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Valley cities challenged trying to fill abandoned retail space

Skeletons of the state’s growth-based halcyon days linger

A glut of empty retail space is challenging Valley cities and real estate professionals who say the region is so overbuilt that even an improving economy won’t bring all the stores back.

“Through consolidation, bankruptcy or redesign, retailers have left spaces behind and there’s nobody to take their place,” says Don Cheatham, managing partner for Velocity Retail Group in Phoenix, one of the area’s largest retail brokerages. “We have over 270 empty boxes in the Phoenix area. No place in America has that many large spaces available.”

The alternative is creative reuse of the space for something besides merchandise.  And cities are more open to zoning changes so all this emptiness can be filled — even if it’s not with tax-generating commerce.

A former Smitty’s grocery store-turned-call center at Alma School and Warner roads in Chandler is now Chandler Preparatory Academy, a charter school where grass grows in the old parking lot. What was once a giant Castle Megastore sex shop at 44th and Van Buren streets in Phoenix is winning architecture and energy conservation awards for its transformation into DPR Construction’s Phoenix office. A shuttered Mervyn’s department store at Desert Sky Mall near 76th Avenue and Thomas Road in Phoenix has been broken up into a multi-tenant Mercado that caters to the area’s Hispanic population.

The fitness craze is turning a number of vacant big box stores into gyms, including a former Target at Seventh Avenue and Camelback Road in Phoenix and a former movie theater at Southern and Alma School roads in Mesa.

Lured by low rents and increasingly frugal populations, discount and thrift stores are occupying vacant spots in struggling strip centers across the Valley. Big Lots, 99 Cents Only, Dollar General, Family Dollar and Goodwill have expanded during the downturn.

Lost taxes

Some of these converted uses bring permanent losses of tax revenues. Charter schools don’t pay property or sales taxes, and nonprofit thrift stores are exempt from sales tax requirements. Records from the Maricopa County Treasurer’s Office show that at several of the former commercial locations now occupied by large charter schools — including the Chandler Preparatory Academy site in Chandler — annual property taxes fell from more than $150,000 a year to zero.

However, city officials say hoping for a new influx of tax-generating retailers is unrealistic and holding out for them just means longer vacancies and blight. “We promote business first and foremost, but we don’t want to see vacant spaces,” says Donna Kennedy, a Phoenix economic development official. Metrocenter — one of Phoenix’ premier regional shopping malls when it opened in 1973 near I-17 and Dunlap Ave. — has been plagued by vacancies and now holds a public high school, health clinic, U.S. Marine recruiting station, music academy and cosmetology school among remaining retailers.

James Smith, a Chandler economic development official, says his community has more retail space than the market will ever support and converting some of it to other uses could benefit remaining shops and restaurants.

“Chandler Prep is a highly regarded charter school and families are driving from all over the Valley to drop off students,” he says. Those families may stop at a local coffee shop or store when they’re in the area.

Great Hearts Academies, which operates Chandler Prep, occupies a number of vacant former retail, office and industrial spaces, says spokeswoman Mary Hall-Lins. Scottsdale Preparatory Acadeny on north 92nd Street is in a former slot machine warehouse. Trivium Preparatory Academy and Archway Classical Academy on West McDowell Road in Goodyear are in a formerly vacant retail center. Veritas Preparatory Academy and Archway Classical Academy are in former Motorola offices near 56th Street and Osborn Road in Phoenix.

Smith says filling so many large spaces in Chandler is difficult, and a few non-traditional businesses like indoor recreation, ceramics clubs or young chefs’ schools failed during the downturn. Demolition is sometimes a better alternative. The problematic design of the  mostly-vacant East Valley Mall at Arizona Avenue and Warner Road in Chandler and a surrounding neighborhood packed with too much commercial space has municipal officials agreeing that demolition — and replacement with non-retail uses — may be in its future.

Cheatham of Velocity Retail says the Valley was ground zero for a hyper-competitive grocery market and a building frenzy during the ’80s and ’90s when bigger was better for newer chains like Bed Bath and Beyond, Circuit City, Best Buy and giant office supply stores.

But online shopping has changed consumer habits, Cheatham says, and the demand for large store space isn’t there. “Cities, retailers, shopping center owners are going to have to look at these buildings differently and figure out how to reuse them in a completely different capacity,” he says.

That means drastic changes, not conversion of a large retail space into smaller shops and restaurants or a grocery into a thrift shop, Cheatham says. He cites the sex-shop-turned construction office in Phoenix and the grocery-store-turned charter school in Chandler as successful examples.

Creative retail

Others believe there is still room for creative retail, restaurant and entertainment uses. Don Keuth, president of the nonprofit Phoenix Community Alliance, says during the worst years of the recession, restaurants were the only businesses filling vacancies because others couldn’t get financing. The organization promotes revitalization, and he says charter and specialty schools have more recently become big users of empty commercial buildings.

