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PHOENIX RISING

Retail developers strive to keep up with metro area’s rampant growth

BY STEVE McLINDEN

There’s sure going to be a lot of consumer power barreling down Interstate 10 by 2030 or thereabouts, given the growth projections for the Greater Phoenix metro area.

Observers expect the population to double from the current 3.4 million to about 6.8 million by then. This, of course, has retailers and developers revving their own growth engines, to say the least.

“We often say that if you take the growth in Las Vegas and San Diego, combine them and then multiply by two, it still doesn’t equal what’s happening in Phoenix,” said David J. Larcher, executive vice president of Vestar Development, one of several retail developers now working away in the area.

To keep pace, the region’s retail pipeline is expected to yield about 3.5 million square feet of new and redeveloped space per year for the foreseeable future (the equivalent of 15 to 20 Wal-Mart Supercenters a year), added to the 111 million square feet already on the ground, says retail consultant Robert Kammrath, president of Kammrath & Associates, Phoenix.

About 3,000 new residents a week are streaming into the Greater Phoenix area, which includes Chandler, Gilbert, Scottsdale, Tempe and about a dozen other cities. More than half of these are refugees escaping pricey Southern California, studies show.

To provide them with places to shop, Vestar and another locally based retail developer, Westcor, have plotted about a dozen major new retail projects between them to supplement their own already imposing regional inventory (see story).

Westcor, a subsidiary of The Macerich Co., says it plans to build five super-regional centers over the next decade and a half.

“Macerich paid dearly for Westcor and said, ‘We don’t just want you to maintain dominance, we want you to expand it,’ ” said David Scholl, Westcor’s senior vice president of development.

For the past five years, Westcor has been busy creating partnerships and optioning land for those five sites, the first two of which will go up in Gilbert and neighboring Goodyear, both south of Phoenix.

Though Westcor has not disclosed the names of any tenants, Scholl says representatives from Dillard’s, J.C. Penney, Robinsons-May and Sears have viewed the sites from helicopters “and left town [tentatively] endorsing these locations.”

Vestar, by contrast, has angled for slightly smaller power center lifestyle center sites. The firm lists nine working projects, totaling more than 5 million square feet, in varying stages of development throughout the area.

And others are joining in. Out-of-state developers broke ground this spring on the $250 million, mixed-use Scottsdale Waterfront complex, pegged for 11.3 acres next to the Arizona Canal, which abuts the city of Phoenix to the east. The nearly 1 million-square-foot project will include a Borders Books, a P.F. Chang’s restaurant and a Sur La Table kitchenware store, as well as a museum and some mid-rise residential and office buildings. It will also house the headquarters for the Fiesta Bowl, the major college football game played annually in neighboring Tempe.

This joint venture of Chicago-based Golub & Co.; Starwood Capital, of Greenwich, Conn.; and Austin-based International Development Management will open up the canal bank to the public. The city has committed $10 million to the bank’s improvement. Scottsdale Waterfront will provide “a lively commercial link” between downtown Scottsdale’s restaurants and shops and Westcor’s Fashion Square Mall, says Michael H. Newman, Golub’s president and CEO. The first phase is slated to open late next year.

The extension of Hayden Road just north of Loop 101 in north Scottsdale will free up hundreds of acres of state land for additional retail and mixed-use development when improvements are completed this fall. In one such project, The Rouse Co. is teaming up with DMB Associates and Corrigan Land & Livestock Co. to build the 160-acre Stacked 40s, so named because of the four 40-acre parcels that it comprises. The 2 million-square-foot project, to include offices, shops and hotels, and more than 1,000 residences, is slated for a site near Scottsdale Road and Thompson Peak Parkway.

Not surprisingly, all this growth in population and development has some city leaders concerned about sprawl, and they are trying to shepherd new construction into areas that have already been developed.

One private investment group, Phoenix Future, is working with city organizations and the Venice, Calif.-based Jerde Partnership on a master plan to increase retail, entertainment, housing and public space in downtown Phoenix. Phoenix Future is headed by Jerry Colangelo, managing general partner of the Arizona Diamondbacks baseball team and former owner of the Phoenix Suns basketball team.

