Gotta Wear Shades

Gotta Wear Shades

The future for Airpark commercial real estate looks bright. But it might be time to start throwing shade, experts say, through vertical growth.

By Jimmy Magahern

Scott Robertson has a problem with the signs. He sees them all over the Scottsdale Airpark, in front of office buildings that are actually all leased out, or advertising commercial properties for sale that have already been snatched up.

“I think one of the misleading components to the Scottsdale market is the litter that you find all over the place in the form of these real estate broker signs, many of which look as if they’ve been through several war zones, economies and weather patterns,” he complained. “And those signs often times mean nothing, other than the broker was either too lazy to take them down or, by design, has chosen to keep the signs up for free advertising, even without regard for availability.”

Robertson is a San Francisco real estate developer who only recently became involved in leasing commercial properties in the Scottsdale Airpark area. “I’m getting married!” he said, happily, and it quickly becomes apparent Robertson is not just preparing to marry the woman he met from Scottsdale, but also Scottsdale itself. “She’s lived in Scottsdale for 20 years, and we’ll be sharing our time between San Francisco and Scottsdale. And because of my interest in her, I became interested in Scottsdale, and as I did, it didn’t take me very long to recognize that Scottsdale was about to move, and move in the right direction for commercial real estate investors.”

The Bay Area investor did his homework, and decided the Scottsdale Airpark was well worthy of his love, too.

“Scottsdale is touted across the United States as being one of the No. 1 retirement communities in the country, close to No. 1 for recreation, and as a top sports environment,” he said. “Scottsdale is kind of like what Palm Springs was in the ‘50s but better, because Palm Springs never had a manufacturing and industrial base. The Phoenix metropolitan area is No. 6 in the United States; it’s a huge metropolitan area, and Scottsdale is your jewel. And the Airpark is the jewel of that.”

Robertson began buying up his first pieces of Airpark commercial real estate in March 2014, and believes the time is right for other investors to start scooping in the area, too.

“I think it’s one of those places in America that will do better than others going forward. It will beat Detroit, it will beat Philadelphia. It will beat parts of California…Stockton, Fairfield/Vacaville. It will beat the outskirts of Dallas/Fort Worth. It will continue to do well because it has some cache that other places just don’t have.”

But first, Robertson said, the powers that be in the Airpark area will have to create and enforce an ordinance that gets rid of those out-of-date real estate broker signs.

“I think they give the wrong impression about Scottsdale,” he said. “They’re sending the wrong signals to people, who say, ‘What’s with all the signs? Left and right, oh my God, the whole place looks like a fire sale!’ The signs give the impression there are vacancies everywhere and that’s certainly not the case. Vacancies are tight, availability for properties on sale is almost nonexistent. The inventories are very, very low and people are scrambling. At the same time, commercial property valuations are climbing, and they’ve been climbing since late 2013.”

In fact, Robertson said, what it may finally be time for the Airpark to do is to consider a design once the antithesis to the wide-open-spaces philosophy that fueled the creation of the West’s Most Western Town’s airport district.

“We have sections of San Francisco now where every constituent group today is aligned, pulling in the same direction for one thing: density,” he said, by way of example. “San Francisco, historically, has always had between 650,000 and 800,000 people. Today we’re going for a million for the first time, and will probably go past that. Even though we’re landlocked, we can go up, and we can go up times three.

“Imagine,” he continued, “if you took the entire Airpark and you tore down all of those one- and two-story buildings and you created six- to eight-story-high density condominium projects. You could triple the density of the Airpark through redevelopment.”

In the Shadows

Jim Keeley admitted he’s still trying to get used to the roundabout at Hayden Road and Northsight Boulevard.

“My wife got pulled over by a policeman not too long ago going through the roundabout,” said the veteran Airpark commercial real estate expert, who’s been working in the area since 1981 and now runs the Scottsdale office of Colliers International, which bought up 50 percent of his Classic Real Estate Corp. in 1998. “Quite honestly, I wonder what the real legal procedure is on how to get through a roundabout.”

Nevertheless, Keeley acknowledged the traffic circle design does help the flow of traffic—approximately 5,000 more cars a day pass through the Hayden-Northsight intersection now than when it had a traffic signal, and there have actually been fewer accidents—and we can expect more of them.

“There’s four more roundabouts planned for the Airpark,” he said. “Once people try them and get used to them, they’re really not too bad. Of course, there’s always going to be some people that don’t like change.”

