NAIOP Commercial Real Estate 2014

2014

30 YEARS OF EXCELLENCE

Residential

Commercial

Development With Vision Sunbelt Holdings is a large scale real estate management, investment and development company. Since 1979, we have been involved in a wide variety of real estate activities from commercial and land development to master planned residential communities. Our ability to produce award winning projects which strengthen the local community and improve the inhabitant’s quality of life has assured our longevity. Our projects are diverse in nature and serve as valuable partners in the community in which they reside. The high calibre of Sunbelt Holdings’ development ensures that our work endures the test of time. We invite you to take a look around our website at SunbeltHoldings.com. There you can learn about our history, our award winning projects, our people and our partners.

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NAIOP (Commercial Real Estate Development Association)

2014 NAIOP-AZ ROUNDTABLE

It’s an exciting time for commercial real estate. With technological advances and a new generation entering the workforce, office space is undergoing a significant paradigm shift. NAIOP Arizona’s members discuss the state’s reputation and role in the market — its strengths, weaknesses and promising statistics ­— as well as what companies need to do to keep that trajectory on the up-and-up.

Moderator: Megan Creecy-Herman, Liberty Property Trust Participants: Anthony Lydon, Jones Lang LaSalle Bob Mulhern, Colliers International Chuck Vogel, American Realty Capital Properties, Inc. Keaton Merrell, Legacy Capital Advisors Molly Ryan Carson, Ryan Companies US, Inc. Steven Schwarz, ViaWest Group Tom Johnston, Voit Real Estate Services 52 | September-October 2014

Megan Creecy-Herman (MCH): What is different in July 2014 in our local commercial real estate industry than a year ago?

Tom Johnston (TJ): Although the economy is growing slowly, it just feels better. Vacancy rates are dropping and rates are increasing in all product categories. Job growth is improving year over year, and it is great to see office and industrial projects under construction again.

Bob Mulhern (BM): The most distinct difference in the local commercial real estate market today from a year ago is increased momentum. In the first half of last year, the office and industrial markets were impacted by tepid employment growth and economic uncertainty at the national and local levels. As such, net absorption was minimal in the first half of 2013. The pace of absorption accelerated in the second half of last year and that trend has carried over into 2014. In the first half of 2014, net absorption of office space totaled more than 1MSF, compared to approximately 150KSF in the first half of 2013. In the industrial market, net absorption in the first half of this year topped 4.6MSF, up from approximately 1.5MSF in the first half of last year.

The other noteworthy change in the market is sustained rent growth in the office market. A year ago at this time, rent trends were mixed. Today, office rents are clearly trending

higher and, with absorption likely to remain positive, rent should continue to rise.

Chuck Vogel (CV): The local economy has continued to gather momentum. Job growth is running 50 percent faster than the national pace and unemployment is lower. A stronger local economy and a pickup in regional and national distribution activity is fueling more demand, especially in the office space (industrial recovered earlier). Rent growth has accelerated, from nearly zero a year ago to about 2 percent annually today.

Construction has resurfaced. Office deliveries in 2014 will be more than double that of the last two years combined, although at under 800KSF it will remain low. Industrial construction is nearly back to pre-crisis levels: nearly 2.5MSF is expected to complete in 2014, split 50/50 between speculative and build-to-suit projects.

Steven Schwarz (SS): The market has shifted very quickly in the past year. A year ago, we were very busy buying distressed properties. Those deals are now few and far between. Capital is extremely active now pursuing both development projects and stabilized assets in certain submarkets. As well, the 1031 Exchange buyer is back because they now feel comfortable selling the assets that they

have been sitting on for the past seven-plus years. We have sold three projects in the last few months to 1031 buyers.

Corporate America has continued to lease space at a moderate pace and we have seen a return, albeit very gradually, of some of the local tenants becoming more comfortable expanding and leasing space.

MCH: There are several things that are different and I would say the vast majority of them are positive. Two differences that stand out are the increased speculative development in the office sector, specifically in Tempe, and now even some proposed ground up development in the retail sector. These are good signs as the market continues to recover and I am optimistic that the recovery will become more broad-based across the Phoenix Metropolitan area over the next 12 months.

MODERATOR

Megan Creecy-Herman

Anthony Lydon

Bob Mulhern

Chuck Vogel

Keaton Merrell

Molly Ryan Carson

Steven Schwarz

Tom Johnston

Keaton Merrell (KM): From a financing perspective, there is more and more money in the market chasing deals and it continues to get more and more aggressive on LTV and rates.

MCH: How would you compare our Metro Phoenix commercial real estate market to other major markets throughout the nation and specifically the western U.S.?

Anthony Lydon (AL): We believe Phoenix is like many other national markets who are experiencing two types of recovery. Value-add, high technology submarkets (i.e., San Francisco Bay Area; Phoenix’s east Valley and Deer Valley) are experiencing a higher level of user demand and good capital flow related to employment. Lower tech submarkets like California/Inland Empire and Phoenix/southwest Valley are seeing an inconsistent, staccato recovery. While the national employment has risen to pre-recession times most of the new jobs are part-time and/or lower wage. This reality has muted U.S. and Metro Phoenix recovery.

BM: The Metro Phoenix commercial real estate market is noteworthy among competing markets nationally and in the Western region for both elevated vacancy and healthy tenant demand. With office vacancy near 20 percent and industrial vacancy in the 12 to 13 percent range, Metro Phoenix is at the high end of the vacancy spectrum. Despite elevated vacancy, tenant demand for commercial real estate is healthy. Final second quarter data is not quite available yet, but in the first quarter, net absorption of office space in Phoenix outpaced all other Western region markets. Tenant demand is sufficient to spark some spec office construction due to tight conditions— particularly for large blocks of Class A space—in a handful of popular submarkets such as Tempe and Chandler. Local industrial properties are further along in the cycle, and spec developments began to deliver in mid-2013. To date, much of the spec industrial space that has been delivered has yet to lease, but the improving national and local economies should ultimately fuel absorption in these buildings.

CV: Phoenix has among the best growth stories in the nation.

Population growth is running at 2-3 times the national pace.

That means more office workers, more shoppers and more goods circulating through the metro’s warehouses. People and

businesses are attracted to the metro’s low living and business costs (especially relative to California), amenable climate, and strong transportation infrastructure.

Although commercial real estate prices have picked up, cap rates remain very competitive relative to those in the top six coastal metros (New York, Boston, DC, LA, San Francisco, and Chicago), which have seen an influx of foreign capital.

Expect prices to increase and cap rates to fall further as more investors look beyond the top markets to places like Phoenix for yield.

SS: Generally speaking, our vacancies are far worse than other western major markets but it doesn’t appear that the capital cares. Most California markets have recovered fully.

Denver and Salt Lake City have surpassed peak values in nearly all product types and vacancies are tight across the board. The capital believes, and I agree, that Phoenix will continue to be a national leader in annual job growth and population growth and is therefore positioning accordingly, but we have a ways to go before our fundamentals are as strong as most other Western markets.

MCH: Where does Arizona stand in its economic development plans? Are we headed in the right direction or leave anything for the asking? Is the furor over SB 1062 still creating an image problem for the state?

AL: Arizona has a terrific story! We can further enhance our brand by passing “thoughtful” legislation supporting our communities, families and businesses. We need to continue to invest in education, increase the state’s job closing fund and maintain lower costs of business. SB 1062 is an

extreme example of a well-funded, smaller minority that can negatively impact all of us. Just as Seattle recently “jumped” in front of the minimum wage issue, Arizona needs to be a perceived thought leader on issues like thoughtful immigration, sustainable energy, educational reform, minimum wage, etc.

MCH: What kind of business practices came out of the recession that many professionals should keep well past the recovery?

TJ: Learning to do more with less man power. From the pursuit of new business opportunities to operational efficiencies, a lot of creativity came about because of the recession.

MCH: I would hope that an overall prudence in lending with an increased focus on the quality of the borrower and their track record is one of the best practices that we all keep in mind moving forward, specifically when it comes to development. I would also hope that real estate fundamentals are the driving factor behind the corresponding financing decisions, as opposed to the availability of capital driving irresponsible development.

MCH: What has been most surprising about Arizona’s commercial real estate recovery?

TJ: How slow it has been compared to past recoveries.

What is encouraging is seeing our healthcare and high-tech sectors expanding.

CV: Warehouse construction is also surprising. Warehouse development has accelerated dramatically, to 2.8MSF in 2013.

As a result, even though demand is robust, vacancies actually 53

NAIOP-AZ

Molly Ryan Carson and Bob Mulhern

12

Over the past months, financial employers have added nearly 8,500 workers

increased over the past year. The hope is that demand will continue to expand to meet this supply. Retailers (Amazon, TJX Companies, Macy’s) and third-party logistics firms are gobbling up millions of square feet, attracted to Phoenix’s affordable land, strong transportation network, proximity to southern California ports, and growing local economy.

