By  on August 8, 2007

PHOENIX — Retail competition is heating up in the desert.

Development continues to boom in this city, the second fastest-growing in the U.S. among those with populations over 500,000. Stores from Barneys New York and Nordstrom to Juicy Couture, Louis Vuitton and Salvatore Ferragamo are looking to capitalize on the growth of the metropolitan area, as well as that of nearby cities Scottsdale, Gilbert, Chandler and Peoria, Ariz. There are currently about 15 regional malls and mixed-use properties with large retail components in the works around the area — many of them upscale.

"We're something of a retail mecca," boasted Rick Kidder, president and chief executive officer of the Scottsdale Chamber of Commerce. area — many of them upscale.

"We're something of a retail mecca," boasted Rick Kidder, president and chief executive officer of the Scottsdale Chamber of Commerce. "Success here is very real. Communities are always vying for sales tax cash cows, for retail that generates sales tax revenue. For some communities, that's Wal-Mart. For us, that's Barneys [New York] and Prada."

The sheer number of projects would be considered overambitious if applied to any other U.S. city, particularly in light of the fact that home sales nationwide have recently flatlined. And the region's growth is creating problems that historically accompany urban sprawl, including traffic congestion and increased crime. But despite questions whether the region can support all the stores flocking in, the mood remains bullish.

"If it weren't for our hot summers, we'd probably have 20 million people here," said Kidder.

Developers seem to agree and are rushing to establish a foothold in the region. Phoenix-based Westcor, which was acquired by Santa Monica, Calif.-based mall development company The Macerich Co. five years ago, is the area's dominant operator of shopping centers with 11 regional malls and 16 specialty and power centers in greater Phoenix.

Still, Westcor executives know they will have to work double-time to stay on top, as the population and wealth in the region continue to balloon, luring more outside developers. Westcor currently has five retail and mixed-use projects in development in the metro area, as well as four more in neighboring counties."Competition is coming," said David C. Scholl, senior vice president of development for Westcor. "This market has become too desirable for others to ignore."

Behemoth mall developer Simon Property Group owns The Arizona Mills mall in adjacent Tempe, Ariz., and recently purchased a second parcel of land in Phoenix. General Growth Properties, which operates the mostly recreational Shops at Arizona Center in downtown Phoenix, will unveil a 355,000-square-foot open-air center called Park West in nearby Peoria, though the company declined to reveal its launch date.

Westcor, which has 93 percent brand recognition among residents in the area, "has been involved in the community for a long time and they've strategically located their properties," said Debra Kuffner, vice president of marketing and communications for the Scottsdale Chamber of Commerce. Kuffner called Westcor's high-end Scottsdale Fashion Square mall "a key economic driver to the city of Scottsdale. It's a fantastic city expander."

New projects for the company include SanTan Village, a 900,000-square-foot mixed-use lifestyle center anchored by a Dillard's and a movie theater, to open this fall in neighboring Gilbert, the fifth fastest-growing city in the U.S.

Following SanTan Village will be Estrella Falls, a 330-acre mixed-use development with a regional center and power centers in Goodyear, Ariz., to open progressively starting in 2008. Palisene, which, depending on market conditions, is scheduled to be the company's third luxury shopping center, will open in northeast Phoenix between 2010 and 2012. Prasada, a regional mall and series of power centers that will act as the retail core of a planned community in Surprise, Ariz., will launch progressively from between 2009 until around 2015. North Black Canyon, which is expected to be a mixed-use retail property including a regional mall, will open in 2015 or later.

The five projects will total approximately 5 million square feet of gross leasable area, "depending on the final design and build-out of the projects," said Rebecca Stenholm, senior manager of public relations for Westcor, who added, "Each of the five projects is the core of a larger urban village that could include up to 15 million square feet of gross leasable area."

Westcor has owned much of the land it is developing for 10 years or more, purchasing parcels in undeveloped areas when they were cheap. Scholl said anticipating growth in outlying areas has been key to the company's successes here. "We couldn't afford a lot of the land we own were we to buy it today," he said.The median cost of land in the region, including both residential and commercial properties, increased 160 percent from 1997 to 2007, said Michael Coover, vice president and director of client services at Phoenix-based commercial real estate firm Land Group, from $130,713 per square acre to $348,480 per square acre.

Westcor currently owns the region's only upscale shopping centers: the enclosed Scottsdale Fashion Square in downtown Scottsdale, which is anchored by Neiman Marcus and Nordstrom, and boasts stores including Burberry, CH Carolina Herrera and Gucci, and Biltmore Fashion Park, an open-air center anchored by the state's only Saks Fifth Avenue and stores including Escada and Cartier.

