Real Estate Forum

NEWS FRONT
With Sex Shops Gone, Kennedale Gears for Development

KENNEDALE, TX—This town of 7,000-plus has some great things going for it, not the least of which is that it combines small-town charm with an ideal location just southeast of Fort Worth. “If you go back into the neighborhoods, this is a lovely community with a lot of great houses that have higher values than nearby Mansfield and South Arlington,” notes Jack Thompson, whose Fort Worth-based company Orasi is providing economic development consulting services to Kennedale.

But in the past, Kennedale has had trou-
ble attracting developers, with the reason
boiling down to three words: sexually ori-
ented businesses. “This had an enormous
impact on development and interest,” says
Bob Hart, Kennedale Economic
Development Corp.’s executive director.
“When we talked to some industries about
relocating here, every one of them told me
to call them back when the sexually ori-
ented businesses at the north end of town
closed down.”
The good news for Kennedale’s future
is that, thanks to an agreement, these
establishments shut down on Feb. 29 and
went elsewhere. The former site of four
sex shops at Interstate 20 and West
Kennedale Parkway is now being platted
for a convenience store/gas station.
Meanwhile, the economic development
council acquired nearby land, once the
site of yet another such business.
Thompson says the goal is to find a casual
sit-down restaurant for that acreage.

Kennedale never put out the welcome mat for those SOBs, as they’re called. Rather, their history reaches back to the 1970s, when Kennedale was annexed to the city of Fort Worth. Cowtown, which wanted to rid itself of the businesses, quietly pushed them to the annexed land. Hart says that when Kennedale came out of annexation in 1999, the move was on to clean up the businesses.

Even while the city was striking deals with
the SOBs, one project, Kennedale Town
Center, moved from planning stages to con-
struction launch. Located on West
Kennedale Parkway near the center of
town, the project represents a partnership
between the city and Cypress Properties of
Austin. Construction began in 2009 and,
upon build-out, the property will have
67,000 square feet over seven buildings
dedicated to mixed uses including restau-
rants, retail and medical, dental and tradi-
tional office space. In other words, notes
David Johnson, president of Cypress, “all
those services people shouldn’t have to
drive more than a mile or two to get to.”
The next step is to move the town for-
ward. Road widening and roundabout con-
struction has begun on many of its streets.
Hart says the plan is also to build neighbor-
hood villages throughout the community,
complete with retail and office uses. He says
he’d also like to bring in light industrial
firms.—Amy Wolff Sorter

Phoenix Industrial Recovers; Office Stalls

The Phoenix commercial real estate market is showing signs of recovery, with both office and industrial experiencing positive net absorption in Q4 2011, as well as through much of the year. What’s been helpful is the metro region’s unemployment rate, which was reported at 7.5% in March 2012, ranking well below the national level of 8.3%. Arizona added 27,900 jobs in February, with 18,000 of those in Metro Phoenix. Interestingly, this is having a terrific impact on industrial, but office remains a lagging sector and isn’t anticipated to make a comeback until both the general economy and housing market improves.

During Q4 2011, Phoenix’s 274-million-square-foot industrial market experienced its seventh consecutive quarter of positive absorption—a respectable 7. 7 million square feet. Logistics and distribution companies and manufacturers are opting to locate in Phoenix as a lower-cost alternative to California’s congested Inland Empire. The Southwest Valley, with its convenient access to the east-west Interstate 10, is currently the favored destination for warehouse/distribution development.

Perhaps predictably, large blocks of space—500,000 square feet and up—for distribution users is virtually nonexistent. The Alter Group plans to start construction on a speculative 605,700-square-

foot distribution center later this year, and several other developers are poised to break ground on large, speculative projects.

But even with the lack of space and the growing demand, construction will continue to be dominated by build-to-suit projects, a trend that is a result of the challenging financial environment. Currently, build-to-suits represent 99.1% of all distribution construction.

Meanwhile, the office sector is struggling because nationally, we’ve only recovered 28% of the 8. 8 million jobs lost, and less than two million new jobs are expected this year. Total nonfarm employment for Arizona is about 2. 46 million as of March. The news isn’t all bad, however—at the end of 2011, the office vacancy rate was 25.5%, a drop from 26.6% the prior year. Some 1. 9 million square feet was absorbed in 2011 (compared to just 104,783 feet in 2010); Q4 2011 saw 517,355 feet absorbed. This has led to a tenants’ market, which allows users to trade up from class B to class A space without paying a premium.

Though office demand typically is driven by rising employment (and Phoenix’s employment is on the rise), the region’s office market is overbuilt. As a result, speculative construction is at a standstill and may remain that way for several years. Difficulty in obtaining financing only aggravates the situation. The rate of job creation needs to improve appreciably before speculative construction can resume. With that said, large blocks of well-located office space are still very much in demand, and we expect that several large office build-to-suits will be developed within the next 18 to 24 months.

Call-center and data operations are returning to the Phoenix market, drawn by the well-educated labor force and affordable housing. This trend is helping to fill space that otherwise might sit vacant. According to a recent Newmark Knight Frank survey, 50% of corporations are expanding and building new data centers nationally.

By Kurt W. Rosene

Kurt W. Rosene is senior vice president at the Alter Group, based in Phoenix. He may be contacted at krosene@altergroup.com. The views expressed here are the author’s own.