Workers are expected to come back in full force in the next few months as Covid-19 restrictions lift across Arizona, and many employers are configuring just how to bring everyone back to the office — or not. 

One of Arizona’s leading real estate attorneys, Jay Kramer of , spoke to �鶹��ýӳ�� about what to expect as well as advice for employers on how to move forward. 

The first challenge will be motivating employees to come back to job sites, Kramer said.  

“People haven’t been in the office for awhile and in Phoenix, you can have a 40-minute to one-hour round-trip commute,” said Kramer, a partner with Fennemore, headquartered in Phoenix. “If they come back to the office and just go into a cubicle or close the door of their office, that may not be a reason to come back. So, we’ve got to make it more enjoyable, more of a communal environment conducive to collaboration and socialization as well as providing quiet spaces for people to work.”

Now that the Centers for Disease Control (CDC) has , Kramer predicts employees will be back in full force by the end of the year. 

Kramer offered up his projections for what’s ahead and some advice: 

Projections for the short and long term

In the short term, the commercial office market will continue to be bumpy, and Kramer advises remaining flexible right now.  

“I think there is going to be an initial knee jerk reaction of, ‘How can we reduce space?’ “ he said. “Most companies will be in a hybrid environment and wonder why they need as much space as they have with only 50 percent of their employees in the office on any given day.”

Longer term, more office space may be required because of the need for more collaborative space, social spaces, quiet spaces, and zoom meeting conference rooms, he said. 

“We may actually need as much or additional space because of all these experiential requirements that we’re going to need in order to get people back to working in the office.”  

Large headquarters may become more obsolete 

Expect large headquarters to go away in favor of regional satellite offices closer to provide more travel convenience for staff, Kramer said. Many offices also will need to be “re-imagined” to make them more attractive to bring staff in for a few days a week or more. 

“Instead of having one large corporate office located downtown or at 24th and Camelback, maybe an approach would be to have two or three smaller offices around the Valley, closer to where your employees are located so they do have a place to go where there can be some feeling of camaraderie and community and firm,” Kramer said. “But at same time, limit the commute and limit the exposure to a large number of people.”

Time to think about flexible lease options moving forward

Over the past 14 months, many big businesses were able to carry their mortgages and leases in 2020 because they were able to reduce other expenses associated with running an office by as much as 20 percent. 

Moving forward, CFOs may need to consider reducing costs on existing leases through vehicles like subleasing. Now is a good time to start thinking ahead about how to renegotiate leases to build in flexibility for expansion and contraction. 

“It’s very difficult to change your lease during the existing lease term unless you’ve negotiated contraction, expansion options or early termination provisions or something to that effect,” Kramer said. “So most of us are going to continue to have to live with our current office space.”

Subleasing glut right now 

With everyone trying to sublease right now, it can be difficult to find takers. Companies may find they are having to retrofit their offices to survive.  

“The key issues are going to be flexibility and that means the ability to contract and expand your space, have options to extend your term but also have the ability to terminate your lease contractually,” Kramer said.

With the knowledge that government mandates or orders can limit how many employees can be in the office, there will be more emphasis on force majeure provisions and leases and possibly condemnation. 

Tenants are in “leverage” position right now

Right now, leverage is with tenants, which means landlords will be more likely to work with flexible lease and other terms. 

“So, if you have a lease that is expiring, you might normally look at your lease 18 months before the expiration date but you may want to start looking three years in advance now and see if there is something you can do.”

Residential real estate boom will benefit commercial market  

With the housing market on fire in the Valley, expect the commercial real estate sector to benefit as well. 

“With more people, you assume that more businesses, whether they are small or large, will either start up here or potentially move their headquarters or their regional headquarters to the area.”

As people move to the region, more “knowledge-based” businesses and higher salaries will follow. 

“The next five years in the Valley are going to be good times for the real estate market. There will probably be some blips, but I think overall the trend will be very positive.”

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Arizona’s new high income tax from Proposition 208 is bound to discourage new investment, harm thousands of small businesses, and is unconstitutional, two of the state’s leading economic and legal experts told the real estate community last week. 