Michael Pollack has been buying, renovating and leasing struggling shopping centers and other commercial buildings for 40 years. His real estate investment company owns

39 commercial centers in six Valley cities and has turned around some of the most challenging. “I can drive up to a building and tell you if it’s a project I want to work on or not,” he says. “Vacancy issues, ugly issues…I can see them all looking brand new again, and I can’t teach somebody that.”

Pollack cites some of the replacements for traditional retailers in his properties: indoor shooting ranges, charter schools, churches, thrift stores, medical offices, recreation centers, antique malls, night clubs.

Discounters to the rescue

During the downturn and as leasing rates dropped, heavy discounters, clearance centers and thrift stores like Goodwill moved into large vacant spaces, Pollack says. “I’ve put Goodwill in nine of my buildings over the years. They are great people to work with.” He’s convinced that changing consumer preferences will keep the bargain shops going as the economy improves. “Consumers have gotten used to getting good deals so even when we have a full recovery people are still going to look for deals.”

That’s a far cry from the reaction thrift stores used to receive from neighbors.

The 2005 announcement that a Goodwill store would replace a long-vacant former Gilbert ABCO grocery at Warner and McQueen roads drew neighborhood protest petitions and objections from other tenants in the strip shopping center. There are few objections these days, although Pollack says the kind of tenants that co-exist with bargain shops are different from those that thrive in a grocery-anchored center. Kennedy, the Phoenix economic development official, says neighbors used to complain about piles of dropped off merchandise that accumulated outside Goodwill stores, but the nonprofit changed its donation process to eliminate the clutter  “and now those same neighbors are donating and shopping there.”

Pollack says several of his centers anchored by Goodwills are fully leased. “They have done an excellent job through turbulent times,” he says.

Courtney Nelson, spokeswoman for Goodwill of Central Arizona, says the nonprofit has opened five to seven stores a year since 2005 and nearly all are in formerly vacant spaces. The economic downturn made desirable spaces more affordable, which helped the nonprofit’s expansion into previously inaccessible areas like north Scottsdale, she says.

Goodwill has changed stores’ appearances and donation practices over the past decade. “We wanted to make stores bigger, brighter, cleaner and more inviting. In order to be successful in our mission and provide job training and placement, we needed to function like a professional retail operation,” Nelson says.

There’s more to filling vacancies than searching for new tenants. Pollack and other real estate professionals agree that cities have become more flexible when it comes to creative reuse of vacant space and have allowed exceptions to zoning and parking requirements. Cheatham says Chandler and Peoria have made exceptional efforts to encourage creative change.

Some centers have deed restrictions that preclude certain uses, and a shuttered store may still be bound by a long-term lease that extends a vacancy. Areas hard-hit by foreclosures, job loss or the housing construction slump may be slower to attract any tenants.

Todd Folger, first vice president for commercial real estate brokerage firm CBRE, says the industry and cities are working together to fill the glut of vacancies, and progress has been made. He says the competitive grocery market remains a challenge and industry experts are watching to see what happens with the Fresh and Easy chain, which is expected to leave the area, and Albertson’s which was recently sold. Vacant stores remain from Bashas’ recent emergence from bankruptcy.  One, at Cooper and Ray roads in Chandler, is across the street from a vacant Albertson’s store in Gilbert.  Both have been vacant for more than three years.

Those in the industry don’t know exactly what the retail future will look like but agree that change is necessary and the Valley isn’t likely to see new malls and big boxes in the near future.

Phoenix metro area retail vacancy numbers

• In the fourth quarter of 2012, 11 percent of all retail space in Phoenix area was vacant, down from 12.2 percent during the same period in 2011.
• Average retail lease rate in the fourth quarter of 2012 was $15.83 per square foot, down from $15.90 per square foot during the same period in 2011.
• Available empty retail spaces larger than 10,000 square feet at the end of 2012: 272 spaces totaling 7.1 million square feet.
• Available empty retail spaces larger than 10,000 square feet at the end of 2011: 312 spaces totaling 8.6 million square feet.

Fourth quarter 2012 retail vacancy rates by area

Northwest Phoenix: 15.9 percent
Mesa, Chandler and Gilbert: 14.4 percent
Southwest Phoenix: 9.6 percent
Paradise Valley: 11.5 percent
Tempe, Ahwatukee: 8.3 percent
Scottsdale: 6.8 percent

— Source CBRE

 Creative reuse

• Former Castle Boutique Megastore sex shop at 44th Street and Van Buren in Phoenix is DPR Construction offices.
• Former Smitty’s grocery store-turned-call center at Alma School and Warner roads in Chandler is Chandler Preparatory Academy charter school.
• Former movie theater at the Poco Fiesta Shopping Center near Southern and Alma School in Mesa is Blast Fitness gym.
• Former Mervyn’s in Desert Sky Mall near 75th Avenue and Thomas Road in Phoenix was divided into small Mercado spaces that cater to the area’s Hispanic population.

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