About 250 new residents arrive in Phoenix's Valley of the Sun every day, two out of five from California. They come for the mild winters, relatively low cost-of-living and Southwestern ambiance — all this and a cosmopolitan atmosphere offering cultural amenities.

Add to that a diversified job market that has weathered the recession fairly well. Unemployment was 5.5 percent in August, better than the 6.1 percent reported nationally. The job market is expected to grow 2.8 percent in 2004 — about double national expectations, according to Global Insight Research.

And average household income is pegged at $45,358, more than the $39,657 reported nationally and the $42,198 in Los Angeles, according to the 2000 U.S. Census Bureau. It is not surprising, therefore, that the region's population swelled by 200,000 to 3.3 million in less than two years. (That puts Phoenix in line to replace Philadelphia as the nation's fifth-largest city.)

The Valley's exploding population continues to push residential development outward along a growing network of freeways, turning once sleepy, outlying villages into some of the nation's fastest-growing cities. In the first half of the year, a record 29,659 home permits were issued in Maricopa County. Much of this development is driven by completion of Loop101, which extends from I-10 north through Peoria, curves around south to Scottsdale and all the way to Chandler, where it will connect with the Loop 202-Santan Freeway now under construction.

BOOM TOWNS

The southeast Valley communities of Gilbert and Chandler are the fastest-growing in the region and the nation. Gilbert, which adds 1,000 residents and 300 new homes a month, has gone from a population of 29,188 in 1990 to 138,000 and is expected to have 150,000 residents by 2005. Neighboring Chandler is growing at a clip of 800 to 900 new residents per month. The city's population has more than doubled since 1990, to 215,000 today from 90,000, and is expected to reach 285,000 by the year 2010.

Socioeconomically, both cities are a retailer's dream, having a young, highly educated, affluent workforce with the highest median household income in the state, $68,032 in Gilbert and $67,600 in Chandler — 38 percent higher than the national average and even higher than affluent Scottsdale's median income of $62,000. With these dynamics, these southeast Valley markets are seeing a boom in retail activity.

Gilbert has had a number of neighborhood centers rise during the past few years, two powers centers are under way, and an auto mall is on the drawing board. Santa Monica-based The Macerich Co., the REIT that brought out Westcor's portfolio and wrapped up the regional mall business in Phoenix recently with acquisition of the Biltmore Mall, plans to build a regional mall on a site in Gilbert along the new Loop 202-Santan Freeway.

Vestar Development is building the two Gilbert power centers, the 800,000-square-foot Gateway Towne Center and the 1.2-million-square-foot Crossroads Towne Center. Crossroads Towne Center is on the Gilbert-Chandler border, with 500,000 square feet of retail space in Gilbert, including a Super-Target, and 700,000 square feet in Chandler.

Chandler has added 5 million square feet of retail space over the past five years, notes Harry Paxton, retail specialist with the city's economic development office, including 1.3 million square feet at the Chandler Fashion Center and 2.5 million square feet combined at three retail centers: Chandler Festival, Chandler Gateway and Chandler Pavilions. Target also is introducing its new Greatland store concept in Chandler, a super-sized retail store without the grocery, and in October Kohl's opened stores in both Chandler and Gilbert. Vestar will also break ground on Ocotillo Towne Center, a 200,000-square-foot grocery-anchored neighborhood center in Chandler next spring.

“Home sales are very brisk, and as rooftops come in, retail wants to be there,” notes Charles Hickcox, vice president of development for Sacramento-based REIT Donahue Schriber, which entered the Phoenix market about five years ago doing a blend of acquisition and development. “Phoenix is experiencing very significant growth, along with a positive outlook for job growth in 2004,” says David Larcher, Vestar executive vice president, noting the number of firms opening operations here, including USAA Insurance Co.'s new Western headquarters with 30,000 employees.

The newest hotspot is the southeast Valley, where the communities of Goodyear, Avondale and Buckeye are planning 210,000 homes, and several power centers are under way or proposed. Noting that one in four homes sold in the region during the first quarter were in this submarket, Brian Kocour, senior associate with Grubb & Ellis/BRE Commercial, says the attractions here are affordable homes and the addition of several large employers.

He notes that the other hotspot is the northeast Valley communities of Peoria and Surprise, which are fueled by both Loop 101 and the proposed extension and widening of SR Loop 303.

More than 3.7 million square feet of retail space was delivered during the first half of 2003, of which 1.2 million square feet was in the northwest Valley and 1 million square feet was in Scottsdale to the west.

RETAILERS INVADE THE DESERT

With the delivery of new space and exit of several large users, including Food 4 Less, which filed bankruptcy, the vacancy rate ticked up slightly to 7.7 at midyear from 7.3 percent at year-end 2002. But vacant space exited by the big boxes was broken up into smaller floorplates and is quickly leasing up, with smaller users such as Dollar Stores, Ace Hardware, and several boutique grocers — Henry's, Sunflower Markets and Spouts — taking up the slack, Kocour says.

