The next retail-building push won’t feature new centers sprouting up on the urban fringes. Retailers, developers and lenders, no longer willing to gamble on future population growth, are focusing on infill sites in existing city cores – closer-in locations surrounded by residents with appealing demographics and solid shopping patterns. Even though the retail market in metro Phoenix is overbuilt as a whole, there are pockets where low vacancy rates and stellar demographics pose unique opportunities, real-estate insiders say.
Many of the sites either were underdeveloped in the days of leapfrog sprawl or feature aging retail centers in need of a face-lift.
Market analysts predict a flurry of activity over the next few years as retailers take advantage of infill locations, cheap rent and a glut of available space to enter the market or expand.
They see opportunities along the Central Avenue corridor in Phoenix and in downtown areas of Scottsdale, Tempe and Glendale. It could breathe new life into aging urban retail centers, improve residential-property values and spark redevelopment in trade areas that have been in decline.
CB Richard Ellis reported that there were 572,091 square feet of retail space under construction in metro Phoenix at the end of the second quarter of 2010, a fraction of the 2.5 million square feet that was being built halfway through 2009.
But developments already in the works, such as the Scottsdale Fashion Square expansion, show demand for infill projects even in a time when consumer spending has dipped.
Financing remains a challenge for any retail development. Beyond the overall credit crunch, some major lenders are hesitant to lend in metro Phoenix’s decimated market.
In addition, many infill projects have special challenges, such as complicated property ownership, hostile neighbors and in some cases, environmental problems.
Already, some of the most ambitious retail projects now under way in metro Phoenix are in infill locations.
In downtown Phoenix, the $500 million CityScape project is just now coming on line. While retail projects have traditionally struggled in downtown Phoenix, developers are optimistic the timing is right for CityScape and that an impressive lineup of new retail, restaurant and entertainment tenants will make it a success.
In Scottsdale, the 20-year-old Scottsdale Pavilions power center is undergoing redevelopment that will add 400,000 square feet to the 1-million-square-foot center and make room for more restaurants and entertainment venues.
Flight from fringes
For years, retail developers have led the flight to the fringes, often laying out shopping centers and malls in advance of the housing developments that always have followed.
But the housing-market collapse in 2008 left many projects stranded without enough population to support the new retail businesses. Ever since, canceled projects, closed stores and shopping-center foreclosures have largely been the story of retail real estate.
Economist Elliott Pollack believes it could be at least five years before new shopping-center construction resumes on the fringes.
“The developers got burned, the lenders got burned and the retailers got burned,” Phoenix shopping-center developer Jim Pederson said.
As a result, most retailers and lenders are no longer willing to gamble on future growth.
Jeff Green, a Phoenix-based retail-feasibility consultant, said, “They want population in place and won’t look at anything in high-growth areas.”
Green spent much of the past decade analyzing sites for new retail projects on the fringes of high-growth markets such as Phoenix and Las Vegas. Now he’s doing feasibility studies for redevelopment projects and infill sites.
“I’m talking to a lot of potential acquirers who are looking for properties with population in place that can be redeveloped,” he said.
Projects on the growth fringe that seemed feasible a few years ago have been put on hold or canceled.
Earlier this year Phoenix mall developer Westcor again postponed the already delayed groundbreaking for its 1-million-square-foot Estrella Falls regional mall in Goodyear after several retailers backed out.
“We’re now just waiting for our retailers to tell us they are ready to expand to the west side of Phoenix, ” Westcor’s senior vice president of leasing Mike Nevins said, adding that the company remains committed to the project.
Other prominent retail developers such as Vestar Development Co. are in the same frame of mind.
“Everything we had planned in the growth areas is on hold,” said Ryan Desmond, Vestar’s director of new development.
Despite the downturn, retailers are looking to grow, especially with appealing locations and lower lease rates almost universally available. Established locations are getting a second look, especially those with solid demographics that are favorable to a particular brand.
“Retailers are revisiting market fundamentals,” said Kevin Schuck, a retail specialist in CB Richard Ellis’ Phoenix commercial real-estate brokerage. “They’re scrutinizing every possible location to see if it warrants expending capital.”
Depending on the type of business, retailers are looking for a specific number of households with a set income level residing within an established distance from the store site. Education levels, ethnic mix and average age of residents also are considered.
