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GOING WEST

A venerable east coast development duo takes its talents to Phoenix

By Joel Groover

The exponential growth in Phoenix over the past decade is hardly a secret among retail developers. And yet the upper suburbs of the Northeast Valley, easily some of the wealthiest enclaves in the Phoenix-Scottsdale metro area, remain long on mountain vistas, Sonora Desert and massive homes but short on luxury retail. These ritzy residential communities sit miles away from any exclusive mall or luxury lifestyle center. They also lack an urban focal point with the chic boutiques and restaurants that tend to be par for the course for the well-heeled tourists who frequent the Valley’s famed golf resorts.

It should come as no surprise that local developers such as Westcor and DMB Associates are racing to bring the likes of Nordstrom and Neiman Marcus to northeast Phoenix. What may be unexpected, however, is that the front-runner in this suburban Arizona contest is the venerable East Coast development duo that created such urban mixed-use icons as Copley Place, in Boston; Water Tower Place, in Chicago; and Reston (Va.) Town Center.

In November longtime partners Thomas J. Klutznick, president and founder of Chicago-based Thomas J. Klutznick Co.; and Kenneth A. Himmel, CEO of New York City-based Related Urban Development, got a jump on other mixed-use concepts planned for the area. The two development veterans broke ground on CityNorth, a $2 billion, 5.5 million-square-foot project on 144 acres at Loop 101 and 56th Street. The first phase, which will contain 3 million square feet of office, retail and residential space, is slated to open in the spring of 2008. Phoenix-based Westcor’s 72-acre Palisene, to be built about a mile east of CityNorth at Scottsdale Road and Loop 101, is scheduled to open closer to 2010. Construction on Scottsdale-based DMB’s 120-acre OneScottsdale, just northeast of Scottsdale Road and Loop 101, begins in March, with an opening set for the fall of 2009.

What has caused a bigger stir than CityNorth’s early time frame for construction is the news of its lease-up. By being first in the area to sign Nordstrom, which will open a 144,000-square-foot store at CityNorth by the fall of 2009, Klutznick and Himmel pulled off a coup that will give their leasing efforts serious momentum, says Robert Kammrath, a Phoenix-based retail analyst. “Now that they have Nordstrom, without having to breathe very hard they’ll be able to get the rest of those [tenants] that just follow Nordstrom around like puppies,” he said. “Others may have to rethink their projects or be delayed.” The site plan can accommodate as many as four department stores. At press time Himmel, who is handling leasing and marketing for CityNorth, reportedly was in early talks with Bloomingdale’s and in late-stage negotiations with Neiman Marcus.

The dearth of luxury retail in the northern suburbs, home to affluent towns like Cave Creek and Carefree and to such booming master-planned communities as Desert Ridge, Grayhawk and DC Ranch, is owing in part to some unusual development dynamics, says Ari Spiro, vice president in the Phoenix office of Sperry Van Ness. The State Land Trust, which owns approximately 9.3 million acres of formerly federal land (a whopping 13 percent of total land ownership in Arizona), happens to hold tens of thousands of acres of prime real estate in and around northeast Phoenix. Its charge is to strategically lease and, less frequently, auction that acreage per its “highest and best use” and to funnel the proceeds to education. Rather than sanction sprawl, the trust has favored leasing huge parcels to master developers for planned communities that can take years to complete, says Spiro.

This has slowed overall retail growth and helped drive up prices. “Some of the residential property in the last 18 months has sold for $600,000 an acre — and that’s unimproved,” said Peggy Neely, a northeast Phoenix councilwoman. Another telling indicator of the rising demand for metro-area property: The trust raised $1 billion in its first 90 years of existence but plans to rake in an additional $2 billion over the next decade alone as it sells and leases some of the most prized parcels in the country.

These barriers to entry clearly work against out-of-town developers hoping to swoop in and make a quick killing. Despite his well-known projects on the East Coast, Klutznick has spent years laying the groundwork for CityNorth. Today 180,000 vehicles pass the site daily, often on the newly built Loop 101 freeway. This was hardly the case when Klutznick first scouted the area. “I can remember us standing out there in the middle of the desert 21 years ago, just me and my father, as he laid out all these plans and projections on the hood of a rental car,” said John F. Klutznick, Thomas’ son and vice president of the Klutznick Co. “For half an hour he explained his interpretation of all that material on the future growth of the city of Phoenix.”