SS: When the recovery started, I did not expect such a pronounced and extreme gap in values and rental rates when comparing quality, well-located office buildings and less desirable properties. The flight to quality was expected but the ability for landlords to push rates on class-A product as much as they have while class-B buildings remain stagnant has been surprising. This is partially attributable to the need for higher parking ratios and other functional issues rendering many older buildings somewhat functionally obsolete. As well, the recovery has been led by corporate America rather than small business so the class-A buildings have experienced much greater demand. With corporate America’s strong activity there is now a shortage of large blocks of space leading to new development much more quickly in the recovery than anticipated. Each submarket is experiencing a very different recovery than others so real estate operators are evaluating opportunities on a micro-geographic and property-type level.

For example, new office and industrial buildings have gone up in Chandler while the overall metro market still had over 20 percent vacancy in office and 12 percent vacancy in industrial.

As well, we bought an office complex in 2012 in west Phoenix although overall vacancy in that part of town was over 30 percent. The reality is that the vacancy out there was in specialized buildings – medical, office condos, Westgate, while the service office buildings had an extremely tight vacancy.

Lastly, the amount and aggressiveness of the capital has been surprising. There is an enormous amount of capital seeking alternative assets.

MCH: What is the current state of our Metro Phoenix office market and what needs to happen to push the office sector into continued recovery?

BM: The Phoenix office market is in a recovery stage, with vacancy ending the second quarter in the mid-18 percent range, 200 basis points lower than one year ago. Net absorption has been positive in each of the past nine quarters, and market rents have increased in each of the past five quarters. Tenant demand growth is being fueled by job growth in office-using sectors, particularly among financial services 54 | September-October 2014

These positions have accounted for more than

20% of total job growth in Metro Phoenix in that time.

companies. Over the past 12 months, financial employers have added nearly 8,500 workers. These positions have accounted for more than 20 percent of total job growth in Metro Phoenix in that time. There are a few things that need to happen for the Phoenix office market to move into a more sustained recovery. The first is continued strength in the financial sector.

Phoenix is attracting large, corporate users looking to operate in our market. This trend needs to continue to backfill vacant space and support new development. Second, the housing market will need to gain some momentum. The housing market has stabilized, with foreclosures having largely been worked through the system and prices ticking higher. While those trends are positive, new home construction is down approximately 80 percent from peak levels and builders are behaving with extreme caution bringing new homes to market.

Housing is a huge employment driver in our market and growth in this sector is essential to long-term economic expansion.

While a return to the peak levels recorded at the height of

the housing frenzy would be a recipe for another “boom and bust” market, current construction levels are hindering a natural pace of economic growth. The final hurdle to clear for sustained recovery in the office market is the need to move to a more diversified mix of industries. Attracting companies from California will be a significant source of economic expansion in the coming years.

SS: Phoenix still hasn’t recovered all the jobs it lost during the recession. Considering this, our office market is doing pretty darn well. There is a shortage of class-A product and large-floor plates in a number of submarkets presently. The class-B and -C product and less desirable areas just need more bodies in more homes and more job growth. It is steadily getting there, but the market is much better than the headline vacancy makes it appear. Phoenix is still a young city and therefore redevelopment of old, functionally obsolete buildings hasn’t taken a stronghold, but as the market tightens and the city matures this will start taking place more. Time, jobs, people and removal of obsolete space are the answers. It’s in process. Slow and steady isn’t necessarily a bad thing for this historical boom-bust market.

CV: The Phoenix office market, like the national office market, is recovering gradually. Job growth is creating some demand, but companies are still soaking up “shadow space” (space under lease but not being used) left over from the recession. Technology (firms do not need the libraries and filing space that they did in the past) may have also dampened demand. Construction is rising modestly but is primarily limited to build-to-suit facilities. Vacancies are high at 25 percent, but they are down 90 bps from last year, and rents are rising by about 2 percent year over year. We expect that the recovery will accelerate over the next few years. Much of the “shadow space” has likely been absorbed. Provided that construction stays in check, vacancies should fall substantially.

Molly Carson (MC): In order to push the office sector into continued recovery, we need to continue to focus on strengthening Arizona’s brand to best position our market to be the first choice for companies looking to relocate — with specific focus toward corporate and regional headquarters.

This cannot be done by one organization, rather a collective, unified effort by the private and public sector on the city and state levels. We have a wonderful opportunity at hand to capture a number of new, relocating or expanding firms from other markets with California being our low-hanging fruit. This takes a strong positive message illustrating the advantages our cities and state have to offer. I think this is one of the most important things the real estate business segment can put efforts toward now and in the coming years.

MCH: Why does the Tempe submarket appear to be so hot right now?

MC: Tempe has done a wonderful job of positioning itself for success within the development realm. The abundance of amenities (restaurants, the Tempe Center for the Arts, Tempe Town Lake) within this walkable community are desirable from

NAIOP-AZ Metro Phoenix typically absorbs

+/-3.5MSF to 4MSF SF of space annually

Steven Schwarz, Megan Creecy-Herman, Tom Johnston and Keaton Merrell a work-and-live standpoint. Arizona State University remains a valuable draw from an employment standpoint. Simply put, Tempe has done an impeccable job of building a strong foundation and was ready to take advantage of the uptick in the market.

MCH: Tempe doesn’t “appear to be hot” ... it is hot. There are numerous reasons why tenants want to be in Tempe, one of which is its central location and the fact that it allows employers to pull talent from across the metro-plex considering that 60 percent of Phoenix Metro residents live within a 20-minute commute of Tempe. Also, its proximity and access to Sky Harbor Airport and proximity to the largest public university in the United States are substantial contributing factors.

MCH: There’s a lot of buzz around adaptive reuse and redevelopment of downtown spaces, particularly in Phoenix. What significance does this development have to the industry? What have been some of the most important projects?

TJ: As someone who grew up here and now lives downtown, it is refreshing to see all the redevelopment in our central core.

As evidenced by housing price increases in central Phoenix, people want to be in an urban environment. They no longer want to drive 30 to 45 minutes to get somewhere. We have seen tremendous success with retail (particularly restaurants) and multi-family redevelopment. There is a lot of opportunity with infill sites for office redevelopment as well. Important projects include 7th Avenue and McDowell Road, 7th Street and Osborn Road, Central Avenue and Colter Street, and the Roosevelt Arts District.

56 | September-October 2014

AL: Metro Phoenix typically absorbs 3.5MSF to 4MSF of space annually. As we move through Q2 Metro Phoenix’s industrial market remains in flux. Larger, national/regional employers like Living Spaces, Winco Foods, Pepsi and others have selected Metro Phoenix to be their “West Coast solution” through the design-build process. These requirements tend to be larger and/or sophisticated “process” facilities that mandate signature construction. In fact, Metro Phoenix has almost 3MSF of industrial facilities currently under construction. In fact, almost two-thirds of “net” absorption is due to corporate design-build projects.

Conversely, the smaller (less than 50KSF) and larger (more than 200KSF) “existing building stock has yet to see a clear, sustained level of occupant demand.” The mid-sized (75KSF to 200KSF) market does show significant activity with several leases and user sales pending. Leading vertical sectors include high-technology, food and beverage, e-commerce and regional retail fulfillment. With a metro industrial vacancy rate at +/-12 percent versus the national average at 8 percent, the Valley has significant product runway to accommodate most occupant requirements.

TJ: The confluence of our freeway system and the center of Metro Phoenix is in Tempe. Proximity to ASU, the airport and light rail make it advantageous for employers. It has become a real urban core where you can live, work and play.

CV: Tech companies want to locate in areas that are attractive to younger, tech-savvy workers. Arizona State University and recreational, cultural and retail amenities are draws for this cohort as is easy access via the Loops 101 and 202, Highway 60 and Interstate 10. Somewhat central locations (are ideal), especially for the east Valley and the nearby Phoenix Sky Harbor.

MCH: What is the current state of our Metro Phoenix industrial market?

3

Metro Phoenix has almost

MSF

of industrial facilities currently under construction

BM: Phoenix is in the early stages of the adaptive reuse and redevelopment phase, in part because Phoenix is a newer city and in part because the area does not have as developed a downtown as some other markets. That is not to say that the city does not have opportunities for adaptive reuse, either with outdated inventory in the downtown/midtown area or some large blocks of vacant retail space. Education has been a driver of redevelopment in the downtown portion of Phoenix, and further expansion by Arizona State University and University of Arizona could be a source of future activity.

The pace of population growth is the wild card for adaptive reuse downtown. First, a larger residential presence would fuel development of retail properties to serve the population. Chefdriven restaurants, where properties are purchased, rehabbed and then re-opened would be an example of this. Also, an increase in the local population would make transit oriented development increasingly feasible and alleviate some of the strain associated with office parking ratios that are lower than the current market standard.

