Retail developers poised for upswing
The Phoenix economy is mending, with indications that its real estate market is the hottest in the nation. But before retail developers jump in, economist Dennis Hoffman cautions them to pause and consider how the retail landscape has changed. The questions they need to ask now include: Will buyers continue to want cheaper and newer homes on the fringe, accepting the long commute? Or will they prefer to live closer, in denser, more urban areas? Are they going to keep working in offices or will they telecommute more? And are they going to shop at brick-and-mortar stores or shift to more online purchasing?
The Phoenix economy is mending, with indications that its real estate market is the hottest in the nation. But before retail developers jump in, W. P. Carey economist Dennis Hoffman cautions them to pause and consider how the retail landscape has changed.
The questions they need to ask now include: Will buyers continue to want cheaper and newer homes on the fringe, accepting the long commute? Or will they prefer to live closer, in denser, more urban areas? Are they going to keep working in offices or will they telecommute more? And are they going to shop at brick-and-mortar stores or shift to more online purchasing?
During a panel discussion at the annual Southwest Idea Exchange presented by the International Council of Shopping Centers, Hoffman also pointed out the challenge veteran brick-and-mortar businesses face as they merge the old and the new. He cited the experience of 120-year-old Sears. The retailer attempted to put on a new face by advertising its Kardashian Kollection fashion line, created by the celebrity Kardashian sisters, while still retaining older customers who may have shopped at Sears all their lives.
“How are we going to deal with the older versus new? In some ways, that may be harder than the when-are-we-going to come back question… We now have these gnarly questions that are going to mean a lot to the location of new retail and office space,” Hoffman said.
Hoffman, an economics professor and director of the L. William Seidman Research Institute, appeared on a panel with local real estate experts in a general discussion of the current and future real estate market in the Southwest.
At various sessions, conference participants addressed the new and the old, ranging from talks about retail incubators to the challenges of redeveloping “dark retailer boxes” – those monstrous spaces left by former big box stores.
Other panelists appearing with Hoffman were Jeff Geyser, a partner with Lawrence & Geyser in Tempe; Michael Hackett, senior vice president of Cassidy Turley/BRE Phoenix, and Nate Nathan, owner and partner of Nathan & Associates in Scottsdale. Moderating was Joel Moyes, co-chair of the event and a principal with Kinetic Companies in Phoenix.
Some of the trends they noted that can affect retail developments include a pending shortage of residential real estate lots in the Phoenix area, possible progress in finally getting sales tax reform to help brick-and-mortar stores compete with online retailers, strong growth in the restaurant business and continued difficulty getting financing for retail developments, forcing many buyers to use cash.
Nathan, a 1976 ASU graduate who has become a major land broker in Arizona, said the Phoenix area’s residential real estate market is recovering nicely.
“You all ought to be really happy because it’s going to be crazy for the next three to four years,” he said.
Economy rebounding
The Phoenix economy hasn’t reached its pre-recession levels, job numbers, home prices and retail sales are improving.
Lee McPheters, an economist and director of the JPMorgan Chase Economic Center, reported recently (Jan. 2013) that Arizona’s 2.1 percent job growth last year put it in fifth place among states, following North Dakota, Oklahoma, Utah and Texas. The Phoenix area ranked third among metros of 1 million or more, behind Houston and Seattle, with a growth of 2.5 percent in 2012.
The S&P Case Shiller Home Prices Indices said the Phoenix area is leading the nation in home price increases, with an over-the-year gain of almost 23 percent in November.
And Hoffman has reported that Arizona retailers saw a 6.7 percent increase in holiday sales in 2012, compared with the previous year. The $9.8 billion exceeded the three to four percent reported nationally.
“We are on a trajectory of growth. We will be back in terms of the peak probably in three to five years,” he said at the conference. He predicted slow steady growth but said “there is a potential for explosion on the upside.”
Nathan said the rapid recovery caught many by surprise. At a conference two years ago, an expert said the Phoenix area would be “dead” for five years, he said. But last year the expert admitted at the same conference that she had made a mistake and that the Phoenix area was recovering faster than anywhere else in the country. Nathan said she encouraged people “to put every dime into Phoenix.”
He said the world has figured out the factors that make the Phoenix area worth investment: its population growth, transportation corridors, affordable housing, innovation, right to work laws, and diverse economy.
Nathan said his company called the bottom of the residential real estate market in the spring of 2010, but most people didn’t catch on until last year. Now he sees a frantic effort to buy residential lots. His company has done almost $800 million in land and lot sales this year.
