The State of Play: Colonial Capital’s 2021 Arizona Property Lending Report

“At Colonial Capital, we’ve seen some solid movement in the Arizona property lending market over the past few months. We’re looking forward to a range of growth opportunities over this year, with a particular focus on the industrial and retail segments. The pandemic hit hard last year, but we are definitely on the road to recovery!” – Rob Leonard Sr. President, Colonial Capital 


2021 is something of a watershed year for the Arizona property market. With rising vaccination rates and a gradual return to pre-pandemic normalcy, growth is back on the agenda. Some of 2020’s more resilient sectors, like industrial, made it through last year’s downturn largely unscathed and are poised for growth. A key highlight: Amazon’s leasing out eleven new fulfillment centers across Phoenix. That’s several million square feet of property worth over (X) dollars. 

In other sectors, we’ve seen the pandemic act as a catalyst to speed up certain structural changes that have been ongoing over the past decade. 

On the one hand, we’re seeing the rise of eCommerce and big-chain retail over smaller players who were already struggling prior to 2020. On the other hand, we’re seeing remarkable growth at the intersection of commerce and residential: Thanks to Phoenix’s infrastructure and relatively lower cost of living, people from across the Southwest and California are moving their lives and businesses to the Valley. This has had a significant impact on the Phoenix startup ecosystem and in intersectional niches like self-storage and apartment rental. 

This Report: An Overview of Key Opportunities and Challenges in 2021

The State of Play 2021 is an executive-level overview of 2021’s property lending market from Colonial Capital’s perspective. It’s also a curated resource of key market information, statistics, and analysis. Let’s take a look now at some of the key areas the report will focus on.

Here’s what we’ll cover:

  • The retail sector
  • The industrial sector 
  • Commerce-retail intersections 
  • The office market 
  • Major 2021 opportunities 

Retail in Phoenix: Current Trends are Accelerating 

“From the end of 2020 and into the first couple months of 2021, we saw the pandemic ushering in a realignment in the retail sector that was years in the making. The shutdowns, statewide stay-at-home order, and a general decrease in retail spending hit small mom and pop retail outlets hard. Large-chain franchisees weathered out the downturn while ECommerce outlets discovered new opportunities.” 

Amazon’s 11 upcoming fulfillment centers across Phoenix, cover over 3 million square feet, are not only expected to bring ~3,000 jobs to the city (source) but are also the clearest sign of things to come in the retail market. 

At the same time, Phoenix is witnessing an apartment construction boom rivaled only by Orange County, with vacancy rates under 5 percent. 

Over the past decade, competition has heated up between small-scale brick and mortar retailers on the one hand, and e-commerce players and large chain retail on the other. As early as 2018 (or another year), we saw a substantial uptick in new franchise properties, compared to stagnating growth for single-outlet retail. Moreover, eCommerce as a share of overall retail sales grew by Z at the same time. These are long-term structural trends which were greatly accelerated by the pandemic last year. Small-scale Phoenix retailers, from tailors and niche clothing retailers to grocers, faced these challenges last year:

  • A stateside stay-at-home order from March to May 2020, which reduced retail sales by X percent. 
  • A “second wave” of closures in June, along with lower foot traffic across the year 
  • A significant decline in the annual volume of tourists, with visitor spending down by $9 billion. COVID shut down MLB spring training in Scottsdale last year – a major revenue source for the city. 

The overall mortgage delinquency – including retail outlets – peaked in May 2020 at a high of 5.3 percent, more than double the pre-pandemic rate. While most of these are in forbearance, over 20 percent do not qualify. 

This is an opportunity we’re seeing buyers keen to leverage, utilizing private capital. As a number of small-scale retailers either sell off their property or face foreclosure, the capital market is becoming competitive. 30-year mortgage rates for the property have dipped below 3 percent. While private rates are higher, at Colonial and at other Phoenix private lenders, we’ve had to cut rates to stay competitive. 

The overall trend here is clear to see: there’s an accelerated decline in Phoenix single-outlet retail, while large chains consolidate their positions and franchisees buy out retail space at lower interest rates. 

Industrial: Driven Forward by eCommerce

The industrial sector was relatively resilient throughout last year’s crisis period. Phoenix warehousing actually saw growth over 2020 as eCommerce businesses serviced the surge in demand for low-contact home deliveries.

This growth in warehousing is a nationwide trend. In Phoenix, specifically, we’re seeing Amazon add 11 new fulfillment centers to meet increased demand in the region. Phoenix’s industrial market continued to surge in the first quarter, with an average sale price that increased to $139/SF across roughly 16M square feet of construction currently underway across the city. (source)

Smaller, regional eCommerce players have also been scaling up Phoenix operations and they represent a major opportunity for private capital lending. 