CV: The Phoenix industrial market is very strong. Demand has been booming, fueled by e-commerce (Amazon), as well as traditional retailers and third-part logistics firms attracted by the area’s low costs, proximity to southern California ports and expanding local economy. Construction has picked up more quickly than we would have expected and led to an increase in warehouse vacancies last year despite robust demand. It is expected that demand will continue to accelerate, putting vacancies back on a downward path.

MCH: NAIOP conducted the industry’s first in depth look at e-commerce and its effect on industrial. Where does Arizona stand in preparedness for this shift, in existing and future developments?

AL: Due to the lack of sales tax consistency nationally, Metro Phoenix was an early winner in attracting e-commerce operations. In fact, Arizona contains almost 10MSF of e-commerce space with operators like Amazon, Target, Home Depot and others. Moving forward, facilities will provide a multichannel service: internet, store replenishment, catalog, etc. Older industrial properties will be hard-pressed to compete with higher clear heights, larger electrical services, higher auto parking needs, super flat floors and other building/site enhancements mandated by e-commerce employers.

MCH: What role does our proximity to the Inland Empire increasingly play in industrial development?

AL: Metro Phoenix offers an excellent location option for energy-centric, higher head count employers who seek a 25 to 40 percent operational cost saving while enjoying a deep,

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57

NAIOP-AZ Arizona contains almost

10MSF

Anthony Lydon and Chuck Vogel qualified workforce population at +/-4.5M. The +/-300MSF Inland Empire lies an hour from the ports of Long Beach and LA and is comprised of “West IE” and “East IE.” IE West has significant geographic and economic development barriers to entry. The IE East lies further from ports while being susceptible to California’s perceived over-regulated and cost environments. Accordingly, Metro Phoenix’s west Valley provides same-day access within the federal truck driving rules and regulations.

BM: In the short- to intermediate-term, proximity to the Inland Empire will play a minimal role in the Greater Phoenix industrial market. The Inland Empire’s status as a premier big-box industrial market is well-deserved, with approximately 70 percent of the market space in buildings of 100KSF and greater and 88 percent of its space built in the past 20 years.

Current vacancy in the region is approximately 4 percent, which at first glance would suggest an opportunity to attract tenants that are unable to secure space in the Inland Empire, but developers have more than 15MSF of space under way to meet current and future demand. Tenant demand in Metro Phoenix is forecast to be fairly steady in 2014 and 2015, but tenant activity will likely stem from organic growth rather than spillover from the Inland Empire.

MCH: Is the Phoenix market ripe now for spec building? If so, where and what type of building?

MC: Yes, for responsible spec building. Tempe’s sub-5 percent, class-A vacancy and overall 10 percent office vacancy combined with very healthy activity in the class-B+ office product make for a market ripe for spec class-A office. The construction of Hayden Ferry Lakeside phase III allows Tempe to remain squarely competitive (with other markets such as Denver, Austin and California in general).

KM: For the right submarket and project, banks will finance spec buildings in the 60 to 65 percent of cost range.

MCH: There’s a lot of capital coming into the market right now. Where is this best invested?

How is financing trending?

MC: Core assets in solid locations within primary and tertiary markets. The discipline to invest in core assets through upturns and downturns is almost always rewarded. As for 58 | September-October 2014

of e-commerce space with operators like Amazon, Target, Home Depot and others financing, we are seeing institutions continue to be competing to invest/purchase/lend for the type of assets mentioned above. Lending for land is still challenging.

SS: Since we are selling a decent amount of office product right now, I would say that the best investments are in stabilized office. The reality is that there are certain office markets (certain pockets of north Scottsdale, like Chauncey, Tempe and Chandler) where rents are beginning to really move in a positive direction. We have sold some assets at sub-6 percent caps, but if full-service rents move from $20 to $25 that is really a 40 percent increase in net rents.

That cap rate becomes an 8.3 percent, which is a pretty nice return on investment when interest rates are 4 to 5 percent. One of our strategies that applies to the local market is a focus on acquiring and developing general industrial in tightening markets. This asset type can take

advantage of the current historically low interest rate environment, upside potential in rents and being bought at below replacement cost.

CV: There is no shortage of available debt and equity capital. Senior secured lenders still remain modestly levered. Projects with 30 to 40 percent equity work because there is plenty of capital available. If the 10-year treasuries tick up, there will be pressure for the senior secured lenders to take a bigger part of the capital stack if cap rates remain low.

KM: Financing is getting very aggressive. CMBS is back and quoting interest only for up to half of the loan term at 75 percent loan to value. Banks are getting aggressive as well.

MCH: What new trends are coming to our industry?

SS: In the short-term, the “densification” of office space and focus on creative space will continue. I love these companies saying they want their office to be a “home away from home.”

If that’s the case, why are they cramming eight people in 400 SF? I doubt most people are sharing their bedroom with seven other people! The corporate world has realized that density saves the company money, so they have offset that negative by making the space fun and cool so people aren’t bothered by their lack of space. There are a lot of studies going on right now about productivity and morale related to office space. It’s still early, so I’m not sure anyone has the true answers at this point. Obviously, the continued adoption of technology such as the internet, smartphones and 3-D printing will change the supply chain and use of industrial space, as will the shifting energy landscape and globalization. These items will have a profound impact on the office environment on a rapid and constant basis for many years to come.

AL: The newest industrial trends include 3-D printing, robotics and open source hardware. 3-D printing deposits thin layers of plastics or metals atop the other fabricating a component part and/or finished good. This will have a profound impact on how companies manage their supply chains. For instance, half of typical pharmacy stock can be 3-D printed on-site. The cost of robotic equipment has dropped from +/-$250,000 per machine to $25,000 per machine. Amazon hopes to increase its pick-pack-ship robotics from 1,300 to 10,000 by end of 2014. Finally, open source hardware found in mechanical systems and networking equipment is available to all without reverse engineering need. This will compress the prototyping cycle time and move machine tools to the production line sooner, quicker and faster.

CV: It is becoming easier for the small investor to invest in institutional quality real estate through non-traded and exchange traded REITs. More investment products are coming available for investors that may offer liquidity and yield in the product types they are looking for. I expect you will see these kinds of investment vehicles continuing to grow. There is also an increasing disparity between credit and non-credit cap rates as the investor appetite continues to grow for credit opportunities, which is keeping the credit cap rates low.

NAIOP-AZ NAVIGATING RECOVERY: Megan Creecy-Herman takes the helm of NAIOP-AZ

By Amanda Ventura

M

egan Creecy-Herman, Senior Director, Leasing & Development at Liberty Property Trust, has worked in commercial real estate for 11 years, 10 of which have been as a member of NAIOP. In 2013, the 33-year-old was the first female chair of NAIOP Arizona and one of the youngest in the country to hold that position. She was recently asked to sit on the NAIOP National Executive Committee and will once again sit on the National Board of Directors next year.

“I am very proud to be working with such an esteemed group of national leaders from around the country in an effort to continue to strengthen NAIOP nationally,” she says.

There has been quite a bit of buzz about your being a young chairwoman, but that buzz is really nothing new. You were also the first recipient of NAIOP’s Developing Leaders Award, for which you were a founding chairperson. Was chairwoman a role you sought?

Yes, I was the founding chairperson of the NAIOP Developing Leaders in 2009 and it was really through my leadership of that group that I was selected to serve on the Arizona and national NAIOP boards. My work ethic has always been one of the traits that has set me apart. When I joined NAIOP Arizona’s board of directors in 2010, I didn’t necessarily set out to become chairwoman.

I just went to work at giving 110 percent for the organization. It was really through the past chairmen witnessing my dedication and my leadership skills [that I became chairwoman].

60 | September-October 2014

A few of the former chairmen were at the helm during trying times. How would you describe the state of the industry during your term?

I’ve been on the Arizona Chapter Board of Directors since 2010, so I remember what it was like for our board and the respective chairmen to navigate such a challenging market. I was the corporate sponsorship chair on the Board of Directors during that period and fundraising was challenging to say the least. Fortunately, the market has continued to recover this year and our membership is feeling optimistic about where the industry is headed. We actually set the record for the most money ever raised through corporate sponsorship this year at $610,000, which blew away the prior record of $525,000 in 2008.

You’ve been credited with a clear agenda for NAIOP’s educational goals. How have those progressed under your term?

Very well. Our signature speaker event featuring Billy Beane from the Oakland A’s was very successful. We’ve also continued our partnership with the ASU Masters in Real Estate Development (MRED) program where we bring industry leaders in to speak to the MRED students on various topics, and we’ve received very positive feedback on that program as well. We have a new education committee this year and they have done a tremendous job in overseeing both of these programs as well as planning our quarterly Market Leaders Series events and also planning our Tempe market tour.

What are other achievements or goals you’ve started working toward as chairwoman?

