Trends in Real Estate Banking in Southern Arizona

When looking back at 2022 in real estate banking, our economy has been sometimes challenging, but always interesting.

At the beginning of 2022, the Tucson real estate market was on an upward trend due to growth in the industrial, multifamily and single-family markets. The Federal Reserve had other plans. In March 2022, the Federal Reserve increased the federal funds rate by 25 basis points and, throughout the year, continued to raise it an additional six times for a total increase of 4.25%. At the end of 2022, the prime rate was 7.50%, compared to 3.25% at the beginning of 2022.

Still, the economy has continued to move forward, especially in Tucson, bringing three important trends:

• Tucson’s industrial market continued to expand in 2022 near Tucson International Airport, which is positioned close to I-10 and I-19, Union Pacific and the Mexican border. Sion Power is expanding into a 111,000-square-foot industrial building in the south submarket of Tucson. American Battery Factory also recently announced that it will enter the Tucson market, building a 2 million-square-foot production facility on 267 acres, also in the south submarket of Tucson.
• Tucson continues to demonstrate a need for multifamily units as the overall vacancy rate sat just shy of 7% at the end of Q3 2022, per Cushman & Wakefield | PICOR. Reviewing the vacancy rates per submarket, there is a need for more units as many prospective homebuyers were unable to finance their dream home in 2022 due to higher mortgage interest rates. 
• Higher rates have affected the single-family home market in Tucson. The first-time homebuyer has been squeezed out of the market. At the beginning of 2022, they could afford a reasonable monthly mortgage payment at interest rates between 3.25% to 4.50%, but that has changed with mortgage interest rates now closer to 6.50%. In response, local homebuilders have slowed home construction, new home permits have declined and cancellations of new homes have increased. First-time homebuyers will be on the sidelines until mortgage interest rates ease and home prices decline. Those new homebuyers may have to wait a bit longer to purchase their home, as the Federal Reserve has hinted that it will continue to increase the federal funds rate in 2023, albeit at a slower pace. The Federal Reserve will meet eight times during 2023, with their first meeting scheduled January 31–February 1.

What is in Store in 2023?

As a real estate investor, what options do you have entering 2023?

• Know your market. Research what type of project you would like to build or purchase.
• Ask yourself: With interest rates increasing, how will that affect my return on investment? Will my project still be able to deliver cash flow? 
• As a sponsor, is there sufficient liquidity should there be a need to contribute more equity to the project? For a real estate developer, we emphasize the importance of stress-testing your project.

Alliance Bank of Arizona, a division of Western Alliance Bank, Member FDIC, provides financing for many different asset classes, including multifamily, single-family residential, vertical and horizontal development, office, retail and industrial. Some of the most frequently asked questions clients ask revolve around the nuances of financing commercial projects.

Sponsorship of Credit

When pursuing financing, sponsorship of credit plays a critical role. In addition to local market knowledge, commercial real estate sponsors not only can provide initial equity for a project but also help evaluate the suitability of the property against an owner or developer’s goals, while taking into consideration risk, timeline and both short-and long-term return on investment.

Sponsors should have the financial backing to include a completion guarantee, as well as a repayment guarantee. For ground-up construction projects, parties should consider a guaranteed maximum price contract or a contract that has sufficient contingency should there be any unforeseen cost overruns. This is especially true in today’s market with the continued supply chain issues and other factors led by pandemic-influenced delays and expenses that could affect the final cost or renovation of the project.

Sandra Barton is Senior Director, Commercial Real Estate, for Alliance Bank of Arizona, where she funds commercial construction, acquisition and development, term and RLC loans. Based in Tucson, she serves clients throughout southern Arizona. She can be reached at [email protected].