Real Estate and Banking Booms Go Bust in Arizona

Promoters of this desert city like to say that it’s located in the Valley of the Sun, reflecting the area’s weather, life style and spirit of limitless opportunity. But the mood here is anything but sunny these days as Phoenix suffers through a real estate and banking collapse that has left its mark all over town.

Once the embodiment of Sun Belt growth and prosperity, the Phoenix area went on a wild spree of development and speculation in the mid-1980s. Now, the excesses have become painfully apparent, and the city, its property owners and the financial community are paying the price.

“Arizona has been on a binge,” Denver-based banking regulator Anthony Scalzi said. “A long one.”

The results:

--Property repossessions on defaulted loans are running into the billions of dollars and office buildings are begging for tenants. Real estate values have plunged on many properties, particularly on vacant land acquired for development.

--Foreclosures have affected some of the state’s best-known residents, including former Gov. Evan Mecham and former U.S. Senate candidate Keith DeGreen. Business tycoon Gordon Hall had his former mansion in suburban Phoenix, all 53,000 square feet of it, sold at auction for less than $4 million, about 20% of its estimated replacement cost.

--Middle-income homeowners have seen the value of single-family houses fall up to 10% in some Phoenix neighborhoods. Residential foreclosures in the Phoenix area have already surpassed 14,000 this year, up sharply over 1988.

--Major lenders are hurting. Arizona financial institutions lost $741 million in value from July through September alone, according to state banking regulators.

“The fact is that bad decisions were made by everyone, and all the lenders got into trouble,” said James P. Simmons, chief executive of Valley National Bank, Arizona’s largest independently owned financial institution.

One Phoenix businessman recently lost his home after the real estate downturn slashed his income, making him unable to meet his $2,400 monthly mortgage payment. “I could see a downturn coming,” he said, “but I never anticipated the depth of the troubles.”

The home, purchased several years ago for $280,000, was recently appraised at $240,000. “That was our fourth or fifth home,” said the executive, who asked not to be identified. “I used to think I was an astute investor.”

Arizona represents a severe example of a real estate slowdown that is hopscotching around the country, touching down in places like New England, New Jersey and some coastal parts of California.

The state’s real estate woes have caused major problems at some of the nation’s largest commercial banks, including First Interstate Bancorp in Los Angeles and Chase Manhattan in New York. First Interstate’s operations in Arizona lost $174 million in the third quarter because of construction and mortgage loans that have not paid off.

There are bright spots, to be sure. Most of the Phoenix-area economy, which accounts for about two-thirds of the state’s business activity, is still chugging along, and the state’s population is still growing at more than 2% a year.

The state’s other major employers--government, manufacturing, mining, services and retailing--have remained relatively healthy, local economists say.

“There are two economic trends here,” said Michael R. Fitz-Gerald, commercial real estate broker in charge of the Phoenix office of Coldwell Banker. “Banking and real estate are in a depression and the rest of the economy is just fine.”

There are bargains galore for cash-rich investors willing to buy apartments and condominiums and keep them several years. Values on these properties have fallen as much as 50%.

“In 5 or 10 years, you’ll see that the greatest buying opportunities that anyone has ever seen are right now,” said Elliott D. Pollack, a former economist at Valley National Bank who is now a developer.

Yet, commercial buildings continue to rise all over Phoenix, leading to fears that the city will face a glut of office and retail space until well into the 1990s. “You’d be surprised at the building that is still going on here,” said Ralph Shattuck, publisher of a newsletter known as Foreclosure Update.

Arizona today is more vulnerable to the harmful effects of a national recession than it used to be, and some economists predict that a national recession will occur in 1990.

“As the nation goes, so goes Arizona now,” said Robert J. Eggert Sr., a well-known national economist who lives in Sedona.

Arizona was one of the fastest-growing states in the country earlier in the 1980s, a place where Michigan auto workers and Texas oil workers went when the economies of their states collapsed.

Population growth in those days ranged as high as 5% a year in some areas, creating boom times for anyone in real estate and lending who provided the newcomers with places to live, work and shop. About 66,000 new arrivals landed in the Phoenix area in 1985 alone.

Other factors fueled the building boom, including easy money from lenders, vacant land galore, few building restrictions and generous tax incentives--since rescinded.

During the height of the speculative fever, building had a Wild West feeling as bankers and developers cut their deals over lunch and lending guidelines were thrown out the window.

Developers made shopping centers out of cotton fields and turned Central Avenue in Phoenix into a corridor of office buildings reminiscent of Wilshire Boulevard in Los Angeles. Fortunes were made in a day on rocketing prices of vacant land.

When population growth began falling sharply in 1987, developers and lenders seemed not to notice and continued their torrid construction of office buildings and shopping centers. “Everyone kept on building,” Shattuck said, “but there was no one moving in.”

Civic leaders were so slow to see the dangers that reality did not dawn on them until late 1988, when Barron’s newspaper predicted that Phoenix was headed for “a deep and protracted real estate bust.”

The reaction was shock and disbelief. “The first response was: ‘You can’t say that about us. This is Phoenix,’ ” developer Pollack said.

A year later, the bust is obvious.

The parent company of Valley National Bank just suspended its dividend for the first time ever after falling real estate values caused losses of $136 million in the first nine months of 1989.

The U.S. government owns a majority interest in the Phoenician Hotel in suburban Scottsdale, possibly the region’s toniest inn. Banking regulators seized the hotel as part of the holdings of Phoenix businessman Charles H. Keating Jr., whose lending and development empire collapsed in 1989.

