Recession-stalled concrete shell finds new life as senior housing

March 19, 2013

Looking at the health of commercial real estate in the Valley, the picture’s a bit mixed. Depending on where you’re standing and what you’re trying to build, financing new development can be tough. But one concrete shell of a building on 32nd Street in the Phoenix neighborhood of Arcadia shows that a more conservative finance market means  developers need to be more flexible in pursuing projects.

shell For years, this concrete shell has been sitting, unfinished, on the corner of 32nd Street and Glenrosa Avenue in Phoenix. Now, it is under construction again. (Courtesy of MorningStar Senior Living)

After sitting for years as a doleful reminder of recession-era bad times, construction is underway again. Workers are drilling hundreds of holes through 10-foot-thick concrete floors so they can install new pipes and wiring.

Greg Hogan, whose RedGroup is in charge of the building now, says the walls are going up, and the exterior ‘skin’ will be on soon.

In 2007, this building was supposed to be 40 luxury condos. 

“When the recession hit, the project stopped,” Hogan says.

The company that started here six years ago, ArciTerra, realized it would not be able to sell their condos when the housing market crashed. So they sealed off the shell and waited.

A couple years later, Hogan pitched the idea of turning the shell into senior housing. After a few years of planning, the two companies found financing. And in January, work started again.

In about eight months, Hogan says the building will have 110 swanky new assisted living suites to lease.

“We’ll have a movie theater and a chapel and a bistro for parties and a nice library and all the services our residents will expect,” Hogan says.

Commercial real estate has been slowly coming back from the hit it took during the recession. Senior housing’s doing even better. Nationwide, it’s an industry that’s been making a strong recovery for the last few years. 

But Chris McGraw, an analyst for the National Investment Center for Senior Housing and Care Industry, says that demand in Phoenix has been a bit soft because developers have been adding more senior housing over the last few years.  Demand here is playing catch-up to supply.

rendering The completed building will have 110 assisted-living and memory care units operated by Colorado-based MorningStar Senior Living. Having a tenant already lined up can be the key to financing in the more conservative post-recession lending climate. (Architectural rendering courtesy of MorningStar Senior Living)

McGraw says an improving housing market across the country could give it a boost.

Phoenix is kind of unique because it’s kind of a destination market for some retirees, so it could definitely benefit from some surrounding markets housing improving,” McGraw says.

Still, most people want to move into senior housing locally, and RedGroup turned that into a selling point to get financing for the project going up in Arcadia. The idea was that seniors who live nearby could  move into an assisted living community without giving up their neighborhood.

Then, they found a Colorado-based company to operate it.

And those points makes the building exactly the type of commercial real estate project that is getting conventional financing these days – built to suit the needs of a tenant committed to moving in once the construction’s done.

“There’s a guarantee there, it’s very safe.  You can finance that stuff,” says Mark Stapp, a professor at ASU’s W.P. Carey School of Business. “Speculative projects require a different kind of financing, and they’re much more difficult to get.  So you’ll find institutional players that are willing to take that risk, but they’re taking a very measured approach to it.”

Stapp says that’s what the real estate market needs. Before the recession, buildings went up just because financing was easy to come by. With a more constrained market, the projects getting built have a lot more cash up front, and they’re mostly going forward because someone actually wants them.

“They’re local driven, they’re local supported, and it’s done with a lot of local equity, and that helps build sustainable communities as well,” Stapp says.

The downside: That probably means other half-built concrete shells around the city might not get finished, unless developers can find a good reason for them to be built.

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