Thomas Title Talk: May’s Commercial Real Estate Market Conditions
Title Talk: Navigating Arizona’s Commercial Real Estate Market
Welcome to our second edition of Thomas Title Talk. My name is Dustin Gaskey, President of Thomas Title & Escrow, located here in Scottsdale, Arizona. Today we’re continuing the discussion on
the Commercial Real Estate market here in Arizona.
Several of us have recently come back from the ULI Product Council meetings in Toronto, the IMN in Miami or the ICSC Conference in Las Vegas. These meetings provided us with valuable insights into how our colleagues are navigating the market and the challenges they are encountering. Ultimately this has helped us compile a comprehensive understanding of the most effective strategies in our own market.
The Darlings of the Marketplace
Currently, the hospitality, data center, build-for-rent and medical office building sectors are the darlings of our marketplace. We continue to observe a growing demand and increasing activity in these areas. We’re beginning to witness some movement in the homebuilder sector. Over the past 3 to 5 months, there has been a steady influx of recycled listings.
However, there hasn’t been much fresh inventory entering the marketplace. Homebuilders are now realizing the importance of securing inventory for 2025 and are consequently stepping up with offers. This surge in offers has led to accepted offers and the opening of escrows in the homebuilding space. The build-for-rent segment is experiencing additional competition for available land, creating some pressure in the market.
From the Industrial Side
In terms of industrial real estate, there was a significant transaction last week involving the closure of a 1.3 million square feet property. The seller of that property possesses a valuable piece of land just north of it. While the land value for the new parcel is similar, construction costs have risen by approximately 50% compared to the costs incurred for building the initial 1.3 million square feet facility. This situation highlights the ongoing challenges faced by various stakeholders, including those involved in debt, equity and construction finance. These challenges are particularly evident when dealing with adjacent properties that hold considerable value.
We have also observed a noticeable slowdown in speculative asset development over the past few months. As mentioned in the previous “Title Talk”, this slowdown is primarily influenced by the land basis and construction costs. Although construction costs have slightly decreased in the retail, build-for-rent and multifamily sectors, they still remain significantly higher for industrial properties, ranging from 35% to 50% higher than they were 18 months ago. This upward pressure on construction costs poses obstacles for advancing institutional-grade properties spanning over one million square feet. Along the 303 corridor, there have been many discussions and conversations regarding industrial activity. When it comes to translating these talks into concrete actions and completing projects, there has been a notable pause in this space.
From the Retail Side
Regarding the retail sector, after attending ICSC, it’s evident that there is still a significant demand for quick-service restaurants. While some independent businesses have struggled to enter this market, those seasoned professionals who have consistently grown their market share have thrived. We have witnessed a substantial increase in various quick-service restaurant chains, with notable statistics indicating that adding drive-thru to establishments like Chipotle can lead to a 25% increase in profit margins. As a result, we anticipate that the required pad sizes for these restaurants will expand, and the expectation for drive-thru capacity will also rise. We are observing a shift where 1,800 square foot stores are now moving into larger spaces, ranging from an acre and a half to two acres. There has also been a significant surge in car wash transactions.
Entering the retail space remains a competitive endeavor across multiple markets and it requires us to stay proactive and stay ahead of the curve. In a notable development, a large multifamily project, one of the largest in Arizona’s history, is underway at Tempe Town Lake. The original land acquisition and construction financing for this project have been approved, with Carlos Slim from Mexico serving as the financing source.
It’s exciting to envision the potential that Tempe Town Lake will bring, with the total project estimated to reach around $2.2 billion once it gains momentum. Our team is actively monitoring any defaults or potential defaults in the marketplace. As a company, we haven’t encountered significant concerns in this regard. We have successfully opened a large TSG (Transaction Support Group) valued at approximately $700 million, allowing us to collaborate with our legal teams, special servicers, asset managers and broker networks. This strategic approach enables us to navigate the market landscape and make informed predictions for the remainder of 2023 and into 2024.
Conversations at the Round Table
Entering the luncheon, each participant may have had their own perspective, but by the end of the day, everyone left with a renewed sense of positivity enriched by the incredible insights shared and the networking opportunities that arose. We believe this event offers immense value and we would be delighted to extend an invitation to you for our next symposium. Join us at the table alongside your peers and experience the valuable connections and knowledge that were exchanged during our latest event.
Thank you very much for joining us for our second Thomas Title Talk, we’ll continue to be bringing these up to you on a regular basis. Please click the link below to join us for our next Thomas Title Talk.