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Phoenix rising and spreading

That other city in a desert keeps on growing

By Steve Bergsman

When Simon Property Group joined two home builders to acquire a 5,500-acre site northwest of Phoenix in January, the deal drew attention far beyond Arizona. The acquisition, one of the biggest ever in that state for an undeveloped site, signaled the retail development sector’s continuing commitment to mixed-use community development.

Simon, Meritage Homes and Toll Bros. paid $312 million for the site (formerly a Daimler-Chrysler vehicle-testing ground) with a view to building as many as 30,000 homes, plus office and retail space, possibly including a large mall.

The transaction proceeds from two trends in the Phoenix metro area. First, strong population growth: Between 1990 and 2000, Maricopa County, which includes Phoenix, saw an increase in population of roughly 45 percent. The county population went from about 2.1 million to over 3 million for the period, according to the Greater Phoenix Economic Council, a rate that made it No. 4 in the nation.

Second, the supply of wide-open spaces creates an ideal setting for master-planned communities, and such communities have grabbed the interest of retail developers. Indeed, in recent years many of the bigger developments in the Phoenix metro area, affectionately called the Valley of the Sun, have been mixed-use projects with considerable residential and retail components.

Simon has not been a major figure here, but its team-up with the home builders gives it a toehold in the market. “In terms of how we look at it, we bought land that is right in the middle of the growth corridor in the Phoenix metropolitan area,” said Simon CFO Stephen E. Sterrett. “And we bought it at $55,000 an acre, so we feel like we bought it wholesale. Entitled land on a bulk basis out there right now is selling for anywhere from $150,000 to $200,000 an acre. The joint venture allows us the flexibility, once the entitlements are obtained, to make a decision whether we want to stay in the partnership or whether we want to exit and capture value along the way.”

Simon may be hedging its bet because of the size of the project, but if recent history is anything to go by, 30,000 new homes will be absorbed quite easily. Phoenix has one of the healthiest economies in the country, with job growth being as robust as population growth.

The state economy will gain about 256,000 nonfarm jobs over the next two years, according to the Department of Economic Security. “The Phoenix metro area accounts for 81 percent of all jobs in the state,” said Don Wehby, a department senior economist. In April the state unemployment rate was at 4.4 percent, very near the national average of 4.7 percent. “People want to build shopping centers in Phoenix because of the old adage that retail follows rooftops,” said David Scholl, senior vice president of Phoenix-based Westcor Shopping Centers, now part of The Macerich Co. “Any town that has 150,000 new people moving in every year needs places to buy food and clothing. As we continue to expand the city from 4 million to 6 million to 8 million over the next 20 years, there is going to be a lot of need to provide the amenities that the doubling of a population is going to require.”

The demand for retail is reflected in the growth of companies serving the retail development industry. Retail Brokers, a Scottsdale, Ariz.-based firm founded in 1994, employs 40 brokers who have been very busy lately. “Our performance for retail leasing and sales was 40 percent higher in 2005 than the previous year,” said Don Sheckell, a senior vice president and designated broker at the firm. “We just finalized first-quarter numbers, and we are running 20 percent higher than for the same period in 2005.” It’s not just growth, but “sustained population growth” that is driving the market, Sheckell says. “With 140,000 to 150,000 new residents, that is not just a blip on the screen, it is a continuous flow of people coming for opportunity, relatively affordable housing and the weather.”

What does this mean for retail? Quoting economists, Sheckell says the Valley of the Sun already has 120 million square feet of retail, and if growth continues, that could reach 260 million by 2030.

Most of the new development is occurring on the outskirts of the metro area — to the southeast, north and northwest. “Last year 68,000 new single-family homes were built in the region, 63,000 the year before and 68,000 the year before that,” said David Larcher, executive vice president of Phoenix-based Vestar Development Co. “This year will be around 60,000 new homes. And retail does follow those rooftops.”

Vestar, which has been one of the busiest developers of shopping, power and lifestyle centers in the region, has 17 projects under construction or in development to be completed over the next 42 months, says Larcher. “Most of these projects are in the path of growth,” he said. They would include projects in the outlying cities of Buckeye, Chandler, Goodyear and Peoria.

The company does have one large in-fill project, the 1.3 million-square-foot Tempe Marketplace. Nevertheless, “it is much easier to develop in a growth area as opposed to doing redevelopment,” Larcher said.

Opus West Corp., based in Phoenix, has developed more that 40 million square feet of office, industrial and multifamily space throughout the West, including some 2 million square feet of retail in Phoenix. And though the firm currently has only some 500,000 to 600,000 square feet of retail in the pipeline, that should pick up after it hires a retail development executive.

The expansion of the area’s retail sector has to do with two things, according to Jeff Roberts, Opus West’s vice president of retail development, population growth and freeways. The metro area has been in a decades-long development of a beltway. “The housing jumped in those areas, and as the freeways were close to being completed, retailers snapped up the nearby sites,” said Roberts. “The freeways have created a lot of great retail locations.”

Opus West has picked up some sites of its own along the new freeways, but it is also known for its in-fill developments. “We believe there are a lot of opportunities for in-fill, and that plays to our strength, because we have developed office, residential and retail,” said Roberts. Next up for Opus West will be a combination retail and midrise residential project in northeast Phoenix.

Westcor, which has dominated retail development in the Phoenix area, has shifted focus. The firm’s future development sites are all parts of large master-planned communities. Its Prasada development for instance, will be the retail component of a 4,200-acre development scheduled for completion in 2010 in Surprise, a city on the fringes of the metro area.

Many of these master-planned communities are being built by partnerships similar to Simon-Meritage-Toll. West of Phoenix, for example, Scottsdale-based DMB Associates is developing the 8,800-acre Verrado community, which will include a resort to be developed by Vancouver, British Columbia-based Intrawest Corp., known mostly for ski resorts.

“We are entitled to build 14,000 homes, but I don’t know if we will build that many,” said Tracy Simmons, DMB’s director of marketing. The overall concept of Verrado is a community to be built around Main Street retail.

DMB and Intrawest will work together to expand the Main Street experience with more restaurants and quality retailers. “We will have, overall, about 4 million square feet of retail and commercial space.”

Intrawest’s involvement reflects another driving element in the area: tourism. The Phoenix-Scottsdale area boasts some of the top resorts in the country.

One of the most successful master-planned communities has been Kierland Commons, in northeast Phoenix, adjacent to the Westin Kierland Resort & Spa. Woodbine Southwest Corp., a local affiliate of Dallas-based Woodbine Development Corp., and Phoenix-Scottsdale’s Herberger Interests built out the Main Street plan over 730 acres.

Westcor manages Kierland Commons’ 75 restaurants and shops. Another developer on the project is Furst Properties, which is building the office component. “People like to live, work and shop in the same area,” said Beverly Eernisse, a Furst vice president. “These submarkets are filling with people who do not like to spend all of their time driving. Kierland works because it provides the amenities for the people who live, visit and work here.”

In short, mixed-use development is picking up speed, and nowhere more in evidence than the Phoenix area.