At the same time, supply chain disruptions have had an impact on less vertically integrated manufacturers and distributors. In short? Industrial isn’t a sector-wide bright spot. However, the eCommerce and warehousing classes are. and will continue to be, growth drivers over the coming months. 

Residential and Commercial Intersections: Arizona Portfolio Loans are an area of opportunity

One of the most interesting property trends we’ve seen this year is the growth intersection between residential and commercial, in areas like self-storage and apartment construction. 

The key driver behind this has been migration to Phoenix and the greater Valley area, mainly from Southern California. A stand-out group of these migrants were millennials. Phoenix experienced a net migration of 5,958 millennials, who now make up roughly 23% of the city’s population post-migration.

Housing costs in Southern California are 26.1% higher than in Phoenix, AZ. This figure will continue to fluctuate over the next few years for a number of reasons including the fact that people are moving out of large, overpopulated cities like Los Angeles. Many no longer want to pay steep monthly rental rates in a city that has yet to fully open up. Without access to the reasons one would typically live in Los Angeles – nightly concerts, comedy shows, movie theaters, and the beach, staying is getting harder to justify. Another reason this number is likely to fluctuate is because Arizona’s housing supply will continue trying to match stride with the rapidly increasing demand. In this situation, Arizona portfolio loans are a product class to look out for in the months to come, particularly for multi-property developers.

High living costs and job market uncertainty are major reasons – people are looking to reduce risk by moving to an area with solid infrastructure and lower living costs. What’s remarkable, though, is that many of these people are bringing the SoCal entrepreneurial spirit over to Phoenix. The impact is visible in the growth we’ve seen in self-storage facilities, apartment construction, and overall startup growth. 

We saw 4,403,920 square feet of self-storage property added in 2020 in the Phoenix area – which is incredible (source). The city is now the fifth largest market in the country for self-storage. This aligns closely with growth in the startup space and apartment construction – the Phoenix metro area is now the 7th best place for new business formation. This has had a direct impact on commercial asset classes like office and industrial space. 

The influx of regional talent to Phoenix is one of the key contributing factors to growth in both these segments. We’re seeing households and startups use self-storage space as they move to town and as small-scale warehousing for business use cases like dropshipping. 

The apartment construction boom is also largely supported by increased demand from new arrivals. While mortgage rates are hitting decade-lows, the actual cost of housing right now is increasing, due to low supply – vacancy rates are at a low of 5.3% (source). Many would-be homeowners are turning to rent. As a result, Phoenix has added more new apartments this year than any other region in the US, apart from Orange County. 

Office Space: Long-term Uncertainties Remain

The office space market is complicated by two factors: the impact of the lockdown and work-from-home, and the growth of the startup ecosystem. 

Because of the state-mandated stay-at-home orders last year, businesses were forced to shift to a work-from-home approach. This caused office space availability to skyrocket through last year, as most employees worked from home. 

Here in 2021, many businesses are unshuttering their physical outlets, and startup growth has created a demand for new space. At the same time, a SPGlobal study indicates that two out of three businesses believe work-from-home is here to stay. 

The overall result of these push-pull patterns is that the Phoenix office market has now stabilized, albeit in a slightly worse condition than before the pandemic: vacancies stand at 13.9 percent, which is actually slightly lower than the historical average of 14.5 percent. Year on year rent growth has decreased for the first time in close to a decade. However, at -0.5 percent, this is a marginal downturn – going into 2022, expect rent to increase, though with softer growth than before. 

Opportunities: What Colonial Capital is Looking At This Year

2021 is a year of economic recovery and this means clear opportunities in the private capital space. There are two areas we’re definitely excited about:

  • The industrial space and warehousing 
  • Large-chain retail 

Hotel refinancing is another potential area of interest. Office space is more of a mixed bag. No matter the opportunity we pursue, we plan to always mitigate risk by working with the developers we’ve worked with before and by following thorough due diligence processes. 

With hotels, we’ll be focusing on refinancing, keeping in mind migration to Phoenix, startup growth, and the long-term recovery of the tourism sector. Many hotels, especially boutique outlets are in a tough financial spot right now, but with solid fundamentals, making refinancing a great opportunity. Multi-property Arizona portfolio loans are a solution

In terms of the industrial space, we’re looking at lending to create and renovate warehousing, with the growth of eCommerce and logistics. As far as retail is concerned, franchise outlets for large chains like the Dollar General will be a key focus area. 

All in all, as we move into 2022, we’re looking at gradual recovery, defining what “a new normal” looks like, and taking advantage of our incredible network.

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