While the tax is intended to provide funding for education, it is flawed in many aspects and will hurt education in the long run if measures aren’t taken to mitigate its impacts, said Jim Rounds, an economist and policy analyst who spoke at a virtual breakfast meeting of the nonprofit , the voice of the real estate industry in the metro Phoenix region.

“We’re not debating education funding. We’re talking about the best way to fund education,” Rounds of Rounds Consulting in Tempe told a group of more than 175 attendees. “We want to make sure the gains are bigger than the economic losses.”

Rounds was joined by constitutional attorney Jon Riches of the Goldwater Institute, which is challenging the tax in Maricopa County Superior Court. Riches detailed why the measure is unconstitutional on several fronts. 

Businesses seeking solutions 

Cheryl Lombard, president and CEO of Valley Partnership, said the organization invited the two experts so members could get more information about the controversial measure. 

Lombard said her organization supports a “well educated workforce” as part of its strategic plan and is joining with other business organizations to determine what is the best path moving forward. If Prop. 208 is not going to deliver as promised or is invalidated by the courts, the real estate community wants to know that there is a path forward that businesses can support.

“As a business community, we need to come together as a collective voice, one voice,” she said. 

Highest income tax hike in state history

Proposition 208 almost doubled the marginal income tax rate for individuals who earn $250,000 or more, and couples earning $500,000 or more, from 4.5 to 8.0 percent, a 77.7 percent increase.

It also will impact thousands of small businesses with 500 or fewer employees that file their taxes as individuals, not corporations. Meanwhile, the measure does not affect large companies that file under the corporate tax code.  

At the breakfast meeting, Rounds discussed economic implications while Riches outlined the legal problems with the new tax. 

Here are highlights from each:

What are the economic impacts of Prop. 208?

Rounds, who conducted an analysis of the new tax with the Goldwater Institute, said that any benefits to education will be offset by the damage it will do to the overall economy.   

For one, high income earners are not a stable funding source, he said. Their income flow tends to be more “volatile.”  

To determine the potential impact of the ballot initiative, the analysts calculated the damage including job losses, suppressed wage growth, dampened business recruitment, and harm to the state’s economic base. 

Among the key findings: 

A minimum of $2.4 billion in state and local tax revenues will be lost As more businesses fail under the weight of the tax hike, job growth and wages will suffer. A conservative economic modeling of the financial impact indicates that a minimum of $2.4 billion in tax revenues will be lost over the next decade. 

Cuts to social services, public safety, and higher education The new mandate will cause a minimum of $120 million in lost revenues annually to the state’s general fund. Since the proposition requires any decrease in state revenue to be made up from other sources, this will likely put critical services on the chopping block.

Substantial job losses Under the most conservative scenario, job losses will reach a minimum of 124,000 over the course of 10 years. 

A drop in new business expansion The risk to new business attraction and expansion could be as large as a 25 percent reduction.

About half of those affected are small business owners Fifty percent of those whose tax rates are expected to be directly targeted are small business owners. 

Why is the new tax unconstitutional?

Riches, of the Goldwater Institute, discussed the that is being heard in Maricopa County Superior Court. RIches said the measure is flawed constitutionally for a number of reasons including:

Arizona’s constitution requires limitation on school spending The law illegally exempts itself from expenditure limitations for school districts as set forth in the Arizona Constitution.

The proposition violates constitutional requirement The new law violates the state’s constitutional requirement that any new tax must be approved by a two-thirds majority of the legislature, which it did not. 

“No legislation, whether passed by the people or the legislature, can override or supercede the constitution,” Riches said. 

The Goldwater Institute is joined by many others in its legal challenge including the leaders of the Arizona Senate and House, Sen. Karen Fann (R-Prescott) and Rep. Rusty Bowers (R-Mesa); several other Republican legislators; Montie Lee, the owner of Lee Farms; cardiologist Francis Surdakowski; and the Arizona Free Enterprise Club. 

