Experience — a Guide for the Future?
says Spart. While he finds they’re interested in everything, he says he has seen the most activity in multi-family and industrial. “Prices are down,” he explains, “so looking 5-10 years down the road, this is a great buy.”
Development Due for a Comeback Pollack describes the present real estate situation here as dire. But he insists that, although this time it’s more severe and protracted than in the past, “it’s just a cycle.” He sees Phoenix already growing out of this one, with a good part of the excess housing supply eaten up and job loss easing up, and expects the real estate market to normalize in 2015. And Metro Phoenix has a lot on the plus side to appeal to a developer, according to Stapp. “There are few constraints on development,” he says. It’s a relatively easy entitlement process to obtain the needed approvals to develop a property for a desired use; it’s easy to add infrastructure such as roads; it has a flat urban economic landscape, with multiple centers of business rather than all development focused on Downtown; and no natural disasters. It also has highly protected development rights. “Arizona, like most of the West, has very strong private property rights protection and mentality,” says Stapp, giving Proposition 207, the Private Property Rights Protection Act, as example. “This deals mostly with eminent domain and compensation,” he explains, “but it reflects the importance of private property rights. This [position] makes it hard for government to restrict land use.”
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“When there are really good projects needing financing, it’s not unusual to see multiple bidders from the finance world,” Spart says. He explains the challenge in lending, however, is finding loans that make sense — where the equity is there and borrowers are in good shape. “The theory is that capital is supposed to enforce discipline,” affirms Stapp, but adds, “Look down the value chain and see how many fees are generated from that one deal, and you realize how many people are motivated for that deal to happen.” Himself a developer as well as executive director of the Master of Real Estate Development program at W. P. Carey, he says people’s motivators are sometimes out of alignment with what’s good for the overall economy. “We need to try to align those motivations better. It’s important to tie capital to what the community’s needs are.” Henig, who has been through recessions before in his 24 years in the business, believes it’s important to have checks and balances in place when it comes to lending, and to learn from the mistakes made this time in over-valuating. “Banks need to be flexible on the interest rate, to make sure the borrower succeeds in the project.” And Stapp makes a case for making development a local investment. “Big banks … want big, national merchant tenants. They believe those tenants are less risky, but in reality, this can be a false sense of security,” he says, noting that local merchants are typically great for the community because they’re very committed and more of the money stays local. He also points out that 88 percent of retail firms employ 20 or fewer people, so the great majority of businesses are small businesses. “Those are the ones having the toughest time getting a loan now,” he notes. “In order to achieve community redevelopment, we need to look at the uniqueness and sense of place involved in different properties,” Stapp says. “We need local lending sources that are willing to help individuals and small businesses, that aren’t dependent on the formulas used by larger banks and decisions made far from the actual real estate locations.” But Pollack does not anticipate another real estate crunch of today’s magnitude even in the industry’s normal up-and-down cycle. “This was caused by a bunch of one-off events on a national scale. There was a new financial instrument in the market, and banks securitized but didn’t know what they were getting into,” he says, drawing a parallel between the common wisdom that single-family housing never went down in price to the belief of 400 years ago that the world was flat — something that everybody “just knew” was true. “People bought into what was a bad job by rating agencies, Wall Street, banks and borrowers.” Such a confluence of events, he says, “is unlikely to happen in tandem again … not for decades … not until there’s a new instrument.” CB Richard Ellis cbre.com Canada Arizona Business Council canaz.net Elliott D. Pollack & Company edpco.com Meritage Homes meritagehomes.com RE/MAX Excalibur excaliburrealestate.com Red Development reddevelopment.com Robson Resort Communities
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W. P. Carey School of Business wpcarey.asu.edu Wells Fargo wellsfargo.com
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