Bob Pearlstein, first vice president in the retail division of CB Richard Ellis' Phoenix office, contends that the entry and expansion of retail operations is a good gauge of market strength. He notes that Kohl's entered the market in October, Lowe's is doing deals, the drugstores — CVS, Eckerds and Walgreens — are very aggressive, and Phoenix is getting the first SuperTarget and Ikea stores in Arizona. Additionally, Wal-Mart plans to open 30 to 40 grocery stores over the next few years. “It's what they're (Wal-Mart) doing to get into the neighborhood,” Pearlstein says, citing resistance to big boxes in some Phoenix-area communities.

With Phoenix's retail market on a roll, sales velocity nearly doubled in the past year, says Ari Spiro, Sperry Van Ness senior advisor for retail in Phoenix. While the market is attracting investors from far and wide, “the vast majority are coming from California,” he says, noting that prices are much lower and capitalization rates higher than in Southern California. However, strong investor activity is driving Phoenix prices up and cap rates down.

“Six years ago the average retail price was $100 per square foot. This threshold was broken in 2001, and now we're seeing prices in the upper $200s to over $300,” Spiro says, noting that the highest priced areas are Scottsdale, north Phoenix, Gilbert and Chandler.

The average retail cap rate dropped from 10.5 percent at the end of 2002 to 9 percent by midyear. However, Kocour notes that the cap rate for grocery-anchored centers has dipped into the 7 percent to 7.5 percent range — on par with similar property in Southern California.

While power centers and regional malls follow freeway footprints, upscale specialty retailers are clamoring for space in a growing number of lifestyle centers at the heart of residential communities. As the village concept gains momentum across the nation, existing towns are revitalizing their central business districts to attract retailers and create a cohesive sense of community, and suburban communities are developing town centers to simulate the small town atmosphere.

PLANNING AHEAD

A study by real estate historian Charles Lockwood, published in Urban Land, found that real estate in communities with town centers consistently outperforms standard suburban real estate, commanding higher retail, office and apartment rents; increasing residential and commercial property values; and generating greater retail sales and tax revenue and higher hotel occupancy rates.

In the Phoenix area, cities like Tempe, Mesa, Gilbert and Chandler, which have downtown cores with historical structures, are redeveloping their city centers. Brent Herrington, senior vice president for Phoenix-based DMB Associates, which helped Tempe launch a revitalization effort back in the 1980s, recently completed development of a town center for a planned community in Scottsdale and is under way on a much larger project that involves creation of an entire town from the inside out.

Market Street, a 37-acre, upscale mixed-use neighborhood center in Scottsdale's DC Ranch, is designed around the ranch's 1900s adobe architecture and attempts to create a town that might have evolved over time. One building is designed as a blacksmith shop that evolved into a coffeehouse. The project, which includes 300,000 square feet of retail shops and services, entertainment, restaurants and office space, offers convenient storefront parking and a pedestrian trail system.

Scheduled to open in January 2004, Verrado is an 8,800-acre residential community in Buckeye, with 14,000 dwellings and 4 million square feet of commercial space. Herrington points out that planned communities typically are highly segregated in terms of housing size, type and ultimately income level, with commercial space located along a network of arterial roads. Verrado is designed around a downtown commercial core, with the highest residential density emanating outward from the center in a ring pattern that progresses from multi-family housing on the inner-most circle to single-family homes with the largest lots on the outer fringes. “We spent lots of time studying the characteristics of a successful small town and found that the further from the center, the less density, and the town gradually loosens and dissolves at the edges. We're designing new planned communities around this model,” says Herrington.

Designing a community around a mixed-use lifestyle center is more complicated to plan and execute than building a typical master-planned development, notes Herrington. “It will cost a bit more…it takes longer and requires more attention to detail,” he says, noting that more developers are realizing that the positive economic impact a lifestyle driver has on values far outweighs the extra cost in time and money. “It's a home run for all project economics,” he says. “Within our peer group, everyone I know is in the middle of one or about to start one, and there will more a lot more of these in the future.”

Market Profile/Phoenix

DEMOGRAPHIC OVERVIEW

  • Total Population 2003: 3.3 million

  • Unemployment Rate: 5.5%

  • Per Capita Household Income: $22,251

  • Median Home Price 2003: $163,545

  • Median Home Price Growth Over 2002: 4.5%

  • Median Household Income: $45,358
    Source: U.S. Census Bureau

RETAIL OVERVIEW

  • Average Asking Rent Per Sq. Ft Triple-Net.: $23 (new, anchored) $15 (2nd generation)
  • Average Retail Vacancy Rate 2003: 7.7%
  • Average Retail Property Cap Rate: 9%
  • Total Retail Completions Phoenix 2003: 3.7 million sq. ft.
    Source: Grubb & Ellis/BRE
    Commercial LLC, CB Richard Ellis