Strengthening NAIOP’s public relations efforts has also been a goal of mine this year. We have a new communications committee, and they have done a great job executing on our plan to increase NAIOP Arizona’s brand recognition throughout the broader business community while also building stronger ties between NAIOP and

all of the local media outlets. Ensuring that NAIOP Arizona’s voice is heard throughout the Phoenix business community is very important to me.

What are two things you find most interesting about the Arizona market right now?

First, that it’s as bifurcated as it is. When it comes to office product, no two submarkets are created equal and that’s extremely evident when looking at Tempe versus the rest of the market. The overall office vacancy rate stands at 17.7 percent and Tempe’s vacancy rate is less than 9 percent and less than 4 percent when it comes to class-A product. It will be interesting to see whether other submarkets can get some momentum going as our recovery continues.

Secondly, the fact that our industrial recovery is becoming more widespread across submarkets and sizes is interesting and encouraging. In 2013, we saw a very pronounced shift in demand from the larger big box tenants who were in the market from the end of 2011 through the beginning of 2013 to the smaller regional tenants in the +/- 15,000 SF to +/- 80,000 SF range, with those users predominantly focused in the airport submarkets and east Valley. During the third quarter, however, we have started to see activity pick up again in the southwest Valley as well, which is a positive indicator for 2015, especially considering that summer is always the slowest time of year in Phoenix.

What is NAIOP’s position and effect on the market?

NAIOP Arizona is the preeminent commercial real estate organization in Arizona. The fact that we have the diverse and experienced Board of Directors that we do helps us to continually monitor the pulse of our market and ensure that we’re providing our members with what they need, whether it be education on what’s happening in the market now or providing opportunities to network with the key players who are doing deals.

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Mike Strittmatter 602.735.5512 mike.strittmatter@cbre.com

© 2014 CBRE, Inc. This information has been obtained from sources believed reliable. We have not verified it and make no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the property. You and your advisors should conduct a careful, independent investigation of the property to determine to your satisfaction the suitability of the property for your needs. BA9161_7/14

NAIOP-AZ

Percep tion determ ines realit y NAIOP Arizona Chapter invests in voter education of pro-business legislators

By TIM LAWLESS

A

bout 10 years ago, NAIOP Arizona made a concerted effort to engage in public policy advocacy at the state capitol in order to attract and grow more high-paying jobs to our state. During this time, we have had a number of successes in the area of lowering commercial property tax assessment ratios. Where we had among the Top 5 worst rankings in the U.S., Arizona is now moving toward the middle.

This past session, we worked with a number of other business trade associations to allow many manufacturing firms that help produce these high-paying jobs to no longer pay sales taxes on their electricity or natural gas consumption. This top priority of NAIOP-AZ, SB 1413, now brings Arizona more into alignment with other states in the union for this tax treatment.

While we have had great success in helping to make our state more competitive in tax policy, Arizona has suffered some recent economic development image setbacks such as SB 1070 related to illegal immigration enforcement and SB 1062 related to religious freedom in the eyes of

62 | September-October 2014

supporters and discrimination to detractors.

In order to help prevent some of these perceptual challenges in the future, our NAIOP-AZ Board of Directors has set aside up to $100,000 from our reserves to help elect state legislators who are more sensitive to our national image in this election cycle.

The key caveat to our investment is that the races we get involved in must be to help educate voters in favor of candidates vetted and endorsed by the general business community like the Arizona Chamber of Commerce and Industry. The further caveat is that our contributions need to be used for positive independent expenditures to educate voters rather than “hit pieces” against their opponents.

With the upcoming change in the governor’s chair this November, the commercial real estate industry is in a unique position to do our part to continue to make Arizona a beacon for job creation with a like-minded state legislature rather than the butt of jokes on the national talk show circuit.

Tim Lawless | NAIOP Arizona | Chapter President

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63

NAIOP-AZ

Networking with a cause

By Amanda Ventura

L

ast fall, Rachel Luttrell was standing in front of a grill at a Central Arizona Shelter Services (CASS) campus in the midst of monsoon season. She was volunteering at one of NAIOP’s Dream Team barbecues that fed more than 10,000 homeless individuals last year. The grills were having a hard time staying lit, and she recalls the smell of smoke filling her clothes.

“I felt defeated,” Luttrell says. “We grabbed the batch of burgers to refill the

64 | September-October 2014

serving line and were greeted by volunteers and CASS clients smiling. The smoke smell no longer smelled foul; it smelled delicious!

A few clients raised their hands in the air and welcomed the rain on their skin. No frowns, just joy!”

Luttrell, a senior property manager at ACP Property Services and philanthropy chair for NAIOP Arizona’s Developing Leaders Chapter for professionals under the age of 35, says the moment reminded her to be thankful for the food, shelter

and support network she has. Developing Leaders hosts five to 10 events a year, including a Halloween costume drive for UMOM, a “Feeding the Homeless” event at CASS and an event that benefits Children’s Cancer Network.

“We realize the importance of strong community in the success of future generations,” Luttrell says.

Most of Developing Leaders’ events, like NAIOP’s Dream Teams, founded in 2013, cap at 30 people. However, Luttrell points

65

NAIOP-AZ

Above: Cushman & Wakefield of Arizona staffers (left to right) Blaine Black, Bonnie Machen, Greg Valladao and Patrick Devine flip burgers on the grills at the Human Services Campus in Phoenix. Left: In 2013, NAIOP Arizona fed more than 10,000 homeless people as member firms volunteered on 12 Friday afternoons. Given the name “Dream Teams,” NAIOP Arizona members this year have fed almost 3,000 homeless people.

out that most networking events that reach much larger groups of NAIOP members can be turned into a philanthropic opportunity (i.e. making admission to an event nonperishable food).

“It was recognized early on that NAIOP’s members are actively involved in the communities they live and work therefore philanthropy was a natural addition to the existing advocacies. The Developing Leaders felt building relationships occurs best when you are alongside each other, stripped of titles and suites, working together for a common cause.”

Charity is a relatively recent addition to the NAIOP Arizona chapter. In 2008, Megan Creecy-Herman established 66 | September-October 2014

Developing Leaders’ philanthropy committee, which pre-dates NAIOP Arizona’s own official adoption of charitable efforts in 2010.

Legacy Capital Advisors Principal Keaton Merrell points out that the chapter has engaged in philanthropic events over the years, but didn’t make it a part of annual programming until four years ago. In that time, the chapter has raised about $150,000 for charitable causes through its annual Crawfish Boil benefiting Ryan House and has served about 23,000 meals to homeless individuals. In 2013, NAIOP established Dream Teams, groups of 30 volunteers comprised of about 10 people from three firms, who get together once a

month to barbecue burgers and hot dogs for the homeless.

“It is always great to see a Dream Team with volunteers who have never done it before and see them team up to feed 800 homeless people,” Merrell says. “Seeing this massive line of people that you are feeding is very gratifying. People that show up for the first time literally had no idea they would be affecting that many people.”

There’s literally a quarter-mile-long line of homeless, says Chuck Vogel, senior vice president of real estate joint ventures and dispositions at American Realty Capital Properties, Inc. “Until you go down [to 12th and Madison avenues] and do it the first time, you don’t even get it,” he says.

Just wrapping up its first year, word has spread and there’s a waiting list to get assigned to a Dream Team. Currently, there are more volunteers than space to feed the homeless. Registration costs about $75 per volunteer.

“It’s funny,” Vogel says. “We send a followup email with photos, and we get phone calls from people saying, ‘Hey we want to go, too.’

It’s almost a competition. They see who has participated. It’s more about who isn’t on that list. Not who is on it.”

67

NAIOP-AZ

INDUSTRIAL SECTO GETS OUT-OF-THE R B PER SPECTIVE OX

By Amanda Ventura

68 | September-October 2014

Airport I-10 Business Park

J

Jeff Hays, senior vice president of sales and leasing at Commercial Properties Inc., is starting his 30th year specializing in the industrial sector and will be the first to tell you that everybody’s busy and no one’s complaining.

LGE Design Build has 54 industrial projects either in the ground or in design, says President Dave Sellers. Brock Grayson, vice president of Layton Construction and co-chair of GPEC’s Community Building Consortium, shares the same sentiments with Layton’s 650KSF of build-to-suit and expansion projects in Arizona.

While LGE’s sweet spot, says Sellers, includes many manufacturing buildings and design-build projects for companies that won’t fit into a spec space, spec isn’t dead. About five spec industrial buildings are in the planning or permitting process.

PAT FEENEY

From Sellers’ perspective, the sector is suiting up, so to speak. In the last two months, Sellers says, LGE Design Build has received seven new build-to-suit projects.

Layton Construction has also seen some build-to-suit demand. The rise in these projects for Layton has little to do with a declining interest in spec development, says Grayson and Layton Executive Vice President Andrew Geier. They’re just keeping busy with everything else.

