COVER STORY, MARCH 2006

PHOENIX'S RISING RETAIL
Valley of the Sun developers look at all the spending people.
Brian A. Lee

According to David Archer, executive vice president of Vestar Development Company, retail development in the Phoenix area is starting to catch up to the strong housing growth that the market has experienced in the last 7 to 9 years. This means tons of square feet of retail opportunity in a market known for its high population growth and regarded as relatively inexpensive when compared to its Southern Nevada and Southern California neighbors.

“Millions of square feet of retail and entertainment space will be set in motion or come on line in 2006, making this year for retail what the first half of the decade was for Arizona housing,” says Archer. “The Phoenix area has had more than 200 miles of new freeways built within the last 7 years, which has provided for a lot of opportunity for retail development. It has changed the pattern of where residents work and shop.”

The 1.3 million-square-foot Tempe Marketplace, on which Vestar Development Co. broke ground earlier this year, will contain power center, lifestyle center and entertainment components when it opens in mid-2007.

“The dominant developers [in the Valley of the Sun] remain Vestar and Westcor,” says Jack Wilson, senior vice president in Grubb & Ellis|BRE Commercial's Retail Group in Phoenix. “While Westcor and Vestar focus on regional and power centers anchored by national retailers and large box users, other developers — including Barclay Group, Kitchell and The Pederson Group — develop power centers as well as neighborhood centers often anchored by grocers.”

Wilson explains that Arizona's impressive new housing growth numbers have kept all of the big box retailers active in the state. Wal-Mart, Target, The Home Depot, Lowe's Home Improvement Warehouse, Kohl's and Costco are all currently looking to open locations in proximity to the areas that witnessed more than 60,000 new housing starts in 2005. “Wal-Mart continues to be the most predatory with their expansion; however, Target has lined up numerous locations in preparation of openings over the next several years,” says Wilson.

Due to greater constraints on their capital budgets, grocery retailers have been less aggressive in the Valley of the Sun. “Nevertheless, Fry's will be opening four to five of their new 100,000-square-foot Marketplace stores per year for the next couple of years,” says Wilson. “Locally owned Basha's is the nimblest player in the Arizona market, with three highly successful product types — Basha's traditional grocery store, AJ's Fine Foods gourmet and specialty stores and Food City, which offers a full range of ethnic products.”

At this juncture, no retail projects driven by Phoenix's light rail program have been announced, but Wilson does not rule out the massive infrastructure improvement as a stimulus for retail developers to venture into the high-density areas of the market in the future.

The continued expansion of the freeway system in the Valley has been the major catalyst for most of the regional and power center development in the market. Completion of Loop 202 in the southeast Valley and Loop 101 and the expansion of Loop 303 in the north and west Valley continue to spur new retail development. “Retailers have already announced new developments along Interstate 10 into Pinal County, including a regional mall by Westcor in Casa Grande at Florence Highway,” says Wilson. “Other developers are selecting sites in Maricopa, Coolidge and Florence to service all of the new housing development there. Many developers are also currently positioning themselves in the Sun Valley area, serviced by the Sun Valley Parkway in the far west Phoenix metro market, as several new master-planned communities are in the works in the near future.”

Situated in the northeast Valley, the massive CityNorth mixed-use development will offer 1 million square feet of retail to Phoenix-area residents.

“CityNorth is unique in several ways including its size and the creating of an urban — and urbane — experience in a suburban desert setting with a blend of desert and urban, medium-density architecture,” says Ed Shook of Thomas J. Klutznick Company.

Thomas J. Klutznick, who has owned the 144-acre CityNorth parcel of land for 15 years, was instrumental in the planning and zoning of the entire Desert Ridge community northeast of Phoenix.

More and more investors are also buying stakes in the bright retail future of the Valley of the Sun.

“While the investment market for large, high-quality retail projects has traditionally been dominated by Southern California buyers, private 1031 investors and select REITs, more interest from insurance companies, pension fund advisors and TIC buyers has become evident,” says Greg Valladao, senior vice president in the Retail Investment Group of Grubb & Ellis|BRE Commercial.

These players recognize that the investment pros easily outweigh the cons in a metro area projected to grow by more than 120,000 people a year for the foreseeable future. Plus, as previously stated, prices are typically lower — and thus cap rates higher — than what they'd find in Southern California and Las Vegas. 

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.