WESTERN SNAPSHOT, APRIL 2008

Scottsdale, Arizona, Retail Market

Kalocin

Scottsdale is known around the country as a shopping mecca full of quality stores that cater to both tourists and wealthy locals alike. With that reputation and the almost 19 million square feet of retail space Scottsdale and North Scottsdale currently offer, this continues to be the most stable and desirable area of metropolitan Phoenix for both retailers and developers.

The Scottsdale area continues to have the lowest vacancy rate in the area. While the entire Phoenix market saw a vacancy rate of 6.15 percent, Scottsdale saw about half of that at 3.64 percent at the end of 2007. While that is slightly higher than earlier in the year, it remains consistent in relation to the rest of the Valley. Some of the factors that attribute to this include the higher incomes of the area (32 percent higher than the metro’s median), relative lack of available land for additional development, a large number of tourists due to the proximity of numerous hotels and resorts, and Scottsdale’s national reputation. When most major retailers or restaurants enter the Phoenix Market, Scottsdale is almost always their first choice in scouting locations.

Rental rates in Scottsdale also trend higher than the rest of the metro area. Annual net-lease retail lease rates average from the upper teens for big box retail to the low 30s for grocery-anchored shop space to as high as $70 per square foot for regional malls and upscale lifestyle centers.

Scottsdale has four distinct retail submarkets, all of which are experiencing growth. Following the Loop 101 Freeway from Tatum Boulevard to Frank Lloyd Wright, encompassing both parts of Phoenix and Scottsdale, The North Scottsdale/Desert Ridge area is experiencing the most growth right now. In 2001, Vestar Development opened its 1.2 million-square-foot Desert Ridge Marketplace, which is a hybrid power center and lifestyle center catering to the area’s young and family-oriented population.

Just east of Desert Ridge is the large mixed-use CityNorth project being developed by Thomas J. Klutznick Company and Related Companies. The retail portion of this project will feature Arizona’s first Bloomingdale’s, third Nordstrom store and at least two more department stores. Joining them will be numerous specialty retailers and several high-profile, first-in-the-market restaurants.

Just east along Loop 101 at Scottsdale Road, Westcor is planning its Palisene mixed-use project, which includes another major upscale regional mall exceeding 1 million square feet. This project would be located on state-owned land, and the winning bidder of the property could actually be one of several high-profile development companies. Across the street from the Palisene development, DMB Commercial has begun construction on its One Scottsdale project. This is yet another mixed-use project, which will be home to Dial Corp.’s new headquarters, along with many soon-to-be announced upscale specialty retailers. Luxury, high-rise condominiums will be added to the project as well.

Just a few miles to the south, straddling Scottsdale Road, is the Kierland area.  On the west side of Scottsdale Road is Westcor’s Kierland Commons, one of the nation’s most successful lifestyle centers. In order to build upon the success of that center, Glimcher Realty Trust is planning its Scottsdale Crossing project directly across the street on what will soon be the former site of the Dial Corp. offices. This will feature another 400,000 square feet of specialty retail.

The rest of the immediate area is a furniture corridor. Many furniture retailers have their only Arizona location here, including Robb & Stucky and Roche-Bobois, while more than 20 other larger and mid-tier chains are located in this area. On the south end of this submarket, C & H Development purchased the 60,000-square-foot Scottsdale Shea Plaza in 2007 for $17 million and recently completed a $5 million renovation, bringing in the area’s first Beverages & More, Fresh & Easy and Arizona’s first Choice Pet Market.

To the southeast is the Pima Freeway corridor, which extends south from about Frank Lloyd Wright Boulevard into the Salt River Pima Indian Reservation. With most of central and south Scottsdale at full build-out, the reservation has become a development hotbed. De Rito Partners Development recently purchased the 1.3 million-square-foot Scottsdale Pavilions for $80 million. In 1991, Scottsdale Pavilions became the first major retail center in the country built on an Indian reservation. The power center will experience major cosmetic upgrades this year, with an expansion in the future. Just to the north, Barclay Group is planning a 400,000-square-foot retail center in 2009. At the Loop 101 and Shea, PGA Tour Superstore recently opened one of its first two Arizona stores.

One of the most well-known retail areas is the downtown area or “Old Town Scottsdale.” Once known for its tourist t-shirt shops, the submarket has seen its largest boom in history. It is home to Westcor’s 2 million-square-foot Scottsdale Fashion Square. With average sales per square foot exceeding $740, this mall has expanded every decade since its inception. It’s currently anchored by Dillard’s flagship store, Nordstrom, Neiman Marcus and Macy’s. In 2009, Arizona’s first Barney’s New York will open. The mall also boasts a roster of luxury stores; many have their only Arizona store at this location.

Just outside the mall is the Scottsdale Waterfront, a collection of restaurants and specialty shops fronting Camelback Road. Immediately to the south is the recently opened Southbrige project, which straddles the canal. Recently completed by local developer Fred Unger, this $250 million development is a unique project in the sense that retailers were hand picked by the developer and could not be part of large chains. This has also spurred some of the remaining downtown stores to transition from small Indian jewelry stores to hip clothing boutiques. Waterworks is relocating from Phoenix’s Biltmore Fashion Park to a new location in the downtown area that until recently wasn’t known for upscale shopping.

Even though retailers may be slowing their expansion nationwide, Scottsdale continues to see more and more diverse retailers enter and succeed in the market.

Kurt Kalocin is a retail broker for De Rito Partners in Phoenix.

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