In the past, two downtown redevelopment projects with major retail components, the Mercado and the city-owned Arizona Center, “haven’t worked very well because the demographics weren’t there, no matter how much money you threw at it,” said Kammrath. But there is critical mass coming. Construction continues on what Phoenix officials say will be the cornerstone of the downtown Arizona State University biosciences campus, a 170,000-square-foot building that will house the Translational Genomics Research Institute and other biotech entities. Hundreds of high-paying jobs to come there are expected to breathe new life into the central business district.

The city is already home to Boeing, General Dynamics, Honeywell, Intel and Motorola plants. “We are attracting high-paying industries,” said Jeanine Jerkovic, a spokeswoman for the Greater Phoenix Economic Council. The metro area is expected to add 66,000 jobs by year-end.

In other efforts to cut sprawl, mayors Phil Gordon of Phoenix and Hugh Hallman of Tempe are pushing for a regional moratorium to stop local tax subsidies for such businesses as big-box stores and car dealerships.

Instead of “squabbling” to attract new development, cities now realize they have to be “more cohesive as a region,” said Christopher Hartye, economic development program director for The Greater Phoenix Chamber of Commerce.

To curb sprawl, area cities have also launched a variety of redevelopment incentives. Meanwhile, a lot of older, obsolete retail spaces formerly housing Kmarts and supermarkets are being converted for other types of businesses, such as corporate call and data centers, says Kammrath.

Adds Scholl, “If we’re going to double from 3.4 to 6.8 million in 15 years, just about everything in town is going to be rebuilt or reshaped at some time.”

In that vein, Developers Diversified Realty Corp., which owns 3 million square feet in the Phoenix area, formed a partnership with Coventry Advisors this year to buy and redevelop the 43-year-old, 1.1 million-square-foot Phoenix Spectrum Mall, two miles north of downtown.

Vestar also is reusing a previously developed site; its planned Tempe Marketplace, at the intersection of the recently completed 101 and 202 freeways, would be the largest brownfield clean-up project in Arizona, says Larcher. The 1.2 million-square-foot project — a 400,000-square-foot lifestyle center surrounded by 800,000 square feet of big-box retailers — is scheduled to open in 2006. It will be modeled after the firm’s highly successful Desert Ridge Marketplace, in northeast Phoenix.

Despite the best efforts of officials and some developers, though, sprawl seems destined to continue as all the residential and business growth pushes out to the market’s periphery, says Kammrath. “It’s still being driven in part by the abundance of relatively cheap land on the outskirts,” he said. “It’s almost a rule of thumb around here that every mile interval is going to have a shopping center.”

The Greater Phoenix cities of Gilbert, Chandler and Peoria, all targets for upscale retail construction over the past few years, are among the 10 fastest-growing U.S. municipalities with over 100,000 residents, according to the U.S. Census Bureau. Gilbert, which has 160,000 people, issued nearly 4,000 single-family housing permits in 2003, while Chandler, in a one-year span from July 1, 2003, to June 30, 2004, added over 12,000. Peoria, a town of 50,000 in 1990, now has 130,000 residents.

“A phenomenon that’s helping drive all this is the completion of 225 miles of freeways within a seven-year period,” in the Greater Phoenix area, said Larcher. “It has really opened up the area.”

Other major business projects under way will lend further retail synergy. The city’s convention center is undergoing a $600 million expansion, and work has started on a $1 billion light-rail project that will link downtown Phoenix to the northwest and eastern portions of the metro area.

Interestingly, despite all the activity, major retail players had not shown an interest in this market until recently. In 2002 CVS Pharmacy made its first incursion into the Phoenix area, followed by Eckerd in 2003. Kohl’s didn’t enter the area until October of 2003, opening 10 stores. Scandinavian home furnishings chain Ikea will open its first Phoenix metro store in November in Tempe, while Target Stores’ SuperTarget megastore concept will make its Arizona debut at two Vestar open-air centers set to open in Gilbert next year. As Kammrath puts it, “Retailers who weren’t in the market have come, looked around and said, ‘Man, we have to be here.’”