Phoenix Market Holding its Own
By K. Robert Wendel

Construction activity in Phoenix is humming along, but builders are keeping a wary eye on the costs of everything from fuel to steel and cement.

Numbers from the Dodge Analytics Unit of McGraw-Hill Construction show that nonresidential building activity in Maricopa County is off 22 percent year to date from numbers posted in 2003. But after factoring out 2003 mega projects such as the Arizona Cardinals football Stadium in Glendale and the Consolidated Rental Car facility in Phoenix, construction starts in Maricopa County in 2004 are up 51 percent from the previous year.

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Residential construction is also healthy, with an 18 percent increase in new starts from 2003. So far in 2004, builders have started $2.1 billion in new housing, but that could cool as mortgage rates rise. The rates are a key factor in single-family home construction, and a driver of much of the region's construction market.

Interest rates on a 30-year mortgage have climbed from historic lows hovering at 5 percent to levels approaching 6.5 percent recently.

"If single-family home construction drops off, retail construction will cool," said Jay Butler, an associate professor at Arizona State University's Arizona Real Estate Center.
Butler also pointed to rising fuel costs that are beginning to erode consumers' disposable income. Rising fuel costs could eat into residential construction, especially in the Valley's fringe areas where workers may face long- and costly commutes.

"The day of $2- a- gallon gas is here to stay, and it's got to have an impact on travel, and it could also impact housing developments on the farther fringes," Butler said.
"When you look at the retail sales growth, the big ones are Wal- Mart and Target because people are being very price- conscious."

The rising fuel costs have meant delivery surcharges from suppliers, further eating into contractors' margins.

Contractors recently began feeling the soaring cost of steel, with scrap prices increasing more than 75 percent and finished steel increasing 23 percent, according to Associated General Contractors' economist Kenneth Simonson in Washington D.C. He also noted rise in copper, aluminum and wood products.

"Contractors are going to face more ups and downs on a wider variety of materials much more than has been the case for the past several years," Simonson said. "The rapid rise in the price of steel is unprecedented."

Increased demand for raw materials from both China and India, along with greater demand for oil and higher food costs, could help push up inflation. Still, builders said the rising prices haven't yet affected project new starts, but in larger projects, commodity prices could become the deal breaker.

"Steel is impacting projects, but people are still going forward," said David Sellers, vice president of Phoenix-based LGE Design Build. "I imagine that if you are doing a $20 million project, the prices may make the project go on hold, but in the $1 million to $2 million range, it's not enough to stop the project. The thing we are getting from owners is 'damn the torpedoes, full speed ahead."

Multi-family on the Move

Many multi family residential projects are on the boards that may take advantage of peoples' frustration with high fuel costs. Located in the downtowns of Phoenix, Scottsdale and Tempe, the new residential housing could prove popular for those tired of long commutes.

Phoenix is getting its first taste of "The Donald" as celebrity New York developer Donald Trump turns his eye to Phoenix with plans to construct an estimated $50 million Trump Plaza condominium/retail/hotel development on 24th Street and Camelback in Phoenix.

The New York firm of Skidmore Owings and Merrill is designing the approximately 500,000-sq.-ft. project, but negotiations are continuing over the site, and a construction start and contractor have not been determined.

In the same area and after the successful Camelback Esplanade high-rise, the Phoenix offices of McCarthy Building Cos. are teaming up with DFD CornoyerHedrick to build a new luxury tower at 2211 E. Camelback Road. Owned by the Patrinely Group of Houston, the 12-story, $40 million project is scheduled to start this month.

DFD CornoyerHedrick, with offices Phoenix is the architect for the "Portland Place Condominiums and Retail" in downtown Phoenix near Margaret T. Hance Park. Plans call for four buildings, three of which are six- to 10- story condo towers and the fourth featuring retail shops. Plans call for an August start date on the $20 million contract, although no general contractor had been chosen as of early summer.

Farther south, DFDCornoyer Hedrick is also designing a luxury penthouse and loft development at 44 W. Monroe in downtown Phoenix. Construction on the six-story project should start in early 2005. No general contractor has been chosen.

Scottsdale will see a flurry of building, including the long-awaited Scottsdale Waterfront Project. Estimated at a total of $250 million, the Phoenix office of The Weitz Cos. recently started on the first, $50 million phase.

