Concerns about potential defaults on the multifamily side have been lingering for months, and we are finally seeing notices of trustee sales. We are closer to the beginning of the trend than the end, however, with a significant quantity of undelivered inventory under construction that’s on peoples’ minds—including lenders. About 33,000 units are in planning and/or under construction.
While the in-the-pipeline development has been dominated by class A properties in recent years, we are starting to see more affordable product emerge. Public-private partnerships, sometimes known as P3, foster development via nonprofit organizations funded with bonds, public funds or government monies through the state or city. P3 initiatives are prominent in the West Valley and we are seeing a proliferation of affordable builders and nonprofits that are focused on Low Income Housing Tax Credit (LIHTC) projects. The trend also dovetails with Gov. Katie Hobbs’ focus on affordable housing, and the $49 million commitment to affordable housing developers announced in January by the Arizona Department of Housing.
An additional trend we are seeing involves more deals structured as ground leases. As our community matures, there are fewer available key parcels located at major cross streets or with desirable frontage. With a ground lease, the owner of a property might lease the undeveloped commercial land to a third-party investor, while retaining the fee interest. Then, the investor may work with a build-to-suit developer to build a Chick-fil-A, Walgreens, or Raising Cane’s. While many corporate owners used to require full fee ownership of the real property, many are now compromising and settling on long-term land lease interests, to secure the location.
Historically, there had been very little investor appetite for that type of transaction, since you’re only getting a slice of interest in the property rather than the whole thing. But as well-located land becomes harder to come by, it requires creativity. Similarly, it takes a mindset change on the part of a landowner: Rather than selling a property outright, a ground lease offers the potential for a long-term annuity income stream.
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