Huge new communities on the western fringe of Phoenix, planned when times were good, look highly questionable today. A privately funded $75-million freeway, built as part of what was to be a planned community in a remote desert area known as Sun Valley, is so seldom used today that it has become a favorite of weekend bicyclists.

The pro-growth optimism has yielded to caution and doubt. Although most local experts say the state has good long-term prospects, most agree that 1990 will be another tough year, with a return to normalcy in several years.

“Like alcoholics, it will be one day at a time (toward recovery),” banking regulator Scalzi warned a gathering of nearly 1,500 business people here recently. Scalzi is head of the western region of the Resolution Trust Corp., a government agency created this year by Congress to sell the assets of failed thrifts around the country.

The Resolution Trust Corp., which now has control of about $9 billion in assets in Arizona, is expected to hire up to 500 lawyers, accountants and staff personnel for its Phoenix office, scheduled to open in a few months.

Real estate salesmen report that housing resales are flat. “The residential market is bumping along the bottom,” said John Foltz, who runs Realty Executives, a brokerage here with more than 800 sales agents.

Dragging down prices is the large supply of foreclosed homes for sale, many of them purchased with government-backed mortgage loans, real estate experts say. The top Realty Executives salesman in 1989 is a specialist who sells foreclosed homes owned by the U.S. government.

“It’s a sad comment (on the market) when that happens,” Foltz said.

Although Arizona’s total population is still rising, many are fleeing to places like Nevada, the fastest-growing state in the western United States. Many home builders who quit doing business here are now building in Las Vegas.

Arizona’s only real boom town today is Bullhead City, the Colorado River town situated across from Laughlin, Nev., where casinos are sprouting like weeds.

In 1988, the number of Arizonans who moved to California outnumbered those Californians who moved to Arizona, reversing the normal population trend. “That’s very unusual, and I expect that to continue another year,” economist Eggert said.

The huge population influx from Texas and Michigan also has stopped because the economies of those states have improved, local experts noted. “Michigan doesn’t have an 18% unemployment rate any more,” said Terry Trost, chief economist at the Phoenix Chamber of Commerce.

The change in migration trends has also caused the state of Arizona to abandon its traditional laissez faire posture and establish an economic development council to lure business, jobs and people. “We never had to do that before,” said Simmons, the Valley National Bank chief executive.

One highly visible symbol of the real estate problems is the McCune mansion in suburban Paradise Valley. It’s a fortress-like complex that has former Sen. Barry Goldwater as a neighbor on one side and a view of smoggy downtown Phoenix on the other.

The home was built in 1963 by the late Pittsburgh, Pa., oilman Walter McCune and acquired in 1983 by Gordon Hall, a flashy Phoenix real estate developer who in better days was reportedly driven around by a female chauffeur in hot pants.

When Hall’s holdings got into financial trouble, the home was seized by his creditors. The mansion, vacant since 1987, was eventually put up for auction after its owner, Southwest Savings, became insolvent.

The home, once featured on “Life Styles of the Rich and Famous,” is a local curiosity. During one recent open house, more than 25,000 people jammed the grounds for a look at its extravagant features, including an indoor ice rink.

Nelson Auctioneering of Las Vegas sold the sprawling 6-acre complex earlier this month for only $3.95 million, even though the home’s replacement cost has been estimated at $20 million or more. The buyer did not want to be identified, auctioneer Aleda Nelson said.

Foreclosure proceedings began last month on a suburban office building that is the former family home and current campaign headquarters of former Gov. Mecham, impeached last year for failing to disclose a large loan as required.

The building had been Mecham’s family home for more than two decades, but it was turned into his campaign headquarters as part of his plan to run for governor again next year. Mecham indicated that he may allow the building, which has a mortgage of more than $400,000, to go into foreclosure because property values in Phoenix have dropped so much.

“I’ll make that decision when the time comes,” Mecham said. If he doesn’t cure the default, the building will be sold at auction in February.

Financial planner Keith DeGreen is facing the loss of his $625,000 home in fashionable east Phoenix after his company, known as WealthBuilder$, ran into financial trouble. DeGreen, also in debt because of his unsuccessful campaign for the U.S. Senate last year, has filed for bankruptcy. He could not be reached for comment.

One of the more bizarre developments in Arizona is Sun Valley, 45 miles west of Phoenix, beyond what are known as the White Tank Mountains. The project has a new, privately backed 30-mile freeway, but little else.

Conceived in headier times by developer Robert Burns, Sun Valley is now in trouble. Lenders have moved to foreclosure on parts of the 40,000-acre property, which was used as collateral for the tax-exempt bonds that financed construction of the freeway.

The road was opened last year, but some of the landowners have since defaulted on the bonds. The property owners now hope to refinance the debt, but some doubt that a master-planned community of 300,000 will ever materialize. Burns could not be reached for comment, but his spokeswoman said that “he still considers this a viable project.”

“There will not be any significant development there in my lifetime,” said Pollack, the economist-turned-developer who is 44. “And I plan to live a long time.”

SYMBOL OF EXCESS

Arizona’s troubled Phoenician Hotel represents one of the real estate excesses of the savings and loan industry. D1.

Arizona’s Real Estate Woes Monthly foreclosures of residential and commercial properties in the Phoenix area between April, 1985, and November, 1989. Source: Foreclosure Update Newsletter