Trendy spots thrive, but fall of neighborhood malls worries some

5 comments by J. Craig Anderson – May. 19, 2011
The Arizona Republic

To the owners and operators of Phoenix-area employment and shopping centers, economic recovery is likely to appear not as a benevolent shepherd guiding a flock to prosperity but as a no-neck bouncer working the line outside a trendy nightclub.

According to a group of commercial-real-estate experts who spoke Thursday at the Urban Land Institute’s 2011 Real Estate Summit in downtown Phoenix, only the youngest, hippest, best-funded and most attractive retail and office buildings will enjoy the full effects of economic recovery in the future.

Commercial real estate that is less appealing to employers and retailers will take longer to fill up again with quality businesses, they said. Some of those properties probably won’t recover at all.

“I think it’s really a tale of two different marketplaces,” one returning to health and the other languishing in recession, said Scott Lamson, Western region managing director for Denver-based ProLogis, which operates distribution centers around the world for manufacturers, retailers and other businesses.

The mothballing of neighborhood retail or office locations could reduce consumer choice and convenience while extending the daily commute for some workers.

It also could leave some neighborhoods with areas of blight where vibrant commercial centers once thrived, according to the panelists, who were asked to discuss the future of commercial real estate.

And remaining retailers in some areas could suffer from a greater number of brick-and-mortar shoppers defecting to the Internet, they said.

The increase in e-commerce actually has benefited developers of industrial real estate because of the need for large, regional distribution centers for goods purchased online. announced recently plans to expand its 600,000-square-foot distribution center at 6835 W. Buckeye Road, in Phoenix, to about 1 million square feet.

Meanwhile, the area’s more popular shopping destinations, including Tempe Marketplace and Scottsdale Fashion Square, are among the least likely retail operations to suffer, because if they lose any retailers, others are likely to want in.

Panel moderator Benjamin Breslau, managing director of Americas research at Chicago-based commercial-real-estate firm Jones Lang LaSalle, said that the prime office properties are the big high-rise towers in downtown Phoenix, filled largely with law firms, big banks, Fortune 500 companies and various professional-services providers.

They include the Freeport-McMoRan Copper & Gold Inc. building, 333 N. Central Ave., and the office tower at CityScape, 1 E. Washington St.

Other qualities that can make a commercial property popular are its location, a large “floor plate,” referring to the square footage of each floor, energy efficiency and having a heavy-duty power and air-conditioning infrastructure.

“Cool air is really the selling point right now,” Breslau said, adding that office properties in regional technology hubs such as California’s Bay Area already have returned to vacancy rates below 5 percent.

In Arizona during the second quarter, the vacancy rate for office space was about 26 percent.

While all types of commercial real estate have been affected by the economic downturn, apartment communities and industrial and warehouse properties don’t appear to be as vulnerable, the panelists said, in part because the demand for things such as housing and storage have been less affected by the recession.

The retail segment of the commercial-real-estate market faces the greatest amount of uncertainty, said Bruce Johnson, chief financial officer of Regency Centers Corp., a Jacksonville, Fla.-based developer of neighborhood strip malls and grocery store-anchored shopping centers.

Retail spending has recovered somewhat in the past year, Johnson said, which is good news for shopping-center owners.

But a number of large, chain retailers have announced plans to transition away from the “big box” model in favor of smaller stores containing far less inventory.

According to Phoenix-area commercial real-estate firms, there are more than 300 empty big-box retail sites in the Phoenix area, and the only way to lease out those spaces has been to chop them into pieces by adding one or more dividing walls.

“We’re probably going to see continued contraction in the amount of space needed by retailers,” Johnson said.

A similar phenomenon is happening in the office sector, said Douglas Schwartz, managing director of J.P. Morgan Asset Management.