Focus on: The Arizona Market

Arizona battles a nationwide perception that not just its air is dry, but the future retail terrain is as well.

While it’s true that the state has taken some hard hits during a brutal economic climate, its development landscape is a lot more durable than many might think.

“We have demographic characteristics that are very favorable to retail,” said Tim Corzine, VP research for Santa Monica, Calif.-based Macerich, a large shopping mall owner and developer that has a dominant Arizona presence through its Phoenix-based Westcor subsidiary. “The demographic makeup can come as a surprise to some retailers.”

The surprise response exists because the retail world has long looked at Arizona as heavy on construction and tourism, and light on other industries. And that’s simply not the case.

“When you study the economic composition of the Arizona economy, tourism and construction comprise less than half of the economic sectors,” Corzine said. “Research told us that we are far more diversified than we are given credit for.”

In 2005, Westcor unveiled Phoenix 20/20, a long-range development plan for the Phoenix area that identified where the city was headed and what kinds of retail developments would be needed to satisfy a growing population. After the downturn, Westcor realized the initiative would need to be revisited.

“For the past year, in order to uncover what the future of retail will look like in Arizona, we have gone back to square one and examined the state objectively,” said Garrett Newland, VP development for Macerich.

The company married exhaustive research data and anecdotal interviews with state business and government leaders to create an internal retail development compass it calls Arizona Road Map.

“When we married the research with the anecdotal interviews, we found some surprising revelations,” Corzine said. “One was the long-term growth potential of the Arizona market. And that, when you compare Arizona with the national picture, it is surprisingly close to the rest of the U.S. in the makeup of the population.”

Research showed that about 50% of Arizona’s population is between the ages of 25 and 54, which are key earning and spending years for retail.

“An ‘aha’ moment for us was when we realized that, bottom line, Arizona is a good bet going forward,” Newland said. “And not just for retail, but overall. The market fundamentals continue to be very strong, the climate is unbeatable, and housing is now affordable.”

Despite its surprising strengths, however, Arizona isn’t headed toward full retail recovery right away. “2010 will be a mixed year,” Corzine said, “as we are still seeing softness but with some bright spots, as well. 2011 will be a year of more growth in Arizona.”

Macerich has tweaked its project development schedules accordingly. The company’s sole major project currently in development in the state is Scottsdale Fashion Square, which opened phase one last October. The regional shopping center added a 100,000-sq.-ft. wing anchored by the state’s first Barney’s New York department store. And hot Swedish retailer H&M will open a new store in the spring.

There are other Macerich developments on deck, but with timelines pushed out to accommodate the market’s current softness. Prasada, in Surprise, Ariz., will open the Walmart-and Target-anchored power-center components of the mixed-use project in 2011 and 2012. Two hallmark developments—Palisene and Estrella Falls, both Macerich’s new generation of regional mall projects—have been pushed back to opening dates that are now four to six years out.

“We are using research to timeline these projects,” Corzine said. “When there is sufficient retail demand to support them, we will open them.”

“It’s about opening the right project at the right time,” Newland added.

Arising downtown Phoenix: A project that has had a big impact on Phoenix’s downtown core is CityScape, a 1.8 million-sq.-ft. urban multi-use project by RED Development, based out of Scottsdale and Kansas City.

What is allowing this project to move forward when others are stalling is much-needed collaboration with, and cooperation from, the City of Phoenix.

“The City of Phoenix Planning Department had a very active role in helping CityScape establish itself as the most progressive urban redevelopment project in the Valley,” said Jeff Moloznik, development manager for RED. “The 12 variances awarded to the project enabled us to use a combination of structured and organic elements to shade pedestrians in both the internal park spaces and on the perimeter sidewalks.”

RED narrowed surrounding streets to nearly half their original width and found an entirely new, drought-tolerant urban landscape palette that will be unique to downtown Phoenix.

One city variance allowed CityScape to position its retail storefronts within 12 ft. of the roadway, providing retailers necessary street presence and visibility.

To help defray development costs impacted by utility relocations, land and a scarcity of available power in the downtown core, RED and the City of Phoenix worked together to implement a tax abatement program to help underwrite the expenses.

“Our theory was to take a model that worked exceptionally well—mixed-use—and put it on steroids.”