Between the build-to-suits and the spec development, though, are the empty spaces contributing to deceptively high vacancy rates. These are the semi-obsolete industrial buildings that need some tenant improvement or a functional change.

A lot of businesses need excess land for more parking or equipment or yard storage, he adds.

ANDREW GEIER

BROCK GRAYSON

“It has become a lot more difficult to find quality buildings. That’s leading to some build-to-suits,” he says.

CPI has worked on a handful of distribution center build-to-suits, including Barrel of Fun in Tolleson and Legends Furniture.

Unlike office and retail, there’s less interest in aesthetics as much as functionality — clear heights, power capabilities and square-footage. It’s one thing that’s keeping obsolete industrial spaces from becoming dysfunctional. It’s about $25 per square foot to raise a roof, for instance, so office users looking for that industrial feel are more likely to take the old 16-foot industrial space than someone who is looking for the new 36-foot clear heights.

Users are safer bets (they’ll pay more), but Hays says CPI is seeing more action

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NAIOP-AZ

from investors lately, particularly with those in California.

MARKET UPDATE While the rents seem to have stabilized overall and absorption in 2Q was 4MSF, things still aren’t where they were. But CPI’s Hays isn’t concerned as long as the market can reach a happy medium. More end-users are upsizing, build-to-suits are seeing success and quality buildings are becoming harder to find. The effect of rising construction costs depends on the submarket in which a developer is looking.

The airport, East Valley and Deer Valley submarkets are seeing upward pressure on rental rates due to short supply of industrial space. In turn, CBRE Senior Vice President of Industrial Services, Pat Feeney, says the short supply of investment properties are putting downward pressure on cap rates for leased investments. The lack of available land is another way Feeney says developers can combat rising construction rates.

“Those that are lucky enough to own in these submarkets are really in the driver’s seat when it comes to tenant negotiations,” Feeney says. On the other hand, he says, the

SPECULATIVE CONSTRUCTION IN PHOENIX METRO Southwest Industrial Center

Southwest Phoenix

685,084 SF

Airport I-10 Business Park

Sky Harbor Airport

603,656 SF (Phase One)

Canal Crossing Logistics Center

Sky Harbor Airport

155,351 SF

Papago Tech

Tempe

62,880 SF

3744 E. Broadway Rd.

Sky Harbor Airport

28,013 SF

“The next couple of large square footage users that lease space are going to be treated as the belle of the ball.”

— Pat Feeney, CBRE

Southwest Valley submarket is “lethargic.”

“The next couple of large square footage users that lease space are going to be treated as the belle of the ball,” Feeney says. “I think that today the landlords are financially sound so it is unlikely we will see lease rates drop to the levels we saw in 2009 when the market was similar in terms of supply.”

“If it’s at the right price, someone will take it,” says Hays, adding that many class-B and -C industrial was absorbed for other uses during the downturn. “People are still looking for good quality buildings.”

72 | September-October 2014

A lack of leased warehouse product in the Southwest Valley available to investors, despite high demand, keeps values up, Feeney says.

“Currently, the big box distribution user activity and inquiries are at a high level, but users in this group have been very slow to commit to executing leases,” says Feeney.

“However, it should be noted that while large users have been hesitant to commit, the 20KSF to 100KSF users have been extremely active. Users in this size range have been carrying the market so far this year with more than 1.3MSF of positive

Top: Papago Tech exterior Above: Canal Crossing Logistics Center net absorption in the first half of 2014. I believe that as soon as we see five to six large leases signed in the Southwest Valley big box distribution market, we will reach a balance of supply and demand that we have not seen since 2005 and 2006. I am very encouraged with the current condition of the market.”

When big box distribution sees some absorption, he says, overall vacancy stands a chance at single digits.

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NAIOP-AZ

Office Mate

The C3 office building, in Los Angeles, was re-imagined by Gensler to include more “front doors” for suites, which are depicted by the colorful stairways on the building’s exteriors.

74 | September-October 2014

The creative endgame for functional obsolescence

By Amanda Ventura

f

Forget the corner office. These days, it’s about the coffee shop around the corner, the food trucks outside the lobby, the light rail that passes an office building every 15 minutes.

The work place is all about the worker. Employee and entrepreneur are synonymous. Human resource departments are working in concert with building owners, managers, developers and brokers. Employee demographics are spanning radically different generations with equally varied needs for a work-life balance. These are all observations shared by industry experts, from international architecture, design and planning firm Gensler, to brokerage houses and developers in the Phoenix Metro.

About a decade ago, traditional offices began to open up for collaborative space.

Since then, office environments have contracted around the remote worker and many other trends that ultimately call for very specific, versatile influenced by a company’s DNA. A demand for trendy, compact work environments that encourage collaboration, focus, creativity and accommodates mobility has led to many new speculative and build-to-suit office developments tailored to an end-user’s needs. This is all while vacancy rates in the market hover around 25 percent. However, many experts say this statistic is misleading.

It’s weighed down by the many office buildings constructed in the ’80s or earlier that are structurally — and aesthetically — outdated.

functional obsolescence among office properties in the Phoenix Metro and found that Singerman was right.

Net absorption of office buildings constructed after 1990, Aulick reports, accounted for 4.4MSF in 1Q 2014. In that same period of time, buildings completed prior to 1990 were reportedly declining in about 320KSF and 200KSF in 1Q and 2Q, respectively. The major contributors or obsolete space is parking ratios and floor plate size.

Midtown, Aulick says, is perhaps one of the hardest hit areas with 10MSF of office and an average age falling pre-‘90s. That area’s options are limited by available space.

It takes entrepreneurship, says Cassidy Turley’s Vice President of Marketing Alison Melnychenko, to recognize the highest and best use for the land on which an obsolete building sits.

OBSOLETE VS FUNCTIONAL BUILDING COMPARISON ARIZONA OFFICE SPACE

Factors causing functional obsolescence in buildings built prior to 1990 within the Phoenix office market. Obsolete values on the left vs Functional values on the right, for all categories.

PARKING RATIO PER 1000 SF

VS Average Ratio Prior to 1990 = 3.9:1,000 SF

Average Ratio 1990 & Newer = 5.5:1,000 SF (Includes future/planned buildings)

FLOOR PLATES

THE OBSOLETE As Cassidy Turley’s head of research, Zach Aulick, puts it: “functional obsolescence” are the buzzwords of 2014.

Aulick cites Rockefeller Group Vice President and Regional Director Mark Singerman’s assessment at a Bisnow event that vacancy rates in the market were much lower, by about 5 to 7 percent, without including obsolete buildings. Aulick, prompted by such buzzings and the news that speculative and build-to-suit development was happening despite vacancy rates higher than 20 percent, looked into the

VS

26,000 SF

50,000 SF Average Typical Floor Plate Currently is ±50,000 SF

Average Typical Floor Plate Prior to 1990 was ±26,000 SF

EMPLOYEES PER 1000 SF

VS Approximate Average Employees per SF Prior to was

Approximate Average Employees per SF Currently is

Courtesy of Cassidy Turley research department

GETTING IN THE GAME If an owner isn’t going to sit back on 80 percent occupancy, there are a few options that could raise the appeal of an outdated building. The first move is to retrofit a space — tear out floors or half floors to make higher ceilings. That can be costly and reduces overall volume. The other option is to add to the building’s function. For instance, the Freeport McMoran Center in downtown Phoenix had high user demand for parking. It was turned into a Westin hotel. Buildings along Central Avenue have been converted into apartments and condos — a trend CBRE Senior Vice President of Office Services Bryan Taute says will likely continue.

Retail and industrial buildings are sometimes flipped into office spaces, given the parking issue can be solved. This is more popular in areas such as Midtown or near the airport.

“I think Midtown has the potential to figure a way out of (obsolescence),” says Taute. “If building owners are willing to sell them to new owners with capital to give creative funky ideas. I’m a big believer in mass transit and infill.”

The general idea among people is that Phoenix won’t pay for that kind of re-activated space. But there is more enthusiasm than meets the eye, says Gensler Principal Beth Harmon-Vaughan. Brokers, developers, business owners, she says, see the potential and there are a handful of undisclosed projects in the pipeline on which Gensler is already working.

On a local level, a call center space built in an old Motorola manufacturing facility was designed by Gensler to “control the churn” of the company’s employees who go through 12 weeks of extensive training. The existing building’s unique floor plate led Gensler to use a blue webbing on the ceiling as a navigational tool that brings the 75KSF area together.

The call center is proof that these trendy spaces aren’t just for software and video gaming companies either. Real estate offices such as CBRE in Los Angeles have adopted these new space use trends, and Gensler says more professional and traditionally 75

NAIOP-AZ staunch companies such as law firms are coming onboard.

CBRE’s office in L.A., co-developed with Gensler, has a “free-address” system of office space use, often called “hot desking,” which can be reserved for individual use during certain times.

