1 MSF Phoenix Office Property Changes Hands

In one of the largest single commercial real estate deals in downtown Phoenix, the Arizona Center has come under new ownership in a $136.5 million all-cash transaction. General Growth Properties Inc. sold the property to CommonWealth REIT.

March 9, 2011
By Barbra Murray, Contributing Editor

In one of the largest single commercial real estate deals in downtown Phoenix, the 1 million square-foot Arizona Center has come under new ownership in a $136.5 million, all-cash transaction. General Growth Properties Inc. sold the mixed-use office development to CommonWealth REIT.

Introduced in 1990 following a multi-phase construction program, the 16-acre property encompasses a range offerings, including two office towers, One Arizona Center and Two Arizona Center, which are 88 and 100 percent leased, respectively. The occupancy level flies in the face of the current office climate in Phoenix. According to year-end numbers from commercial real estate services firm CB Richard Ellis, which orchestrated the sale of Arizona Center on behalf of GGP, the average vacancy rate in the city is 21.6 percent.

“Downtown Phoenix used to be one of our tightest submarkets,” Robert L. Young, senior vice president and investment specialist with CBRE, told CPE. “For years, the vacancy rate for downtown was 5 to 10 percent, but then two new buildings opened and the economy collapsed, and the vacancy rate spiked into the 22 percent range.”

Arizona Center, with an average occupancy level of 93 percent, has clearly weathered the storm and is positioned for success well into the future. “Two Arizona is 100 percent occupied by utility provider Arizona Public Service on a long-term lease for the next 35 years,” Young said. “And 78 percent of One Arizona is occupied under long-term leases. Snell & Wilmer, which is the largest law firm in Arizona, occupies 58 percent of the building under a lease that goes to 2022; last year they renewed it early for another 10 years.” Pinnacle West Capital, claiming 20 percent of One Arizona’s office space, is the other long-term, high-profile tenant in the building.

In addition to premier office space in the two towers, Arizona Center features a third building with garden office accommodations and 77,000 square feet of first-floor retail space that includes a number of popular eateries. The property is also home to a 93,000 square-foot, 24-screen AMC movie theater that opened its doors in 1998. And there’s room for growth. Arizona Center has three developable pad sites.

A bevy of investors took interest in Arizona Center. “Quite a few people looked at it; we ended up with 16 offers on the property,” Young noted. “We had a very good bidding situation.” The stable, long-term income stream played a large role in luring potential buyers, as did the upside potential provided by the pad sites. The property is a magnet for tenants. “People there like the amenities. There are a number of restaurants on-site, there’s a brand new hotel right across the street. It has gardens and walkways. It’s a Class A property in a nice environment and there’s no other project like it downtown. When it was first built, it was on the edge of downtown, but now there’s the 1,000-room Sheraton Hotel, the Convention Center expansion, the University of Arizona College of Medicine and bioscience company TGen. It’s an area that is just going to get better over the next 10 to 15 years.”

During a period when the commercial real estate industry is continuing its fight to recover from the downturn, General Growth let go of a successful asset with a long list of desirable attributes and a positive future. However, there was a method to the company’s madness. “General Growth Properties is really a retail REIT, more specifically it is an enclosed malls REIT,” Young said. “They acquired Arizona Center when they acquired Rouse Company, which had malls and other properties like this one. As part of General Growth’s bankruptcy plan, they made a decision to focus on their core properties, which are malls.” GGP plans to use proceeds from the disposition of Arizona Center to boost liquidity and pay down debt.