The initial payoff for that long contemplation of the Phoenix-Scottsdale market came in the late 1990s when the state named the Klutznick Co. master developer for the 5,723-acre Desert Ridge planned community. CityNorth’s site lies on the eastern edge of the parcel, which also contains the $300 million JW Marriott Desert Ridge Resort & Spa (Arizona’s largest resort and convention hotel) and Phoenix-based Vestar Development Co.’s 1.2 million-square-foot Desert Ridge Marketplace. Both projects opened in 2002. The latter, an open-air retail project with a Kohl’s, a Marshalls MegaStore, a Target Greatland and other power-center tenants, drew 26 million shoppers in 2004.

Desert Ridge’s condominiums and single-family homes, located in a trade area where the average household income tops $100,000 yearly, will eventually house up to 50,000 people. “Currently, we have about 9,000 residents there, roughly 3,000 homes,” said John Klutznick, who oversees development at Desert Ridge. “What’s fun is, the commercial viability of the area is finally at a point where it can support a development of the nature of CityNorth, with a more urban mix.”

That is precisely what drew Himmel, developer of Manhattan’s Time Warner Center (where annual sales per square foot at The Shops at Columbus Circle reach $1,200, more than twice the national average), to become a partner in CityNorth five years ago. “Northeast Phoenix is probably one of the three or four fastest-growing areas in the country,” he said. “I looked around at the marketplace and said, ‘Phoenix and Scottsdale don’t really have the kinds of projects we do.’ ”

Those collaborations began in 1974, when Himmel, then 28 and an executive of Boston-based real estate firm Cabot, Cabot & Forbes, began overseeing development of the Ritz-Carlton Hotel at Water Tower Place. John’s father, Thomas, and grandfather, Philip M., completed the 74-story retail, hotel and office complex along the Magnificent Mile in 1975. The project, considered America’s first truly vertical mall, was built during an era when most mall developers had suburban greenfields in their crosshairs. “If that was your first project, can you imagine what your expectations were going to be?” Himmel said.

For 32 years, Himmel and Thomas Klutznick have parlayed those high expectations into a laundry list of notable mixed-use projects. Some, like Copley Place and Chicago’s 730 North Michigan Ave., are vertical developments in densely packed downtowns. Others, most notably Reston Town Center (built in 1990), required considerable urban planning. At Reston Town Center “we introduced an urban product along this very suburban corridor when there was less than 10 million square feet of office space,” Himmel said. “Fast-forward 10 years and there is 40 million square feet of office space and some of the most successful numbers happening anywhere in the country.”

In much the same way, the partners appear to have positioned themselves to capitalize on the robust growth that clearly is coming to northeast Phoenix. With CityNorth, however, the partners now have the opportunity to marry decades of experience to something that is becoming increasingly rare in today’s marketplace: a blank canvas. “It really is a downtown being built from scratch,” said John Klutznick. “At five-and-a-half million square feet on 144 acres, you can have some real mass and create a very interesting look.”

CityNorth is organized around a main plaza and boulevard enlivened by fountains, sculpture gardens, eateries and jewel-box retail. These public spaces will cost up to $25 million to build, says Himmel. The first phase will contain 11 three- or four-story buildings along High Street at the northernmost tip of the property, with 290,000 square feet of retail, 230,000 square feet of offices and 264 residential units. The retail corridor was designed to have a neighborhood feel akin to that of Newberry Street, in Boston, or Oak Street, in Chicago. The second phase, slated to open in the fall of 2009, will have a grander scale, with department stores and larger-footprint bridge and luxury retailers. It calls for 571 more residential units, 975,000 square feet of retail, 235,000 square feet of offices and two luxury hotels. (At press time Himmel was reportedly targeting Mandarin Oriental, St. Regis, Starwood and W Hotels.)

The overall design, a collaboration between Elkus/Manfredi Architects, of Boston; and Nelson Architects, of Scottsdale and Austin, Texas, represents a departure from certain Southwestern clichés. “It has more of a skeletal, bony feel instead of that heavy adobe feel,” John Klutznick said. “We’re also mixing it with indigenous stones to keep it warm. We’ve worked very hard for more than two years on our architecture to create something that is complementary to the desert.”

If the sum of these efforts eventually is a new mixed-use icon in the Arizona desert, some may marvel that the creators of Water Tower Place have done it again. Anyone seeking to divine some kind of a detailed Klutznick-Himmel formula for mixed-use success, however, is likely to be disappointed. “Every time we look to another project, we don’t say, ‘What kind of iconic project can we create here?’ ” John Klutznick said. “We’d be doing ourselves a disservice if we had that kind of cookie-cutter mold. … We just like to keep looking to the horizon for something new.”

Still, a big success at CityNorth might highlight a simple principle or two: First, have the foresight to imagine something on that horizon — even if all you see there today is scorching-hot desert.

And get there first.