Despite the increase in remote work, companies still want employees to come to the office. Whether its the highly crafted informality of a Quicksilver office’s mixmatched meeting chairs in a windowless warehouse or the raw floors, pet amenities and employee-generated wall art at Facebook’s Menlo Park campus, the younger generation is revolutionizing office space.

Other trends include authenticity designing the DNA of a company into its office spaces - and having a “front door” instead of anonymous-feeling lobbies.

Gensler’s design of Los Angeles’ C3, for example, achieves a “front door” feel through colorful exterior stairwells to upper-story suites.

Phoenix may not be on that level, but change is coming — even to the ’80s-heavy areas of Midtown.

It just takes a drive down Central Avenue to see the buildings in need of change. The Class-B high-rise at 2828 N. Central Avenue was built in 1985 and offers the typical functionally obsolete issues, parking ratios and small floor plates, explains Aulick.

However, it was a building that — with a little renovation — could be turned into the headquarters for the co-op workspace known as “mod on Central.” It’s stylized as a hotel, features a cafe and is a public workspace for remote employees that, as Lynita Johnson, of Olson Communications says, are looking for somewhere that’s “never boring or beige.”

“It’s the way you want to work, because it’s the way you like to live,” she says of the development.

Finance and law firms are among the next wave of industries adopting the new kind of office space. Old, dated, standard offices such as Rose Law Group’s former eight-year residence has transitioned into a high-tech, smart, fun, sleek and creative space in Old Town Scottsdale, near a cultural hub of restaurants.

Rose Law Group’s employees skew “young and energetic,” says Jordan Rose, founder of Rose Law Group. “We are 85 percent below the age of 40.”

“If we weren’t locked into our old lease we 76 | September-October 2014

This call center space features a blue webbing on the ceiling as a navigational tool that unites a unique, 75KSF floorplate.

would have been the first to the open floor plan party at least six years ago,” says Rose.

“We knew as soon as we moved into the old space that we needed a more collaborative atmosphere that would only be achieved through design. That said, traditionally law firms are not known as hot beds of creative thought and collaboration. We have a bit of a different model in that we employ lawyers and non-lawyer planners, MBAs, project managers and energy consultants who can help shape the ultimate advice we provide our clients. Sometimes legal advice in a box is just really bad for a client’s bottom line.”

Non-traditional changes include minimizing the firm’s waiting room area, meant to remind the team that clients shouldn’t wait long to see their attorney.

Conference rooms and open space areas are named after employees and balconies that can be used to host meetings. Offices are centered around a park space where people

can eat lunch. There are also a few old, full-sized arcade games.

ELBOW ROOM As space allotted per employee continues to drop to about 167 SF per person — down nearly 100 SF in the last few years, with CoreNet Global estimating a further drop to 151 SF by 2017 — developers are tasked with finding ways to make the workplace more enjoyable.

Right now, that looks like raising the roof (or, rather, knocking out floors in highrises). Floor-to-floor heights in buildings constructed in previous decades have been about 13.5 feet. Now, says Sven Tustin, vice president of development and investment for Trammell Crow, they’re about 15 to 16 feet floor-to-floor.

While eight-foot ceilings won’t make an office building obsolete, Taute says a space will be more challenging to sell and

NAIOP-AZ DOWNTOWN: ACTIVATED One of the general opinions is that public transit will have a positive influence on activating downtown Phoenix’s older office buildings that may be outdated with their parking ratios. Have you observed any relationship between the health of downtown Phoenix’s office sector and public transit?

“I think there has been a relationship, but I don’t think it’s been quantified. We certainly need much more housing in the downtown area and a lot of it is coming. This could put a lot of downtown employees much closer to their work so they don’t need to have the car there all the time. There are also buildings in the Central Ave corridor that could be re-purposed from office to residential similar to One Lexington. In my opinion, a bigger challenge to some of the B and C product is the technology gap that these buildings have with newer product. I think we will see a continued growth in downtown employment in the years ahead due to the availability of the workforce, the expanded light rail system and the amenities that a downtown location can provide.”

Mod turned a re-purposed Midtown lobby constructed in 1985 into a co-op office space that helps keep the building’s outdated features from making it obsolete.

demand a lower rental rate than an office with higher ceilings. Buildings with lower parking ratios typically see leasing 80 percent of its space as success.

Tustin has seen some significant repurposing happen in southern California, most recently at Playa Vista, a former Howard Hughes hangar that received a $50M makeover that includes an office campus for media, entertainment and tech firms.

“There’s an authentic experience to be had,” says Tustin. “In Phoenix, it’s a little more challenging. Our office employment is a little less creatively geared and more focused on labor.”

Midtown is the only submarket that has experienced negative absorption over the last decade, thanks to the light rail, amenities and the right neighborhood.

“The trick,” says Tustin, “is buying those buildings cheap enough.

“We’ve explored a lot of new developments for infill. We’ve been promoting this initiative quite a bit and one thing we’ve been concerned with is our flight of the younger demographics who view places as more fun.”

Trammell Crow has challenged itself to 78 | September-October 2014

create a project that could be just as fun, though not as extreme, as Playa Vista.

Also, Phoenix doesn’t boast a lot of old warehouses, notes Taute. Trammell Crow is working on a 200KSF project at Cooper Road and Loop 202 that’s a two-story tilt-up office building with 50KSF floor plates and 16-foot, floor-to-floor heights.

The building, he says, targets software and financial service companies. Trammell Crow is focused on creating “the arrival experience” with escape areas, shade structures and “the small things.”

“Developers have probably emphasized aesthetics more than the experience of a building,” says Tustin. “I think it’s worth reallocating the investment toward the employee.” zThis is where Millennials come in.

“From my perspective, it’s a lot more fun because in Phoenix it has always been about price and the things that create it as a commodity,” says Taute. “Now, the office space is being looked at as an attraction tool, which means people are willing to spend more money. If they can get the rents, to make cool office space…All of those things are good for our city. The longevity is better than cookie cutter office buildings.”

— Don Keuth, President, Phoenix Community Alliance

Zach Aulick

Beth HarmonVaughan

JORDAN ROSE

Sven Tustin

H AY D E N FE R RY L A K ES I D E Te m p e , A r i z o n a

R ea d y for

G EN ER ATI O N N E X T

Millennials are 2x as likely to use

public transit as any other generation

Tempe is the

most walkable city in Arizona

Proximity to family, friends, shopping

Millennials will

and entertainment isÂ

35% of the workforce

to this generation

in 2015 and 50%

than any other

by 2020

more important

make up almost

Parkway’s premier assets are perfect for GEN ER ATION N EX T Strategically located adjacent to the light rail station and Mill Avenue entertainment district, we have space that your workforce will love.

Join tenants like Microsoft, Amazon, Silicon Valley Bank, LifeLock, Citrix and KPMG and lease your next office from Parkway.

602.997.5405 | www.pky.com

NAIOP-AZ

TICKET TO RIDE: T

he NAIOP bus tour is kicking back into gear this fall with plans to roll through the largest hub for Valley development — downtown Tempe.

Tour trollies will cycle through stops at Marina Heights, Hayden Ferry Lakeside and Liberty Center at Rio Salado, where participants may network and meet the sites’ respective developers.

“The biggest catalyst to starting the bus tour concept again is the number of exciting projects that are underway,” says Parkway Properties Vice President and Managing Director Matt Mooney. “Everyone in our industry experienced the challenges of the Great Recession, so to now have the Valley, and specifically Tempe, exemplifying such strong development in certain segments is worth seeing. Also, many of the major developments underway in Tempe are NAIOP member projects and this bus tour is a great opportunity to showcase the development prowess and expertise of NAIOP’s leading development firms.”

80 | September-October 2014

NAIOP Arizona Tempe Tour

It’s also a way for members and nonmembers to meet with the developers of the respective projects.

“We wanted to feature Tempe as it is one of the strongest performing submarkets across all of the western United States, and these projects were chosen specifically because of their proximity and size,” says Mooney. “Marina Heights is the largest office development in Arizona history, Liberty Center is already two buildings into what will ultimately be a mixed-use park of more than 1MSF, and Hayden Ferry III is the first mid-high rise multi-tenant office building in this cycle.”

NAIOP’s end goal, Mooney says, is to give members insight into how and why the projects on the tour came together, what they will be and the trends to which they speak.

Where: Tempe Center for the Arts When: Thursday, October 23, 2014 Tickets: $50 for members, $100 for nonmembers (includes cocktails and hors d’oeuvres).

By Amanda Ventura

Stop 1: Hayden Ferry Lakeside III

Developer: Parkway Properties General Contractor: Ryan Companies US, Inc. Architect: DAVIS Location: Tempe, Ariz.

