Phoenix Business Journal – by Jan Buchholz and Lynn Ducey
Commercial real estate brokers who specialize in retail aren’t singing the blues this holiday season, even though more than 1.8 million square feet of retail space will be vacated by the first of the year as a handful of big-box retailers close.
Greg Abbott, principal and investment broker for Arizona Retail Advisors, calls the situation “classic economic Darwinism” and said he’s not surprised.
In other words, underperforming retailers such as Mervyns, Linens ‘N Things, Circuit City and Shoe Pavilion will be weeded out during times of economic downturn, making way for new and stronger stores.
“There are already other retailers coming in and looking at the spaces,” Abbott said.
Two other Phoenix-based retail experts agree: Rick Murphy, senior vice president of CB Richard Ellis, and David Cheatham, executive vice president and managing principal of Staubach Retail.
“Our market has been very tight and prevented retailers from coming into it,” Murphy said. “So, in every downturn, there is an opportunity for them.”
The current situation is similar to what happened in the early 2000s, when HomeBase and Montgomery Ward vacated several million square feet, said Cheatham.
“In a matter of moments, it was snapped up,” he said.
Vacancies could top 8 percent
While the retail market may be pregnant with possibility, it also could be ripe for vacant storefronts. Despite what the experts see through rose-colored glasses, retail vacancies could top 8 percent next year as many of these stores close their doors. That’s up from nearly 7 percent in the third quarter of this year and 5.25 percent in 2005, according to data provided by CB Richard Ellis.
“I think it will go up to 8 percent, but we have some of the lowest vacancy rates in the country,” Cheatham said.
“We’re all watching to see what Christmas brings,” Murphy said. “After that, things will probably get worse than better because of the slow growth of housing.”
It may be hard to believe during this bleak spell, but retailers with a minimal presence or none at all in the Valley are looking at real estate that will be left behind. The deals offered by landlords to get spaces filled quickly actually may increase interest in the Phoenix area.
“Rent structures are going to change. We expect to see some very aggressive rent deals,” Murphy said.
Another factor that could end up in the “opportunity” column is the sheer number of locations that are available. In the case of Circuit City, there are 13 sites in the Valley. Mervyns has 11 and Linens ‘N Things has 12, according to research provided by CB Richard Ellis.
Retailers interested in entering the market with a critical mass of stores usually aren’t presented with a host of spaces ready to go.
Such availability provides efficiencies of scale for those that otherwise might have to build new stores all over town.
“If weak retailers have good real estate and go away, other retailers will be right there. It won’t stay on the market for long,” Cheatham said.
So who’s looking?
The growing Los Angeles-based fashion retailer opened a 40,000-square-foot stand-alone flagship store two years ago in Pasadena, Calif. Its stores have been located primarily in regional malls.
Murphy and Cheatham said another retailer with ambitions to open more Valley stores is Hobby Lobby, an Oklahoma City-based purveyor of crafts and home decor.
Staubach Retail represents Total Wine & More based in Maryland. In recent months, the independent wine retailer has opened three stores in Arizona and is actively seeking spaces, Cheatham said.
Pacific Sales, an offshoot of Best Buy that sells large appliances, also may be expanding into Phoenix, Cheatham said.
Other retailers on Abbott’s radar screen as potential tenants are Boot Barn, an Anaheim, Calif.-based retailer, which has two stores in the Phoenix area and wants to expand; and PGA Tour Superstores, an Atlanta-based golf product retailer that has one store in Scottsdale and wants to add more in the Valley.
New retail may be slow
The retail specialists are less optimistic about new retail being built and said construction of new property is going to be slow. Still, two Valley developers who handle a large percentage of new retail space aren’t worried.
Bill Whiteside, vice president of property management for Westcor, said change is expected.
“Sometimes that is a result of massive growth and positive change, and sometimes it’s the opposite,” he said.
Westcor, which owns most of the major regional malls in the Phoenix area, is continuing construction on Barney’s New York, which will anchor the east side of Scottsdale Fashion Square.
Whiteside said Westcor also considers the Mervyns site at The Colonnade, near 18th Street and Camelback Road, a premium site for redevelopment.
“We are working all sorts of possibilities (there),” he said. “How that space gets remerchandised or remodeled, though, is still many, many months away.”
David Larcher, executive vice president of Vestar Development Co., another major shopping center developer, isn’t bemoaning the loss of the big-box stores – even if they are located in the new Tempe Marketplace and the Happy Valley Towne Center in north Peoria.
“These companies are having problems at the corporate level, as opposed to a specific location or region,” Larcher said.
Attrition, even at great performing centers, always is to be expected, he added.
“Retail has always been a very dynamic industry. It’s always changing. It’s always transforming.”