The Arizona Republic
May. 30, 2007 12:00 AM
Developers are bullish about future demand for office-condo units, even though there are signs that the Valley’s market is becoming oversaturated in some areas.
In fact, they are in the process of increasing the area’s inventory of such space by as much as 65 percent and show no signs of slowing even as units remain on the market longer.
Office condos are buildings with individual office units that occupants typically own rather than lease. Service providers such as dentists, doctors, accountants and lawyers view them as an attractive option because they appreciate in value, providing their businesses with additional monetary worth.
The office-condo frenzy hit metropolitan Phoenix in the early 2000s and continued as the Valley’s population grew. Brokerage Grubb & Ellis and PNC Real Estate Finance called Phoenix the “office-condo capital of the nation” in a 2005 report because of its activity.
Now an overabundance of inventory and increased buyer sophistication have caused sales activity to slow. That’s leaving some brokers skeptical about whether there are enough businesses to absorb the units under construction.
Developers are in the process of building 3.02 million square feet of office-condo units in metropolitan Phoenix, with an additional 4.07 million square feet of space planned, according to first-quarter data from CB Richard Ellis.
That is in addition to the Valley’s base of 10.97 million square feet of existing office-condo space.
“We’re seeing a little bit of holdback,” said Blake Hastings, a senior associate in Grubb & Ellis/BRE Commercial LLC’s Phoenix office. “There’s not as much craziness in (office) condos in the tertiary markets.”
That’s especially true for submarkets, including Surprise, midtown Phoenix and the area near the recently completed Mercy Gilbert Medical Center in Gilbert, said Colleen McPherson, a senior associate in CB Richard Ellis’ Phoenix office.
“As you look at these properties under construction, I just don’t see how the doctor pool is going to fill all that space,” McPherson said of developments around Mercy Gilbert.
Developers jumped at the chance to build out the area near the hospital, hoping to attract doctors who wanted offices nearby. The hospital, near Loop 202 and Val Vista Drive, opened last year.
Now, developers who have yet to complete projects may have trouble attracting buyers, she said.
“In my opinion, if you didn’t have it up and under construction and built by a year ago, you missed it,” McPherson said. “I think the frenzy of, you know, ‘You don’t want to be the only guy in the hospital who doesn’t own his own space,’ is over.”
However, McPherson and others note that with interest rates hovering around 6 and 7 percent, it makes sense for many businesses to buy instead of lease.
And developers say they have not experienced any significant shifts in demand for space.
“We’re seeing a lot of activity,” said Arch Ratliff, chief operating officer of Gilbert-based office-condo developer UTAZ Development Corp. The company currently has four office-condo projects under development, including a three-building, 30,000-square-foot complex near Mercy Gilbert Medical Center and a 16-building, 85,000-square-foot complex north of there, he said.
As the Valley continues to spread, Ratliff said, demand for the type of service providers that typically buy office condos should continue.
“The whole purpose is to bring services . . . into areas close to where people live,” he said. “That’s always been the purpose, and so we look for places that have that need for professionals to be close to large areas of residential (developments).”
The increase in inventory has made choosing prime project sites more important, said Steven Beck, a principal in Mesa-based office-condo developer COBE Development.
“We look to locate ourselves near freeways in growth patterns,” said Beck, whose company has projects under construction in Chandler and in Phoenix.
Still, some say it’s time to slow the construction pace down a bit.
“The general overview is there is definitely oversaturation and definitely a slowing of sales,” said Jim Riggs, president of SAXA, formerly Shea Commercial, in Scottsdale. “That doesn’t mean the market’s bad, it just means that there’s too much inventory at one time.”
SAXA currently has seven office-condo developments that include about 450,000 square feet of space under construction across the Valley, Riggs said. About 75 percent of that space is sold.