Size: 311,505 SF (including parking garage) Brokerage Firm: CBRE Value: $42 million Start/Completion: April 2014 to September 2015 Subcontractors: CECO Concrete, Kovach Building Enclosures, Kearney Electric, Comfort Systems, W.J. Maloney Plumbing Hayden Ferry Lakeside was the first major development along Tempe Town Lake and precipitated other, more recent developments such as Marina Heights, the new home of State Farm. The boat-shaped, nautical-themed Hayden Ferry Lakeside buildings I and II were completed in 2002 and 2007, respectively. The last phase of the three-building project, HFL III, broke ground in May 2014. It is a 267KSF, 10-story, Class-A office building with one level of below grade parking that ties into an existing parking garage.

Stop 2: Liberty Center at Rio Salado

Developer: Liberty Property Trust General Contractor: Wespac Construction Architect: RSP Architects Location: 1850 W. Rio Salado Parkway, Tempe, Ariz.

Size: 155,000 SF Brokerage Firm: CBRE Value: WND Start/Completion: December 2013 to September 2015 Subcontractors: Quality Building Maintenance, Speedie & Associates, Hunter Engineering, Arizona Traffic Signal, Buesing Corp., Gunsight Construction, Mister Bugman, Torrent Resources, Desert Services, JJ Sprague of Arizona, The Landscape Broker, Suntec Concrete, Coreslab Structures, Re-Create Companies, Bernies Brass, S&H Steel, E2 Innovations, Fine Line Cabinetry, Rite-Way Thermal, Diversified Roofing, AK&J Sealants, Walters & Wolf, American

Stop 3: Marina Heights

Developer: Sunbelt Holdings / Ryan Companies US, Inc. General Contractor: Ryan Companies US, Inc. Architect: DAVIS Location: Tempe, Ariz.

Size: 2,095,000 GSF Brokerage Firm: Phoenix Commercial Advisors (Retail) Value: $600 million Start/Completion: 2013 to est. 2017

Direct, Demers Glass, Stucco Renovations of Arizona, Adobe Drywall, Berg Drywall, Wholesale Floors, Adobe Paint, Ganado Painting & Wallcovering, Trademark Visual, Partitions & Accessories, Thyssen Krupp Elevators, Ryan Mechanical, RCI Systems, Alpine Mechanical, DP Electric, Simplex Grinnell, Arizona Control Specialist, Cookson Door Sales, U.S. Mobile Communications, Norcon Industries, Standard Restaurant Equipment, Mountain States Drapery

Subcontractors: Buesing, Suntec Concrete, Walters & Wolf, Delta Diversified, Harder Mechanical, HACI, Sun Valley Masonry, Brothers Masonry, Sturgeon Electric, Jencco, Kovach, Otis Elevator, Olympic West, Aero Automatic, Alliance Fire Protection, Berg Drywall, Adobe Drywall, Custom Roofing, Progressive Roofing, Red Pont, Speedie, CTS, Meade Engineering, Kraemer Consultants, EME, Design Element This project is the new hub office campus of State Farm, a Midwestern insurance company. The LEED Silver design concept covers an area of approximately 20 acres and includes five office

At full build-out, Liberty Center at Rio Salado is a 1MSF mixeduse project at the northwest corner of Rio Salado Parkway and Priest Drive. The 100-acre property will focus on high-performance buildings with a sustainable design built to achieve LEED Silver certification. Designed to accommodate the businesses of today, the project features a 6/1,000 parking ratio and is just minutes from the downtown Tempe entertainment district and Sky Harbor Airport.

towers of varying heights; three to four stand-alone retail buildings; and two below grade parking garage levels.

Approximately 40KSF of retail amenities will complement the transit-oriented development and include food service, coffee shops, restaurants, business services and fitness facilities.

The site will also feature a 10-acre lakeside plaza, which will be open to the public. The total project will consist of approximately 2,040,000 gross square feet of office and retail space and 8,600 parking spaces.

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1. 10 West Logistics Center Developer: Wentworth Property Company General Contractor: Graycor Architect: Butler Design Group, Inc. Location: 6200 W. Van Buren St., Phoenix Size: 660KSF Start/Completion: Summer 2014 10 West Logistics Center is an 80-acre, Class-A masterplanned bulk distribution business park. The high-image facilities offer 36-foot clearance, ESFR sprinklers, energy efficient motion sensor lighting, dock-high loading and trailer and car parking.

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2. American Furniture Warehouse — Glendale Developer: American Furniture Warehouse General Contractor: D.L. Withers Architect: Butler Design Group, Inc. Location: SEC 99th Ave. and Bethany Home road, Glendale, Ariz.

Size: 600KSF Value: $25M Start/Completion: March to August 2014 Located on the east side of 99th Avenue at the southeast corner of 99th Avenue and Bethany Home Road, American Furniture Warehouse (AFW) is a single-tenant retail development that supports the City of Glendale’s desire for high quality retail in the area. The one-story building is approximately 534KSF on 36 acres of land fronting on 99th Avenue. The building will consist of approximately 152KSF of showroom, 382KSF of warehouse space and 60KSF of mezzanine within the warehouse area.

3. Amkor Corporate Headquarters Developer: Ryan Companies US, Inc. General Contractor: Ryan Companies US, Inc. Architect: PHArchitecture Location: Tempe, Ariz. (ASU Research Park) Size: 101,949 SF Brokerage Firms: Cassidy Turley (Ryan Cos.) and CBRE (Amkor) Start/Completion: March 2014 to est. January 2015 Subcontractors: Suntec Concrete, Ace Asphalt, Delta Diversified, Saguaro Steel This is the new 101,949 SF corporate headquarters for Amkor Technology, Inc., featuring an open office concept for approximately 350 employees with large training and conference areas.

4. Aspera Developer: Cardon Development Group General Contractor: TBD Architect: Butler Design Group, Inc. Location: NWC 75th Ave. and Loop 101, Glendale, Ariz.

Size: 83KSF Start date: September 2014 The commercial retail parcels are a collection of eight single story buildings comprised of four pad sites, three shop buildings anchored by a single 39KSF Mountainside Fitness (Cardon Development Group, Ryan Companies, Butler Design Group, $5M, September 2014 to February 2015) on less than 17 acres.

PROJECTS 5

THE CRITERIA: • Property must be owned or have non-refundable earnest money in escrow by 8/1/14 • Property must have proper zoning in place by 8/1/14 • Property must be bigger than 100KSF

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5. AZ 202 Commerce Park Developer: ViaWest Group General Contractor: TBD Architect: Ware Malcomb Location: Arizona Avenue & 202 Loop Size: 260,600 SF Brokerage Firm: Cassidy Turley Value: $20M Start/Completion: November 2014 to May 2015 Subcontractors: TBD Two industrial buildings comprised of 139KSF and 122KSF grade level and dock-high loading and 28- to 30-foot clear heights. The property is one turn to diamond interchange at Arizona Avenue and the Loop 202 freeway.

6. Centrica Developer: Phoenix Rising Investments General Contractor: Willmeng Construction Architect: Nelsen Partners Location: 1550 W. Southern Ave., Mesa, Ariz.

Size: 140,000 SF Brokerage Firm: Cushman & Wakefield of Arizona Completion date: November 2014 The adaptive re-use development will turn three shuttered, big-box retail stores into a Class-A office building expandable to 140KSF. Its location in the Fiesta District and a robust fiber optic infrastructure make Centrica ideal for tech companies seeking a headquarters or office space.

7. Coldwater Depot III Developer: Trammell Crow Company General Contractor: D.L. Withers Construction Architect: Butler Design Group, Inc. Location: Avondale, Ariz. (NEC 127th Avenue and Van Buren Street) Size: 187KSF Brokerage Firm: CBRE Value: $10M Start/Completion: Nov. 1 2014 to April 30 2015 Coldwater Depot Logistics Center Phase III is the final phase of a three building master plan developed by Trammell Crow Company and Clarion Partners. The previous two phases were sold in Q42013 to Lake Washington Partners. The 11-acre site, located just south of the Interstate 10 Freeway in Avondale, Ariz., will feature one 187KSF, Class-A distribution building.

8. GoDaddy Global Technology Center Developer: Ryan Companies US, Inc. General Contractor: Ryan Companies US, Inc. Architect: PHArchitecture (shell); Ajanta Design (interiors) Location: Tempe, Ariz. (ASU Research Park) Size: 150KSF Brokerage Firm: Cassidy Turley (Ryan Cos.); CBRE (GoDaddy) Value: $30M Start/Completion: September 2013 to est.

September 2014 Subcontractors: Gunsite Construction Corp., Suntec Concrete, Carlson Glass Inc., JD Sun Mechanical, Berg Drywall This 150KSF, two-story facility providing creative space for 1,300 employees, including engineers, developers and customer-care representatives.

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9. Kyrene 202 Business Park - Phase I Developer: EastGroup Properties, Inc. General Contractor: The Renaissance Companies Architect: Butler Design Group, Inc. Location: 200 S. Kyrene Road, Chandler, Ariz.

