Depending on what kind of distress they're looking for, investors in search of troubled properties in the Southwest are likely to find the most deals in the office and retail sectors and a high percentage of those deals in Arizona. That's the view from Phoenix, where Steven Lindley, executive vice president of the Capital Markets Group of Cassidy Turley/BRE Commercial, foresees a continuation of a trend that has developed in the Arizona markets.

The first and worst of the distress consisted of new developments in emerging suburban locations, Lindley explains. "Those hit the market quickly," he says. "Most have gone through the distress cycle and are now resolved or have been sold as REO or notes." The second wave of distress came in more centrally located properties that had previously been leased but are suffering from high vacancies, declining lease rates and high leverage. "That's where most of the opportunities are," and where many of the opportunities will be. Within those more centrally located geographic areas, office and retail properties will most likely offer the most opportunities, Lindley says, with relatively fewer deals in the industrial sector. "Here in Arizona and in other markets where our company works, industrial has been surprisingly limited because the owners are usually better capitalized and lower-leveraged," he says. "There is distress in all sectors, but there are probably five office assets for every one industrial that is distressed."

Lindley is quick to point out, however, that none of his observations about the geographic markets or distress-by-sector are hard-and-fast rules. Although he sees office and retail as the sectors offering the most opportunities and industrial the fewest, he notes that his investment sales group sold a 13% occupied, 220,000-square-foot multi-tenant industrial property in Mesa, AZ for less than $20 per square foot, a price that equates to the value of the land. "My sales pitch was, ‘Why don't you buy the land, and I'll give you a building for free,' " Lindley recalls.