This is the story of a commercial re-development project I did with a business partner in a funky Phoenix neighborhood. It involves a beat-up 1948 building that had "lots of potential" as we re-habbers always say...
After redeveloping multiple residential projects in central Phoenix over a number of years, the next logical step was to move into the commercial sector. We were interested in the old urban core in or close to downtown Phoenix, and decided to start small. We found a 6000-SF, mid-century modern building in an edgy neighborhood close to downtown. It had three boarded-up storefronts on the first floor and a cluster of tiny offices surrounding a relatively spacious, courtyard terrace on the second floor. There was a scary tenant living upstairs, using a bucket for plumbing. The roof leaked everywhere and the electrical system was sparking and spitting fire all the time.
The building was packed floor to ceiling with abandoned hair products that were way past their expiration date. The other main challenge was on-site parking (6 or 7 spaces max). Luckily, however, there was a free, City-maintained, 30-space lot just a few steps from our building that never seemed to get very full.
We were at the beginning of a good market cycle. The general location was great: five minutes to downtown, ten minutes to the airport, and multiple freeway access points within two or three blocks heading any direction.
The commercial corridor in the immediate neighborhood was architecturally cool, at least by Phoenix standards. There were rows of 1940-60’s brick and masonry storefronts and a few bow-truss warehouse buildings along this stretch of East McDowell Road.
Much of the surrounding residential area was historically designated (Coronado and Brentwood Districts), with some bungalows built as early as the 1920’s. Socio-economically, the area was more challenging: middle to lower-middle class, with a good degree of blight. Pride of ownership was mixed and it was hard to say if it was trending upward overall. But the central location was a big plus, and hey, that's what "urban pioneering" is. In a sprawling metropolis like Phoenix with one-hour commute times from the perimeter, we predicted that a neighborhood like ours would trend upward in desirability in the long run.
Recent historic home prices in the immediate area had already moved from $80k or $90k to about $220k in just a year or two. In hindsight that much of a rise was inflated and prices retreated back to $120k to $150k.
The previously described corridor on which our candidate building sat was occupied by cute little neighborhood businesses such as bridal shops, furniture stores, yerberias, carnicerias, and at least five home-style Mexican restaurants. There were also a few neighborhood bars and a strip club. Heavier commercial uses included a Sears warehouse, a pet food distribution facility, an Italian tile company. Rounding out the mix were a few national chain stores like Rental Center, Checker Auto, Circle K, and Dairy Queen.
Interestingly, this corridor was Phoenix’s original “Miracle Mile”, a prime shopping district back in the 1940’s, anchored by Corex Department Store. A ‘50’s vintage restaurant right across the street from us was designed by architectural icon Al Beadle. Existing urban pioneers included an established international art dealer, a well-respected recording studio, and an old warehouse converted into artist studios and band rehearsal spaces, with its own alternative rock music club.
Another urban pioneer we know (who was instrumental in developing the Roosevelt and 3rd Street district downtown) had purchased a 10,000-SF group of storefronts and an adjacent vacant acre, just a few hundred feet east of the building we were considering.
Reviewing all the data, we decided to buy the building and got it pretty cheap at a courthouse auction, but were not exactly sure what to do with it. It didn’t feel like a big risk because the commercial market was just beginning to rumble. At worst, we could flip it “as is” in a few months and probably make a few bucks with no effort.
But our desire was to re-develop it, not only to make a profit but to help revitalize an up-and-coming historic district. As a former appraiser my first question was, what is its highest and best use? We did our own market analysis. We also had a few architect and investor friends tour the building and neighborhood to get their insights. There was an immense trend in urban living, evident in all the new high-rise “loft” condo projects going up downtown. Price movement was strongly upward, and we had already profited from this in our residential work. In the commercial market, office condos were clipping along nicely. Office buildings and retail centers had low vacancy, and developers were actively building.
After completing all our analysis and sacredly invoking Laxmi, the Hindu Goddess of Wealth and Prosperity, we concluded that the highest and best use was to re-develop “McDowell Studios” as we called it, into small owner-occupied commercial spaces that could be used for storefronts, offices, or studios for individual photographers, artists, etc. The five studios would range from 900 to 1300 square feet, with three units on the first floor and two upstairs lofts surrounding a private “sky terrace.”
Given the hot office condo market, we decided to make the units self-contained, putting a restroom with shower in each studio (vs. common restrooms in a typical office building). We also stubbed some other plumbing for kitchenettes in each unit, which didn't cost much extra to do. We were zoned C-2 Commercial but wanted to at least suggest a live-work use to potential users, and in Phoenix, the zoning ordinance technically allows residential use allowed under C-2. We converted the units to a horizontal property regime, planning to sell them as individual commercial condos “with live-work possibilities."
Now we were ready to gut the building, hire an architect, and get started!
To be continued...
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