A separate lawsuit also was filed by small business owner Ann Siner, CEO of My Sister’s Closet, and John Buttrick, a retired Superior Court judge and federal magistrate. 

Both experts said �鶹��ýӳ��ust find a better way to fund education. Legislative leaders in both the Arizona Senate and House are seeking ways to do just that.

Among the solutions under discussion are mitigating the damage from Prop. 208 with tax reforms. No concrete proposals have been introduced but committee chairs in both houses said mitigation is one of their top priorities this year.

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As voters head to the polls next Tuesday, commercial real estate and economic development professionals are calling on citizens to vote “no” on Proposition 208. The high-tax measure threatens Arizona’s economic growth and recovery, and could punish thousands of small construction businesses who would be subject to the new tax, they said. 

“I’ve been in Arizona for about a quarter of a century and this is the worst proposition to make the ballot during that time, and it may be one of the worst in the history of the state,” said Tim Lawless, president of Commercial Real-estate Executives for Economic Development (CREED).  

“It’s divisive. It’s very chilling to job creation and it’s basically killing the golden goose. We’ve got a good thing in Arizona and we need to keep the momentum and I feel this is going to sidetrack that totally,” said Lawless, whose organization represents the largest property owners in the state, accounting for a minimum of 70-million square feet under management and more than 5,000 business tenants, most of whom are small businesses. 

Why they oppose the ballot initiative 

Lawless is one of several real estate and economic development experts who spoke to �鶹��ýӳ�� about why they oppose Prop. 208. 

The ballot initiative is intended to tax top earners in the state to fund education. But it also will affect a large number of small businesses and sole proprietors in the construction industry who file their taxes under the individual tax code, not the corporate tax code, he said. 

In Arizona, the industry employs close to 150,000 workers, according to the Arizona Office of Economic Opportunity.

“People in commercial real estate, especially the developers, take a lot of risk when they decide to build a multi-million-dollar development, and they are typically small business people,” he said. “Many companies have 10 to 15 employees and everything else is pretty much subbed out and they create LLCs to push the work forward. 

“It’s really their skin in the game and this is going to have a chilling effect on them wanting to take greater risks.” 

Jobs, growth, tax revenues at risk  

The tax measure, also known as the “Invest in Ed” initiative, would almost double the marginal income tax rate for individuals who earn $250,000 or more, and couples earning $500,000 or more, from 4.5 to 8.0 percent.   

Local economists and groups like the nonprofit Arizona Tax Research Association and the Goldwater Institute have calculated that passage would create a dampening effect on jobs, new business growth and tax revenues. 

Commercial real estate group values education, not Prop. 208

Suzanne Kinney, president and CEO of the Arizona Chapter of NAIOP, the commercial real estate association, said her members care deeply about education and understand how important it is to pay teachers and support staff fair salaries in order to attract and retain the best talent. 

But placing the tax burden on the shoulders of small contractors, subcontractors, manufacturers and other small companies is unfair and creates a foreboding look into the future, Kinney said. 

“We believe a well-educated workforce is essential to the livelihood of Arizona. However, implementing a funding mechanism that singles out a small sliver of taxpayers will have a negative, long-lasting effect on small businesses,” she said. 

Competing with no-tax, low-tax states for major corporations 

If passed, the tax increase initiative would result in Arizona having the country’s ninth-highest income tax rate, said economic forecaster Elliott Pollack, CEO of Elliott D. Pollack & Company, who spoke during a town hall to chambers of commerce leaders Monday. 

Pollack said other high-tax states like California and New York are shedding people and jobs.

Arizona could easily lose its competitive edge to other states with lower income taxes, or no income taxes, like Texas, Kinney said. Brokers who work with national manufacturers are being told by some of their clients that they are putting planned investments on pause until the ballot initiative is decided.  

“If Proposition 208 passes, Arizona could get passed over for major corporate locations, including in the manufacturing sector,” she said. “Too many of our neighboring states have lower income tax rates, including several that have no income taxes at all.”

