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Commercial Real Estate:A Market ReboundingbyJ. Rentilly

ALTHOUGH THE PAST decades

graphs of the commercial real

estate market performance in the

Phoenix area closely resemble

the elastic and wildly extreme trajectory of a

bungee-cord adventure, a recent report from

W. P. Carey School of Business at Arizona State

University nds the extremes are likely over

and suggests the region is in the early stages

of recovery.

That recovery is not going to happen

overnight, though, says Karl Guntermann,

Fred E. Taylor Professor of Real Estate at ASUand author of the new report. Its going to

take years, not months, but the worst appears

to be behind us. This is going to be a slow

crawl to normalcy.

For many, the worst was bad really

bad. After a peak positive rate of change of

28 percent in the third quarter of 2006, the

Phoenix area commercial real estate market

comprised of industrial and ofce space,

retail, storefronts and apartment buildings

nosedived to an annual negative rate of

40 percent by the end of 2009. But 2010,

Guntermann says, was basically a at year

no growth, no loss. And, although ofce

vacancy rates are still above 20 percent in

the area, retail vacancy remains more than 11

percent and industrial real estate vacancies

are the highest in America, according to Blue

Chip Economic Forecast, also issued by ASU,

Guntermann says the rst quarter of 2011

suggests an annual rate bounce back of 13

percent on the 68 percent loss.

Much of that growth is in the apartment

or multi-family dwelling sector, which has

seen double-digit growth over the past

two quarters, primarily because Phoenixsresidential housing market has been so hard

hit by foreclosures. More than 60 percent

of Aprils residential transactions were

on foreclosed properties. Many of those

displaced homeowners are migrating to

apartment buildings. With demand slowly

inching toward supply in that sector, some

investors are beginning to snatch up those

properties, and at deeply discounted rates.

Once attracted to residential properties

for ip or rent, big investors, those able to

hold static portfolios for ve years or more,

are intrigued by return potential on quality

commercial properties now available for

50 to 60 cents on the dollar pre-housing-

bubble, 2004 price levels, Guntermann says.

Theyre seeing the potential.

For a more substantial, wider-ranging

recovery for commercial real estate to occur,Guntermann says the Phoenix regions overall

economy must rebound from its harrowing

four-year decline. When an economy grows,

unemployment rates drop, property prices

rise, consumer spending moves upward,

businesses expand or begin and developers

launch new projects. For more than one year,

commercial development in the Phoenix area

has been, essentially, frozen, although a recent

federal report revealed that Phoenix added

10,400 retail-sector jobs in 2010, well ahead

of most major markets surveyed. Guntermann

believes these small wonders are signs of an

Tenants Can Weather the Commercial Foreclosure Storm

Foreclosures in the commercial market

have been heating up lately, although

generally avoiding the emotion-tinged

headlines of its residential counterpart and,

reassuringly for business, generally not

disrupting tenants office, retail or industrial

operations. Even the Viad Building, a

high-profile landmark in Phoenixs Central

business district, was caught in this

toll having a Notice of Trustees Sale

recorded in 2010 and, ultimately, sold out of

receivership in mid-May of this year.

Questions about the legality of the

receivership process have emerged. The

process begins when a property is being

foreclosed on and the lender asks the

court to appoint a receiver to manage

and sell the property, but the debate

now is whether, by appointing a receiver,

the court is circumventing the 91-day

foreclosure period that the property

owner can use as his final chance to

restore his loan to good standing. There is

nothing in either case law or statute that

specifically gives the court the right to

order a sale of property in receivership.

In a growing number of cases, the

defaulting property owner is ceding to

his lender a deed in lieu of foreclosure,

avoiding having a foreclosure on his

record by preemptively giving the

property to the lender. Not all lenders,

however, are eager to take this type

of deed because it would carry any

intervening loans that the property owner

may have taken on, whereas a foreclosed

property would come free and clear of

such additional debt.

Tenants in these situations are often

protected from the ownership upheaval,

thanks to a non-disturbance and

attornment agreement that guarantees

the continuation of their lease and directs

them to pay the lender instead of the

owner, or the new owner instead of the

old one. Such an agreement may be part

of a deed of trust or a subordination

agreement (often required by a new lender

who enters the picture after the lease is

in place, to put his rights in higher priority

than those of the lessee, as priority would

otherwise follow a date of recording

sequence). While lenders are, for the most

part, loathe to vacate tenants and lose

that income, such jeopardy does exist for

lessees who do not have a non-disturbance

agreement in place.RaeAnne Marsh

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