The project features two, 13-story residential towers; two, three-story residential buildings; six, two- to three-story retail and office buildings and a 650-space underground parking garage. Architects include Scottsdale-based H&S International LLC and Solomon Cordwell Buenz and Associates of Chicago.

Tempe is also jumping on the high- density housing bandwagon with plans to start a $37.5 million, eight-story condominium development along Tempe Town Lake.
McCarthy Cos. is expected to start on the project this fall.

Owned by Suncor Development, the project is designed by Hancock Bruckner Eng and Wright Architects of Vancouver, B.C.

Phoenix-based Todd & Associates are in schematic planning for the Tempe Town Lake Condominiums in downtown Tempe. A general contractor or start date is not available.

On the west side of the Valley, Arena Development LLC is in the final stages of planning for residential and retail projects at the Glendale Arena. The first phase of the project is expected to start this summer, with contractors building the 500,000- sq.- ft. first phase of a planned 6 million sq. ft. of retail, entertainment, hotels and housing.

"We are building a city," said Steve Ellman, a principal with Arena Development LLC.
"What we are building is a combination of the best things that we have seen over the past 20 years."

According to the Dodge Analytics Unit of McGraw-Hill Construction, more than $650 million in multi family construction projects valued at more than $1 million each are in various stages of planning, bidding or construction in Maricopa County.

Retail Leading the Way

The Valley's explosive growth has been good to general contractors specializing in retail construction, and there are huge developments planned on the Valley fringes.

Numbers from the Dodge Analytics Unit of McGraw-Hill Construction show that more than $5.5 billion in retail construction is in various stages of planning, bidding or building in Maricopa County.

The biggest project on the books is the massive, $400 million development by the Salt River Pima Maricopa Indian Community. More than 2 million sq. ft. of retail, restaurants and offices is planned to front the Loop 101 in Scottsdale.

The Phoenix office of The Weitz Cos. is acting as the general contractor on the 186-acre project, and Scottsdale-based Patrick Hayes Architecture is the designer. The owner is in the preliminary approval mode.

More than 20 projects are in the $50 million range alone, including Gilbert Town Center, the Spectrum at Val Vista, Peoria Crossing and the $75 million Cibola Village Development on Lake Pleasant Road.

The Cibola development calls for 200 acres of single-family development, three phases of timeshare development and a 20-acre commercial development. DFD CornoyerHedrick is the consulting architect for owner Morrel and Associates of Phoenix.

Westcor Development is striking while the iron is hot with a $65 million retail project on east Mayo Boulevard in Scottsdale. General contractor is Tthe Weitz Cos. The project includes construction of 11 buildings totaling more than 630,000 sq. ft. DFD CornoyerHedrick is the project architect.

Office/Industrial Limps Along

Valley developers have big plans for office and industrial projects, but pulling the trigger may take some time. The Valley's office construction market posted one of its slowest years ever with $371 million in new office construction, down from a 1998 peak of $805 million.

Still, developers seem optimistic, with more than $3.5 billion in new offices space in various stages of planning.

But a glut of office space on Central Avenue and the rest of the Valley and concerns about outsourcing jobs continue to dog the market.

"The key issue is jobs," ASU's Butler said. "Arizona needs to get good paying, career enhancing jobs, and we are just not getting those."

Few speculative office projects are currently in construction, although McCarthy Building Cos. is nearing completion of the $37 million Scottsdale Promenade on Frank Lloyd Wright Boulevard.

Wells Fargo also has two large build-to-suit projects, with The Weitz Cos. nearing completion on the $37.5 million Wells Fargo Campus in Chandler and a $ 20 million home mortgage center on Washington Street in Phoenix.

Office condos and build-to-suits are popular projects in the Valley.

Manufacturing continues to limp along in 2004 after posting record numbers in 2003, mainly due to Intel's Fab 12 expansion in Chandler. The sector shows a 78 percent drop from last year, but the $145 million in new manufacturing work looks good when compared with the dismal years of 2001 and 2002.

Less than $100 million in new manufacturing space was built during those two years.

>Phoenix Market Holding its Own
>A Friendly Place to Retire
>Downtown Rising
>Riding the Rails