But a “serious shortage” of residential lots is expected in the next few years, he said. Nathan quoted Scottsdale economist Elliott Pollack’s prediction that a million new residents will come to Arizona in the next decade, with Maricopa and Pinal Counties expected to get the majority. “It (housing 1 million people) takes 260,000 houses and 75,000 acres of land with infrastructure. Go find it,” he challenged developers.
And he advised retail developers to pay closer attention to where residential growth is happening because it might not be where they expect. His company has sold more than 5,000 lots along Loop 303 in the far northwestern part of metro Phoenix and he said “no one is paying attention.”
Geyser, a shopping center developer and investor with a law degree from ASU, said he remains conservative in buying and building centers. He advises developers to consider locations not only for potential customers and demographics but their functionality, neighborhoods and even the climate of the municipalities. He praised Tempe and Chandler as being two cities with good leadership and more progressive approaches to businesses.
Sales tax reform
While developers and retailers try to figure out the best locations, state and federal lawmakers may finally give them relief this year from a long festering problem – some online and remote sellers have not been administering the collection of sales taxes which puts state and local brick and mortar establishments at a competitive disadvantage. Hoffman said it’s clear that online sales have detracted from local businesses with physical locations.
Since 1982, he has maintained a tax revenue forecasting model used by the Executive Budget Office for Arizona. In 2010 he was tapped by Gov. Jan Brewer to chair a working group to simplify the states sales tax structure.
He said that in the 1980s Arizonans were spending six to seven percent of their annual incomes in local brick and mortar stores during the height of the holiday shopping season – December through March. Those holiday sales have fallen to the four-percent range in recent years. He attributes that to a greater share of incomes being spent on remote (i.e. catalogs) and online purchases, as well as on services, such as haircuts and fitness centers. Still, total taxable retail holiday sales rose steadily until 2006, hit a recession low in 2009 and are now approaching peak levels again, his numbers show.
The proposed federal Marketplace Fairness Act is needed to level the playing field between online and brick-and-mortar businesses, Hoffman said. The proposal would allow states to compel online and remote sellers such as Amazon to collect sales taxes on all purchases made in their states. The states would have to simplify their tax structures, however. Arizona’s tax structure has become so complicated because of the many jurisdictions charging sales taxes that The Arizona Republic recently reported that Circle K has to file 50 returns a month.
According to Richard Travis, a consultant for the International Council of Shopping Centers and president and CEO of Nexxus Consulting, LLP, of Phoenix, the Marketplace Fairness Act has wide support from federal senators and representatives. “I’m happy to report tremendous progress on state and federal levels,” he said.
The Arizona Legislature is also considering a bill, House Bill 2657, to simplify its tax structure. Municipalities have protested that they will lose revenues, but Travis said discussions are underway to reach a compromise.
Restaurants: hot spot
December-March restaurant and bar sales last year in Arizona broke records and are expected to surpass that this year, according to Hoffman. March numbers from the Arizona Department of Revenue won’t be finalized for two months. “It’s a huge business. It is a growing business,” he said.
Restaurant-anchored properties, which have proven to be a good way to attract customers to centers, are the trend, Geyser said. Restaurants are stabilizing many strip centers. In fact, his company has begun adding kitchens to some of the retail space it is leasing to make them more attractive to potential restaurants. He is co-owner, founder and president of Lawrence & Geyser Development Corp. and his firm has developed more than 1 million square feet, including the Tempe Crossings retail and office complex northeast of Ray Road and Priest Drive in Tempe.
“Restaurants, fortunately, are the one thing you can’t get online. You can’t have a remote experience with food,” he said.
Financing
Panelists also touched on financing retail spaces and businesses, which remains difficult. Bank loans remain hard to get, and as a result, most deals – especially those for up to $10 million – are cash, said Hackett, who earned a B.S. in finance at the W. P. Carey School in 2000.
The good news is that sales of distressed and bank-owned retail properties are rapidly shrinking. Hackett, whose company exclusively represents investors in the marketing and sale of retail investments, said trustee sales of distressed retail space peaked in 2010, and dropped 50 percent in 2011 and another 50 percent in 2012 and should be virtually nonexistent this year in the Phoenix area.
The market is looking more normal as traditional sales doubled from 2011 to 2012.
“The trend is to see traditional sales as a higher percentage of total sales,” he said.
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