Size: 120KSF Brokerage Firm: Colliers International Kyrene 202 Business Park is a six building, front-park, rear-load business park designed to attract customers needing a minimum of 8KSF up to 122KSF. The project will contain state-of-theart features such as 24-to 30-foot clear heights, ESFR sprinkler systems, T-5 warehouse lighting and a parking ratio in excess of two per thousand square feet. Phase I, consisting of 119,933 SF, is currently under construction with an estimated completion during September 2014 and Phases II and III, totaling 285,800 SF, will be constructed in 2015.

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10. Living Spaces Furniture Showroom and Distribution Center Developer: Irwin Pasternack General Contractor: Ryan Companies US, Inc. Architect: Irwin G. Pasternack, AIA & Associates Location: Phoenix Size: 437,234 SF Value: $14M Start/Completion: April 2013 to February 2014 Subcontractors: Hard Rock Concrete, Ace Asphalt, JB Sun Mechanical, Chas Roberts This 437,234 SF showroom and distribution facility, includes 314,384 SF of warehouse and distribution space, a 122,850 SF showroom, and a receiving dock with 35 truck bays. Ryan also built the surrounding infrastructure, including roads and traffic signals.

11. Mach One — – Chandler Airport Center Developer: Trammell Crow Company General Contractor: TBD Architect: Butler Design Group, Inc. Location: NWC Cooper & Germann Roads, Chandler, Ariz.

Size: 200KSF Value: $5.388M Start/Completion: 2Q to 4Q 2015 Brokerage Firm: Colliers International This spec office space within the Chandler Airport Center is comprised of two, 100KSF two-story buildings.

12. Parc 17 Developer: Jackson Shaw Company & LaPour Cos General Contractor: Nitti-Graycor Architect: McCall & Associates Location: NWC 7th Ave & I-17 Size: 177,750 SF Brokerage Firm: Lee & Associates Value: $14M Start/Completion: November 2014 to May 2015 Parc 17 is a Class-A industrial development fronting Interstate 17 less than three miles from Sky Harbor Airport. Parc 17 offers a 101,290 SF multi-tenant industrial building with dock high, grade level loading options as well as ownership opportunities featuring over-standard secure storage yards and dock high loading capabilities sized from 31,862 or 44,592 SF. All buildings are constructed to a 28-foot foot clear height and equipped with ESFR sprinkler systems.

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13. Park Lucero Developer: Trammell Crow Company General Contractor: D.L. Withers Construction Architect: Butler Design Group, Inc. Location: Gilbert, Ariz.

Size: 631KSF Brokerage Firm: JLL Value: $46M Start/Completion: Aug. 1 2014 to March 1 2015 Park Lucero is a new Class-A industrial development located along the south Loop 202 Freeway developed by Trammell Crow Company and Artis REIT. This ±48.3 acre project features six buildings totaling 631KSF. It’s one of the newest and largest developments in the Southeast Valley of its kind.

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14. Playa del Norte Developer: Irgens Partners General Contractor: TBD Architect: WorksBureau Location: 979 E. Playa del Norte Dr., Tempe, Ariz.

Size: 103KSF Brokerage Firm: Cushman & Wakefield of Arizona Start/Completion: TBD Playa del Norte is a nine-story, 103KF buildto-suit, Class-A office building in Tempe. It offers convenient access to the Southeast and Northeast valleys, Sky Harbor International Airport and the 101 and 202 freeways.

15. Portico Place II Developer: Irgens General Contractor: TBD Architect: Archicon Location: 2195 W. Chandler Blvd. Chandler, Ariz.

Size: 49,175 SF Brokerage Firm: Lee & Associates Value: TBD Start/Completion: September 2014 to March 2015 Portico Place II is a 49KSF, two-story, Class-A multi-tenant office building breaking ground in fall 2014. With modern design amenities, energy efficient construction, and large 25KSF floor plates, Portico Place II will be the premier Class-A office building in Chandler for corporate users. Located just off Chandler Boulevard and Dobson Road, the property provides prospective tenants a highly visible and accessible location. Portico Place II enjoys a retail-type presence with many desirable amenities within a one-mile radius including Chandler Fashion Square Mall. In addition to being less than one mile from the Chandler Regional Hospital, the project is in close proximity to major employers such as Intel, Microchip, Bank of America and Orbital Science.

16. Reserve at San Tan - Phase II Developer: Orsett Properties General Contractor: Willmeng Construction Architect: Butler Design Group, Inc. Location: 339 E. Germann Rd., Gilbert, Ariz.

Size: 104,425 SF Brokerage Firm: Newmark Grubb Knight Frank Value: WND Estimated completion: December 2014 Phase II of the Reserve at San Tan includes construction of Building No. 4, a single-story office building with multiple options for tenancy, including mezzanine or second floor capabilities.

The Reserve is a 39-acre, Class-A business park.

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17. Rivulon 1 & 2 Developer: Nationwide Realty Investors General Contractor: TBD Architect: Butler Design Group, Inc. Location & City (major crossroads/exact address): NEC of Gilbert Road and San Tan Freeway, Gilbert, Ariz.

Size (SF): 150KSF; 125KSF Brokerage Firm: Lee & Associates Start/Completion: 4Q 2014 to 4Q 2015 Rivulon 1 is a three-story build-to-suit building for Isagenix. Rivulon 2 is a four-story speculative office building. Both projects will be submitted for LEED Certification.

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18. Scottsdale Quarter III, Block M Developer: Glimcher Realty Trust General Contractor: IBEX Construction Architect: Nelsen Partners Location: 15059 N. Scottsdale Rd., Scottsdale, Ariz.

Size: Âą170KSF Brokerage Firm: CBRE Value: WND Start/Completion: Summer 2014 to summer 2015 Scottsdale Quarter is the premier mixed-use project in Greater Phoenix, located on 28 acres at the southeast corner of Scottsdale Road and Greenway-Hayden Loop. At complete build-out, Scottsdale Quarter will include more than 1MSF of office, retail, residential and hotel space. The dozens of restaurants and shops on-site offer an unmatched walkable amenity base in the heart of upscale Scottsdale. Phase III will add another 140KSF of Class-A office space.

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19. SkySong III Developer: The Plaza Companies General Contractor: DPR Construction Architect: Butler Design Group, Inc. Location: 1365 N. Scottsdale Rd., Scottsdale, Ariz.

Size: 148,960 SF Brokerage Firm: Lee & Associates Value: $12M Start/Completion: August 2014 This a four-story multi-tenant office building more than 80 percent leased. This project has been submitted for LEED Silver certification.

20. SkySong IV Developer: The Plaza Companies General Contractor: DPR Construction Architect: Butler Design Group, Inc. Location: 1355 N. Scottsdale Rd., Scottsdale, Ariz.

Size: 150KSF Brokerage Firm: Lee & Associates Start/Completion: October 2014 to August 2015 This is a four-story multi-tenant office building. This project will be submitted for LEED certification.

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21. Spectrum Ridge Developer: Trammell Crow Company General Contractor: TBD Architect: Butler Design Group Location: Phoenix Size: 220KSF Brokerage Firm: CBRE Value: $19M Start/Completion: Aug. 15 2014 to March 1 2015 Spectrum Ridge is a Class-A industrial development located in the Deer Valley submarket on 7th Street, one mile north of the Loop 101 Freeway, developed by Trammell Crow Company and Principal Real Estate Investors. This Âą14.4acre project features three buildings totaling 220KSF.

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22. Tolleson Corporate Park, Building E Developer: Merit Partners, Inc. General Contractor: The Renaissance Companies Architect: Butler Design Group, Inc. Location: 777 N. 79th Ave., Tolleson, Ariz.

Size: 580KSF Start/Completion: 2015 This is a single-story industrial build-to-suit project.

23. Westech Developer: Seefried Properties General Contractor: TBD Architect: Butler Design Group, Inc. Location: 300 E. Palomino Dr., Chandler, Ariz.

Size: 126,360 SF Start/Completion: TBD Westech proposed 126,360 SF single-user speculative industrial/manufacturing building.

Truck loading and receiving located on the east side of the building with cross-dock capability on the west side. The north side of property is planned for outside storage or building expansion.

24. WL Gore & Associates Manufacturing, Building 3, Phase II Developer: W.L. Gore & Associates General Contractor: Ryan Companies US, Inc. Architect: Reece Angell Rowe Architects Location: Phoenix Size: 132,900 SF Value: $35M Start/Completion: June 2012 to December 2013 Subcontractors: University Mechanical, Kearney Electric, Metal Weld, Baker Concrete, Berg Drywall, KT FAB This 132,900 SF facility includes office, warehouse and clean rooms spaces. A walkable ceiling above the clean rooms allows workers to change out light bulbs and air filters without interrupting production. An exercise room, kitchen area and volleyball courts help to promote employee wellness.

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