The two centers bookend a fast-growing affluent area in Phoenix known as the Camelback Corridor, and the company is reinvesting millions of dollars in each to keep them fresh and relevant. The $130 million renovation of Scottsdale Fashion Square will include the launch of the first Barneys New York unit in Arizona, set to open in fall 2009.

But competition for luxury retailers in the area has been heating up, due to two high-profile projects in development here — One Scottsdale, owned by Scottsdale-based developer DMB Associates, and CityNorth, a joint project with the Thomas J. Klutznick Co., a family-owned development company, and the Related Group. Westcor's 72-acre Palisene shopping center in northeast Phoenix "is our play in response to the luxury growth here," said Scholl.

Mixed-use project One Scottsdale will include 600,000 square feet of retail, two or three hotels, 10 to 15 restaurants, at least 300,000 square feet of office space, a path and trail system and 250 residential units above the stores — all on roughly 120 acres.

Phase one of the project is scheduled to be completed in October 2009, and will include 240,000 square feet of retail, office space and residential units. Though tenancy has yet to be announced, "The majority of our merchants are not in Arizona right now," said Irene Carroll, vice president and general manager of DMB Associates. "We are trying for the Rodeo Drive set of [retailers]."

The 144-acre CityNorth project, which will function as the commercial core of master-planned community Desert Ridge in northeast Phoenix, may not be in direct competition with One Scottsdale and Westcor for top-tier luxury retailers, but it has already attracted Nordstrom, which will open a 144,000-square-foot store in CityNorth.The project will include 1.25 million square feet of retail and restaurants, a five-star hotel, 2.5 million square feet of office space and 2,000 residential units. "We will have luxury, bridge and mall retailers," said Daniel Klutznick, grandson of Thomas J. Klutznick. Phase one is expected to be completed in fall 2008, with the final phase wrapping up in fall 2010.

Westcor's Palisene and CityNorth will be located within a couple of miles of one another, and Kidder said, "You do worry about oversaturation of the market, but what you don't see yet is that there are going to be another 50,000 homes built in the area in the next 10 years. This is one of those examples where the retail leads the residential, but it's coming."

Phoenix and surrounding cities have been riding a wave of growth for at least the last decade. The 515-square-mile Phoenix, which is larger than Los Angeles proper by around 45 square miles, grew from 1.46 million to just over 1.5 million residents in the 12 months ended in June 2007, and by 40,000 residents the previous year, according to the census bureau.

Scottsdale, which is famous for its hillside mansions and verdant golf courses, gained another 3,543 residents in those same 12 months, bringing its total population to 231,127. Bedroom communities Gilbert, Chandler and Peoria were also listed among the top 20 fastest-growing cities of any size.

In response, median housing prices in Phoenix proper have tripled in the last seven years, from $112,600 in 2000 to $320,000 in 2007. The scenario is similar in Scottsdale, which saw its average home price hike from $220,800 to $422,000 from 2000 to 2005.

Meanwhile, the median household income here has risen at a rate on par with the rest of the U.S. Phoenix residents bring in $50,309 annually, up from $42,721 in 2002.

Still, growth in the Phoenix area, which is referred to as "The Valley" by locals, has arrived with its share of challenges, including increased air pollution, in the form of a low-hanging fog blanketing the city, dubbed "the brown cloud."

But as Phoenix and Scottsdale extend their reach into the desert with new centers, both are keen to ensure that suburban development doesn't sap their city centers of vitality. While malls are key to retail in the greater Phoenix region, one of the most anticipated projects under way here is the redevelopment of a section of downtown Scottsdale by developer Fred Unger.His Spring Creek Development is spearheading the 96,000-square-foot South Bridge project with support from the city. It's already been 10 years in the making, and will include roughly 20,000 square feet of retail — collectively called The Mix — spread out over three curbside buildings.

The project will also include a Fred Unger-designed boutique hotel, 42 condo units, 13 brownstones, restaurants and a town square.

Local retailer Jennifer Croll, who owns six eponymous specialty boutiques in the area, bought the buildings that will comprise The Mix from Unger in May, with the agreement that it would be developed as a unique retail hub, spotlighting local, upscale retailers. Tenants will include Jennifer Croll, up-and-coming Chandler, Ariz.-based contemporary specialty store Moody Blues and Glam Lounge, a beauty store that features lines including Dianne Brill and Kevyn Aucoin.

"There are no leasing agents for The Mix," said Evon Yaro-Fig, head buyer for Moody Blues, which is owned by Shannon Gatewood and her husband, Randy Gatewood, a professional arena football player for the Arizona Rattlers. "Every store that's coming in was handpicked. It's nice to be a part of something that has soul and isn't just another mall."

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