Stable funding source for education still needed

Kinney said she is concerned that the state has been unable to rally around a stable funding source that will provide schools with the resources they need without damaging the economy. 

“As a policy wonk, I am certain there are better ways to fund education. My dream would be to see all those who care about education come together around a better solution,” she said.

�鶹��ýӳ��s, real estate and economic development groups voting “no”

�鶹��ýӳ��s of commerce across Arizona, and real estate and economic development groups are opposing Prop. 208 including: 

Commercial Real-estate Executives for Economic Development 

Arizona Association of REALTORS

Arizona Builders Alliance

Homebuilders Association of Central Arizona

Arizona Multihousing Association

NAIOP Commercial Real Estate Development Association

Southern Arizona Home Builders Association

Southern Arizona Leadership Council

Associated General Contractors Arizona Chapter

Yavapai County Contractors Association

For more information and to view a complete list of who opposes the high tax measure, go to: . 

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At the request of the Arizona Multihousing Association and the Arizona Association of REALTORS®, Elliott D. Pollack & Company analyzed the potential impact of eviction moratoria on the Arizona rental housing industry.  The results clearly indicate that eviction moratoria and the non-payment of rent could have devastating consequences on the rental housing industry and the real estate industry as a whole. 

Renters account for over 35% of total households in Arizona. The latest U.S. Census survey places that at 919,931 renter households across the state. Combined with a median rent of $1,036 per month, nearly $1 billion in rent is paid every month across the state of Arizona. Thus, if renters cannot, or decide not to pay rent during the eviction moratorium, losses will add up quickly. 

While the exact percentage of renters who don’t pay rent is currently unknown and likely to fluctuate over time, the following illustrates a potential range of scenarios:  

• 1% non‐payment: Over seven months equates to $67.8 million in lost revenue. Adding the eviction process and turnover (up to two months of lost income), totals $87.1 million.
• 15% non‐payment: 7‐month losses grow to over $1.0 billion. Including the eviction process and turnover equates to over $1.3 billion in losses.

Though well‐intended, the combination of relief measures including enhanced unemployment benefits and an extended eviction moratorium have created a perverse incentive for residents to withhold rent payments without penalty.  This is patently unfair to rental property owners who have been forced to bear the brunt of someone else’s financial burden without any due recourse or compensation. 

Eviction moratoria and the subsequent nonpayment of rent will cause a ripple effect. The employees, contractors, and suppliers that rental property owners utilize will begin to feel the pinch when owners do not have the ability to meet their financial obligations. This, in turn, will impact the employment of those supplier industries and the financial health of those workers and their families. The apartment industry alone employs over 21,900 workers both directly and through their ripple effect. This will impact their estimated $695.9 million in wages and the $3.8 billion economic activity that is generated annually. 

We cannot continue to ask one sector of the state’s economy to provide a social safety net without any participation from government. This is not sustainable and will have consequences both near and long-term on Arizona’s housing market.  

Rental housing is one of most effective solutions to addressing our state’s growing affordable housing issue. Looking further out, in the medium to long-term, the potential imposition of any future moratoria by government may create a dampening effect on rental housing development. This affects additional jobs as well. Each year, an estimated $1.1 billion in apartment construction activity generates an estimated 14,374 jobs across the state, responsible for $746.6 million in wages, and a total economic impact of $2 billion.  

Moratoria are unnecessary and impact small owners

According to Census data, over half the rental market is comprised of smaller housing types and not in a traditional apartment community. An estimated 331,022 rentals are single family homes and another 148,442 units are made up of condos, duplexes, triplexes and fourplexes. These are largely owned by individuals or small businesses, not large companies. For senior owners and state pension funds, rental income may represent a substantial share of their total source of income.  

Rental property owners are not just large corporations, but include small and family businesses, individuals, and couples.  Many have invested substantial portions of their savings in rental real estate, and the rental income from these properties contribute to their total household income. Without that income, these owners are at risk of losing their properties to foreclosure if they cannot pay their mortgages or HOA fees.  

