The Plight of Phoenix

The city I've lived in since March 2008 is really in transition. The economic spiral has hurt the local real estate market alot, causing troubles for many investors and residents. The tourism and travel industry has dropped dramatically. Big box retailers are pulling out of the city and office vacancies are everywhere.

Two recent articles in major publications here have highlighted the economic difficulty facing the region. This week's Phoenix New Times documented the crushing blow of an ambitious real estate project in Tempe that has derailed finances for all the investors and has left the town with a tombstone of a building right in its heart. A tombstone that some are saying might be torn down before they ever fill up:"it's uncertain whether anyone will ever inhabit the structures that loom over Tempe's landscape. Like so many properties in the Valley, Centerpoint is upside-down on its mortgage — but most foreclosures don't see debts of $135 million. Listen closely and you'll hear speculation around Tempe that the towers will be imploded. As in, everything on the property will be torn down and something more practical, like a parking garage, will be built.

Most experts seem to pooh-pooh that idea because the project is worth millions (even in its unfinished state) and would cost millions to demolish. But simple arithmetic shows this drastic conclusion may not be far-fetched. The developers testified in court that another $75 million would be needed to finish both towers, including the ground-level retail sections. With such an infusion of cash, the first tower could, theoretically, be finished in six months. But that would raise the debt to $210 million. Assume for a second that the 375 units in the towers could then be sold for an average price of $300,000, raising about $113 million. Add to that the $35 million that the buildings are worth now "as is," according to an appraiser hired by the developer, and their total worth falls far short of the $210 million debt."

Ouch!

Another recent piece highlighted the closer-to-home reality of home rentals across the city and how troubles are bubbling there too. The daily newspaper AZ Republic highlighted the plight of landlord-tenant relationships on its front page over the weekend: "Rent rates used to be a function of covering mortgage payments for many landlords. More downward pressure on rents comes now from people who recently paid cash for inexpensive foreclosure homes and can ask for less in rents. With Valley home prices down 50 percent from 2007, longtime landlords are feeling the pinch. Rents on Valley homes are now down 10 to 25 percent from last year, depending on the area, landlords say. The drop in rents means many longtime landlords can't cover their mortgages anymore."

Double Ouch!

Change is clearly needed, to move the economy from a real estate and tourism mindset to something else. Business people keep touting solar energy as the next big industry for the region. Who knows? Maybe Silicon Valley refugees can work with many of the under-the-radar entrepreneurs here to get some big, successful web startups going.

One tech blogger and civic activist Derek Neighbors wrote in a blog piece called 'Does Phoenix Need to Change' today: "We need to change something because the economies that built what we have today, land development and tourism, will not be significantly rebounding in the next decade. We will experience a rather unpleasant adjustment if we are not able to institute new economies. Attracting and keeping talent for new economies will require some adjustments."

He's right, and in some ways, this flexible economy we're in is the absolute right one for the changes that are required. It's open and ripe for change. But can we get the $$$ and enthusiasm needed to fund and launch some great ideas here and help reverse this downward financial spiral? Let's hope so.

(Now, I know bad news is easy to find - it's the good news that takes some digging - please feel free to brighten up this blog in the comments below with success stories, no matter how large or small!)

[photos above from Phoenix Business Journal and Phoenix New Times)