were an important part of our economy, but most are either cutting back or closing up," says DuBois. "Otherwise, we have a strong work force with annual job growth in excess of 4 percent and an in-migration of around 10,000 people a month."
Esteves say there's...