Downtown Phoenix May Be Only Bright Spot in Entire Market

Despite Phoenix’s reputation as having a high foreclosure

By Erika Schnitzer, Managing Editor

Phoenix—Despite Phoenix’s reputation as having a high foreclosure rate and a high unemployment rate, JAG Development’s newest urban infill project located in the downtown area, Portland 38, experienced consistent sales during the first quarter of 2010. Approximately 60 percent of the units have sold.

“We recapitalized the debt, and we were able to get a lower cost structure in the process so we were able to lower the prices in August,” with the first closing occurring in September, explains Allan Gutkin, principal of JAG Development. “Getting FHA [financing] made it easier, [using the] carry back from first sales,” he adds.

Many of Portland 38’s buyers are moving from other cities into the downtown Phoenix area, which Gutkin tells  is really the only area of the market with any growth opportunity for the near-term.

Compared with other submarkets of the Phoenix area, the downtown area, Gutkin notes, has “somewhat limited supply. The rules are different in the core of the city, where there’s some restrictions on supply.” Comparatively, the suburbs saw fewer supply constraints, but Gutkin believes much of this has to do with the $4 billion public-private investment in the area, including a new light rail station and convention center.

Consequently, the downtown area may be the only true bright spot, since the light rail is expected to bring in new businesses.

However, prices have dropped about 50 percent in the market. “I do think Phoenix is undervalued. We are 30 percent below the median,” notes Gutkin. “We have job growth problems and a very conservative state legislature, which is hampering growth.”

In an impending legislative session, lawmakers will vote on whether to increase the state sales tax by 1 percent in order to generate revenues for school funding. Gutkin believes that if the legislation, which is scheduled for a vote on May 18, doesn’t pass, it could have tremendous consequences for the state’s overall economy, particularly when it comes to trying to convince companies to move their headquarters to The Grand Canyon State.

According to Gutkin, the growth of Arizona State University over the next decade will be “the key to the economy—they’ll have to drive the areas of new technology and that’s going to drive job growth. I think ASU is on the right path, but it will take funding from the state legislation.

“Job growth affects the real estate market,” Gutkin points out, though he acknowledges that, because of the downturn, the market has become very affordable. However, “you can’t just rely on low prices to attract people to come in.”