Keeley has made it his business to track the changes in the Airpark’s commercial real estate market. His annual “2030 Report,” tracking economic activity, growth and trends and making predictions through this decade and the next, has become the bible for the Airpark’s commercial, office and industrial sectors. And his figures bear out Robertson’s outsider perspective that the Airpark is becoming a hot area again for commercial development.

“It’s taken about six years since the downturn to fill up a lot of the space,” he said. “And there are different segments: there’s retail, industrial and office. The office market was probably hit hardest in the Airpark area. But just in the last year, we’ve gone from 20 percent vacancy to 16 percent vacancy in the office arena. So that’s a really good sign. It was 30 percent at the peak, which is just a ton of space. And for the first time in a long while, we’re seeing some new office construction. There’s a new 40,000-square-foot project going up at the 101 and Bahia just north of the canal.”

Prices are lower, too, than in most areas of the country.

“A $22 to $24 per square foot office rental rate is what we have, which is really good,” he said. “Arizona’s been that way for many years. We always bring good value compared to the California cities and the East Coast. Arizona has always had a lot to offer in terms of the cost of housing and office space.”

Keeley also agrees with Robertson’s prediction that “density” will be the buzzword for the Airpark’s future. He said that the zoning changes approved by the City Council in 2012 to increase height variances throughout the Airpark from 36 feet to 48 feet, and the update in December 2013 that could allow up to six to eight stories on sites totaling 16 or more acres, have paved the way for taller buildings to be constructed throughout the Airpark.

“That’s why you’re seeing taller buildings going up around the Scottsdale Quarter,” he said. “That’s kind of a trend. Those are big projects that will take a long time to put together, but it’s kind of where we’re headed. As the millennials continue to fill out our work spaces, they tend to prefer the mixed-use type of projects.”

Those taller buildings will also produce something that’s considered undesirable in many cities, but could be a blessing in the Valley’s sweltering summers: shadows.

“In the ‘80s, you had certain groups—leftists, let’s say, that advocated more for those who weren’t driven by economic interests—and they stopped project after project for things like shadows,” said Robertson, who admits to having some political ambitions, about his own progressive city. “Shadows on a public park, shadows on another building, shadows on a historic statue. Today, everybody’s onboard with higher density and nobody’s talking shadows.”

In the Phoenix area, shadows are talked about—but in a good way, even by environmentalists. Richard Adkins, forestry supervisor for the Phoenix Parks and Recreation Department that developed the City’s Tree and Shade Master Plan in 2010, maintains that creating more shady spots around town is the key to surviving climate change, and that taller buildings, like the ones at Arizona Center that cool the sitting areas between the towers, can do their part.

“It’s all about siding,” he said. “Whether you make the shadows land to the east or the south or wherever.”

Robertson said he’s already seeing some shadows around the Scottsdale Airpark, but is not sure how Valley sun-worshipers may take to the change.

“They just built that new addition to the Scottsdale Quarter, and there was a guy who bought a hangar complex right there on 73rd Street who’s now in the shadow half the day,” he said. “I don’t know if that’s what he would have preferred.”

Flex Appeal

If there’s one thing that’s out in 2015, it’s hangars.

“Hangars had high vacancy in ’08 and ’09, when everybody lost their airplanes,” Keeley said with a slightly pained laugh. “They’ve filled up now, but there’s not a lot of demand for new ones.”

“To put them in order,” said Robertson, “the best investments would be flex buildings that have an office component with a warehouse in the back, then flex buildings with a retail component, then office buildings, then hangars. Residential is for the bigger players right now.”

Randy Shell, principal of the 13-year-old commercial brokerage company Shell Commercial, said he generally avoids hangars, but has had a lot of success leasing light industrial properties, which he said is the more traditional term for what today is called flex.

“The rental rates for the light industrial market have really firmed up, and for the first time in a long time, we’re 100 percent leased,” he said. “The problem is a lot of these leases were signed a few years ago, so the rental rates are down. We had to drop the rates when the crash came and we restructured a lot of leases to keep people in business. But now the markets are better, vacancy rates are down substantially, and that’s putting pressure on rental rates, so they’re starting to go up.”

The danger in rising rates is that it may force some businesses to leave the Airpark. But Robertson mentioned if that happens, they’ll eventually come back.

“My perspective on Scottsdale is driven in some respects by my experience in San Francisco,” he said. “When prices get sky high in San Francisco, whether it’s residential, office or industrial, people move to the outskirts of the Bay Area. But when the market crashes and prices plummet, they come back.

“I think that goes for the Scottsdale Airpark, too,” he added. “If prices get too high, businesses may move to other parts of town, but if prices go down everywhere, they’ll be back. In a desirable area, vacancies are just the product of pricing. There’s always a permanent demand.”