Phoenix Retail Softens, but Outlook Not Entirely Dire

The Phoenix retail market softened during the first half of 2008, with tenant demand failing to keep pace with completions and this weakening is expected to persist through the near term as the current economic slowdown weighs on consumer sentiment, according to the most recent report by Marcus & Millichap Real Estate Investment Services.Ongoing struggles in the local housing market have decreased spending, causing some merchants to vacate their locations. Additionally, new home sales have lagged in outlying suburbs, particularly in the West Valley, and retailers that expanded into these areas in anticipation of future household growth are currently recording some of the market’s weakest fundamentals. For example, vacancy in the West Phoenix/Southwest Valley submarket has increased more than 400 basis points during the past 12 months, while rents in the area have ticked lower, according to the report. “The status of retail development is, without a doubt, dramatically slowing,” David Glimcher (pictured), president of Glimcher Ventures Southwest in Scottsdale, Ariz., told CPN. “The slowdown in the economy right now allows a sorting out of ancillary developments from the ones that have a niche market and sound variables that need to be addressed,” Hanna Struever, principal of Retail Portfolio Solutions, the chief luxury merchandise strategist overseeing the luxury merchant mix within The Palmeraie in Scottsdale, told CPN. “Right now in the Scottsdale and Phoenix metro areas there is an opportunity to sift out the competition and allow the most strategic developments, where demand exists, to continue to proceed.” Glimcher said he anticipates very slow growth as financing for new projects is extremely difficult, if not impossible, to obtain in the current credit environment. “Two years ago we saw a recession coming, but we obviously didn’t think it would be anything like this. I’ve been in the industry for 35 years, and just looking at the past eight to nine years; 75 percent of retail centers built were built for the high-end consumers and high-end consumer look-alikes,” Glimcher said. “These look-alikes were middle-class consumers who aggressively borrowed and who used funds to shop like/buy like the high-end demographic. Those consumers are gone forever in our opinion. Therefore, it has pretty much stopped retail development in that venue.” “At GVSW, we’ve taken the approach that ‘yes, we are in a recession. What kind of vehicle can we develop that will be as recession proof as possible?’ We acknowledge that everything in the marketplace is going to take a hit. But at this point, it’s about the level of the hit,” Glimcher said. “We are preparing for our first location of The Boulevard to open fully by late April, early May in Surprise, Ariz. If you look at our tenant mix, it’s geared to the population as a whole. It’s anyone and everyone. We have developed a brand and property that is accessible and affordable to all consumers, no matter their demographic. We offer a center that has something for everyone without price sensitivity.” Glimcher said he believes retail will recover, but it will have to reinvent itself. “Our property and project is an example of the reinvention component out there. Retail over the past 80 years has reinvented itself. This period in time will be no different. But, we will be dealing with a true economic base that is not fueled by synthetic debt loads that allows consumers to spend well beyond their means. Therefore, retailers will have to adjust to what consumers can afford,” he said. Looking ahead, employers are expected to continue to trim payrolls over the remainder of the year, but projections for increased employment growth beginning in 2009 should drive additional demand for retail space going forward, according to the Marcus & Millichap report. For recovery to take place, Glimcher believes a huge job stimulus program is required. The federal government will need to be willing to buy commercial and residential paper from banks and financial institutions to reestablish the marketplace. “The marketplace is frozen solid. Banks will need to be willing to lend money and extend most of their loans by a minimum of a year in order to allow stability to take place and work through the credit crunch,” he said. Glimcher plans to expand The Boulevard brand into different key cities across Arizona as well as contemplating roll out of a hotel expansion program over the next five years. “In addition, we are looking at opportunistic management leasing and acquisition of properties that we can facilitate through redevelopment or other modifications to the existing asset. We will be working with lenders, other developers and institutions that have troubled assets in their portfolio,” he said. Struever will be working on The Palmeraie in Scottsdale ,which is being developed by locally-based Five Star Development. The project is a luxury retail, hotel and restaurant destination adjacent to The Ritz-Carlton, Paradise Valley master-planned community that is currently underway. It’s still in the planning and approval stages, however Hermés has already committed to the project, Struever said. The Palmeraie will occupy 18 acres of the 123-acre, $2 billion development with approximately 112 high-end retailers, 12 restaurants and an Edition hotel, the new boutique hotel brand by Ian Schrager and Marriott International.