In addition to this loss of income, these operators and owners of rental real estate are further burdened with statutory obligations to provide essential services; all without a plan to provide a source of revenue to cover operating costs. They must maintain employment of maintenance and administrative staff, perform repairs and maintenance to keep the property habitable and sanitary, and pay property taxes; all without recourse for nonpayment of rent by their residents.  

Provide resources, not remove property rights  

The COVID-19 pandemic has hit every Arizonan in some capacity, and some more than others.  Through no fault of their own, many Arizonans have become unemployed, have seen a reduction in their work hours, or have been hospitalized due to COVID-19.  Many business owners across the state have also been forced to close their doors in order to slow the pandemic’s spread. In an effort to mitigate the economic consequences of the pandemic, the federal CARES Act, the President’s Executive Orders, and any federal aid that follows has provided financial relief for most affected individuals in the form of stimulus and enhanced unemployment benefits for those who are currently unemployed. Congress has also provided relief to small businesses by way of the Paycheck Protection Program.  

These resources, along with the nearly $130 million in Eviction Prevention and Rental Assistance aid offered by state and local governments in response to COVID-19, have provided Arizonans with the means to pay rent. 

At a time when affordable housing is at its greatest need, developers may begin factoring future moratoria into their risk assessments for the Arizona housing market and look elsewhere for investments with less risk. This could displace substantial investments in our state in favor of alternative locations. 

Elliott D. Pollack is CEO of Elliott D. Pollack and Company, an economic and real estate consulting firm in Scottsdale

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Despite the Valley’s booming economy, affordable housing continues to be an issue for many Phoenix-area families, as the increase in housing prices outpaces income growth.

That could be troubling news for the region, because higher homeownership rates benefit the community as much as homeownership benefits individuals emotionally, physically and financially.

According to the National Association of Realtors, there are several important benefits to owning your own home, including:

• Higher educational performance for children
• Greater participation in civic and volunteer activities
• Lower crime rates
• Better-maintained neighborhoods

Bank of America recently released the results of its , which explores the attitudes, preferences and behaviors of the modern homebuyer.

The study found that 93 percent of those who have bought a home said they’re happier because of it, and 83 percent said they wouldn’t go back to renting.

While many recognize the financial benefits of homeownership, 82 percent said they also derive satisfaction from the time they spend on hobbies and passions since purchasing a home — including new pursuits such as gardening, cooking and interior design.

Beyond hobbies, 78 percent said they feel satisfied with the quality of their social life and credit homeownership with their improved ability to entertain and gather with friends and family.

Given interest rates have fallen in recent months to relatively , we may see this start to change. After all, Phoenix offers a booming economy, a mild winter climate, plentiful options for arts, culture, sports and entertainment, and none of the natural disasters that affect so many other regions of the country.

Rent vs. Buy

Some potential buyers on the cusp of homeownership may be weighing the pros and cons of buying versus renting. There are benefits to each, with renting allowing for greater ease if you’re planning on relocating frequently and requiring less money up front.

But Phoenix area rents are skyrocketing, and Zillow calculates that it’s actually cheaper to buy than to rent in the Phoenix area if someone stays in their home for just .

Unfortunately, many prospective buyers fear the upfront costs and self-select out of homeownership without getting all the details.

In fact, said the biggest barrier to homeownership is saving enough money for a down payment and closing costs. The good news is that solutions exist to give prospective buyers the power to get over this hurdle.

Bank of America recently launched a to help more than 20,000 individuals and families overcome homebuying hurdles, including in Phoenix. Benefits include a new down payment grant program that gives eligible borrowers up to $10,000 to be used toward their down payment, with no repayment necessary.

Homebuyers may also be eligible to receive up to $7,500, which can be used for non-recurring closing costs or to buy down their interest rate.

Increasing homeownership in the Phoenix area will be a win-win for homebuyers, our communities and our economy.

I’m proud that Bank of America is working to find solutions to make homeownership a reality for more local families.

Diana Varley-Roberts is a vice president and area lending manager in consumer lending at Bank of America.