Department-store executives, for example, may look for 100,000 people in a specific trade area with an average annual household income above $75,000. A supermarket chain may look for 1,000 people within a mile of the store and be content with lower household income.
Schuck believes retail lease rates that have declined 35 percent from the 2006 highs and a glut of vacant “big boxes” of 10,000 square feet or more are providing an additional incentive for retailers to fill in holes in market coverage, expand or upgrade to a better site.
Warehouse grocery retailer Smart & Final plans to move from its 27th Street and Indian School Road location to the higher-end Town & Country Shopping Center at 20th Street and Camelback Road.
Sears recently opened an outlet store in a former Kmart location at Cactus Road and 32nd Street to fill a gap in its market coverage. The store sells discounted appliances, furniture and some clothing.
The glut of space and cheap rent also will present opportunities for existing chains to enter the market for the first time and for new emerging retail concepts, such as temporary so-called pop-up stores.
New arrivals such as craft retailer Hobby Lobby, grocer WinCo Foods and furniture seller the Dump acknowledge that available space and falling rents helped draw them to the market. Discount grocer WinCo is said to be looking for as many as seven sites in metro Phoenix for its warehouse-style supermarkets.
Vestar’s Desmond said, “A good infill opportunity will be plausible before a new project in an area formerly characterized by high growth.”
Kathy Grannis, a spokeswoman for the National Retail Federation in Washington, D.C., said retailers are expanding at a more moderate pace as a result of the recession and in established areas.
Jenna Reck, a spokeswoman for Minneapolis-based Target Corp., said the retailer is being much more selective about its new store locations.
“We’re focusing on underserved markets with strong existing demographics,” she said.
The company expects to open 10 new stores in the U.S. this year compared with 118 in 2007. None of the new stores is planned for Arizona, where Target has 48 stores.
Executives who have followed the market for years readily point out pockets of opportunity – areas where low vacancy rates and stellar demographics pose unique opportunities.
Pederson said, “There are areas all over the Valley where an infill retail project would make sense right now.”
Those areas include the Central Avenue corridor in Phoenix, downtown Tempe, and central and south Scottsdale, according to Pederson.
Pederson’s company has been mentioned as a possible buyer for the Park Central Mall site in central Phoenix.
Green sees opportunities in Phoenix’s Arcadia and Biltmore areas and in central Glendale.
Marty De Rito, whose firm, De Rito Partners Inc. is redeveloping Scottsdale Pavilions, is another developer looking for infill retail opportunities.
“They’re the only projects that have a chance of getting financing,” he said.
Jeff Moloznik, development manager for RED Development LLC’s CityScape project, said, “There are so many great sites that got left behind with the push to the suburbs.”
Like other retail developers, RED is now focused on infill and redevelopment projects.
The company is working to buy the retail component of the 40-acre Aspen Place at the Sawmill mixed-use redevelopment project near downtown Flagstaff and looking for other opportunities.
Lots of challenges
But infill projects aren’t built on raw land with few neighbors nearby. The projects face challenges usually unheard of on the fringes.
“You have to assemble the sites from multiple owners,” Pederson said. “Sometimes there is environmental remediation that needs to be done and there are neighbors to deal with who may be resistant to change.”
Gordon Keig, a senior vice president with Los Angeles-based Kornwasser Shopping Center Properties, has been battling neighbors in Glendale over a proposed WinCo supermarket at 51st and Peoria avenues. The site is now occupied by a horse farm and neighbors were opposed to the store’s planned 24-hour operation and its almost 100,000-square-foot size.
Kornwasser, which is developing the site for Idaho’s WinCo, cut the WinCo space to 70,000 square feet to appease the neighbors. Five years ago, the neighbors drove off a Super Target that was planned for the site.
“The neighbors have been very vocal,” Keig said. “But I think we have finally arrived at a compromise they can live with.”
Keig agrees the project in Glendale has been significantly more challenging than the shopping centers he developed in the growth fringe while the market was still booming.
“We’d hold neighborhood meetings and no one would show up,” he said. “There were no neighbors.”
Jeff Green Partners was founded in May of 2004 in response to a growing demand for a new level of expert consulting services in the retail real estate marketplace. Led by President and CEO Jeff Green, Jeff Green Partners provides a full spectrum of analytical and interpretive services for property owners and developers.