California investors are driving transaction volumes in Arizona during the pandemic. California investors typically account for 30% to 40% of transaction volumes in the market, but recently, that number has increased to 50%. While the pandemic has impacted all markets, California investors continue to flock to business friendly markets, like California.
“We attribute this recent surge to a widening disparity in business climate in Arizona versus California,” Ari Spiro, founding principal of Orion Investment Real Estate, tells GlobeSt.com. “Increased concern of regulation and taxation on investment properties is causing concern and Arizona’s historic pro-business environment has proven to be attractive to businesses relocating here as well as investment capital.”
Phoenix has many attractive qualities, including population and job growth, but it is also a natural investment market for California capital. “One of Arizona’s biggest investment attractions is its proximity to Southern California,” says Spiro. “Being only an hour flight from LAX to Phoenix, investors find Arizona assets to be manageable from a logistical standpoint. Couple that with Arizona making daily headlines of attracting corporate headquarters, distribution centers, healthcare, and technology firms makes Arizona an obvious choice for investment capital looking to diversify geographically out of the California market.”
Orion Investment Real Estate recently closed the sale of the Glendale Towne Center for $3.8 million or $387.72 to a California investor, and it is a prime example of the trend in the market. “Most of our interest and offers in Glendale Towne Center were California investors,” says Spiro. “Particularly with an asset like this, there is a comfort level with a Target-anchored center on a high traffic intersection with recognizable national tenant names. It’s basically a similar asset that is in their own backyard, but at a lot higher return and lower cost.”
Affordability and yield are also drivers of investment in Arizona; however, the pandemic could catalyze a meaningful price reduction in California product, which could encourage more investment in California. However, Spiro says a price adjustment and investment response is still unknown. “The pandemic has created a tremendous amount of uncertainty and has certainly slowed down investment activity nationwide over the last quarter and probably will through the end of the year,” he says. “The pandemic has already had its impact on sales velocity, cap rate, occupancy and prices. Most investors are cautious, and both buyers and sellers are, for the most part, waiting until the dust settles to assess their occupancy, rental rates, and valuations.”
In the long run, investors expect this event to end and for everything to return to normal. “Most investors and lenders have the “this too shall pass mentality” and that, once we emerge from the health crisis, the Phoenix metropolitan area, with its strong job market, affordable lifestyle, newer freeway system, and plenty of land, will be poised to take advantage of the post-COVID world,” adds Spiro.
When things do return to normal, Arizona is well positioned for continued growth. “As a result of the economic shutdown and various “shelter in place” orders, there has been a dramatic shift from collaborative work environments to home offices and a change in desire from the urban living experience to a more suburban lifestyle,” says Spiro. “Factoring this along with an aging millennial population, the Phoenix market is well-positioned to provide the elbow room that many are now seeking.”
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