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A vision to fill in the dusty stretches of the Salt River with teeming development, recreation and wildlife refuges is becoming a reality step by step.  

The dream was something two elder Arizona statesmen, U.S. Sen. John McCain and U.S. Rep. Ed Pastor, worked their entire careers to nurture.  

Both passed away recently, just months after a historic meeting March 31, 2018 where all the necessary parties – tribes, cities, state and federal agencies, non-profit and business groups – committed in writing to make it happen.  

Called Rio Reimagined, the project’s first year was a blockbuster.

In addition to winning a coveted federal urban waters partnership, the Corps of Engineers has agreed to help with several projects. There is broad-based public and private support.

Riverfronts are also bustling with new multi-family residential, corporate and industrial development, particularly in Tempe Town Lake and Mesa.

Residential, hospitality and beautification projects are also moving forward in Goodyear, Buckeye and Avondale.

Suddenly, investors are interested in long ignored “brownfields” along the river, former landfills, mining pits and other areas that have been cleaned up and are suitable for development, said Melissa McCann, Director of the Arizona State University Exchange that is acting as a coordinator for Rio Reimagined as it takes root.

Much of the interest is due to most of the river’s corridor, roughly 70 percent, within federally designated opportunity zones, McCann said. Approved by Congress last year, the Opportunity Zone program is designed to bring capital investment into underserved areas. Investors receive reductions on capital gains taxes.

“ for innovative solutions for those sites,” McCann said. “It’s enticing for them to think that investors are interested in brownfield sites along the river that they wouldn’t have considered before.”

Rio Reimagined wins coveted ‘river city’ partnership  

Rio Reimagined also just received a highly sought after prize. It is now one of 20 river cities involved in the Environmental Protection Agency’s Urban Waters Federal Partnership.

The Partnership offers many rewards: preference for grants, an ambassador position to coordinate the project for four years, and assistance from 20 federal agencies and 19 nonprofits that support the 19 other urban river systems. Intended to revitalize waterways and promote economic, environmental and social benefits, it also builds on local efforts to stimulate local economies and new jobs.

Arizona’s congressional delegation stepped in to nominate and win this coveted opportunity that will elevate the project’s potential exponentially. Sen. Martha McSally met with Environmental Protection Agency (EPA) Administrator Andrew Wheeler to promote Arizona as an ideal fit for the partnership.

Industry and non-profits help carry dream forward

Many business and nonprofit groups also are involved in supporting and assisting Rio Reimagined. The non-profit Arizona Forward, which brings together business and civic groups to promote environmental sustainability and economic vitality, held its first Sustainability Summit to get a starting framework for the project.  More than 200 experts shared ideas and developed recommendations.

“This was an important first step in a major multi-generational project,” Arizona Forward CEO Lori Singleton said after the summit. “When we brought in folks from the San Antonio Riverwalk and the Los Angeles River Revitalization and showed that these types of projects take a long time but have results that last generations, everyone got excited. We recognize this as an incredible opportunity to leave a meaningful legacy for future generations.”

Among the many groups supporting Rio Reimagined are:

Arizona Forward

Valley Partnership

Arizona Audubon

Salt River Project

Greater Phoenix Leadership

Greater Phoenix Economic Council

Lower Gila River Collaborative

Kyl Center for Water Policy

Team Rubicon

Sonoran Institute

WESTMARC

Rio Salado project’s evolution   

Rio Reimagined is the next step in the evolution of the original Rio Salado Project started in the 60s by Arizona State University Design School students and staff.

Last year, fueled by the wish of Sen. McCain, eight river communities signed a letter of intent to coordinate to revitalize a 50-mile stretch of the Gila and Salt rivers. The rivers’ path slices through eight communities: the Gila River Indian Community, Phoenix, Mesa, Tempe, Avondale, Buckeye, Goodyear, and the Salt River-Pima Maricopa Indian Community

The project has multiple objectives: public open space, environmental and water quality, housing, transportation, economic development, workforce development, community sustainability and resilience for the future.

To see a map of the river, go to:

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