Phoenix Rising?

I’d like to try something a bit different for this week’s column: a market-specific conversation! I’ve tapped Dave Cheatham from Phoenix-based Velocity Retail Group, an X Team International Partner, to help me examine the recent ups and downs of the local retail market in Arizona — and what the lessons learned here mean for brick-and-mortar retailers nationwide.

Jeff: It’s great to be sitting in Phoenix talking about growth, construction and new retailer expansion. For so long, we were talking about a “new normal,” lowered expectations and fewer opportunities.
Dave: To talk about the “new normal” you first have to start by identifying what we meant by normal prior to the recession. What we saw in Phoenix before the recession was clearly anything but normal. The ways rents were spiking and commercial developers were speculating in 2005-2007 was totally out of balance with pre-2005 norms.

Jeff: It might be better to refer to the current state of Phoenix retail as getting back to normal: stable, predictable growth.

Dave: We are getting back to a more steady level of population growth, and commercial development mindset that reflects a more rational and more sustainable approach.

Jeff: One of the things that has always distinguished the Phoenix market is that exceptional in-migration you mention — it really drives the regional economy and spurs retail growth.

Dave:  I think we are starting to see new job creation, and we were ranked recently as the number one for future new jobs in the nation. That coupled with getting back to strong numbers of in-migration will lead to a more predictable growth that allows you to more accurately predict/project ahead. Compare that with the bubble behavior we were seeing shortly before the recession. I remember commercial developers planning and projecting malls to go in some sites before there were people there!

Jeff: It’s a classic example of that familiar ‘irrational exuberance’ idea.

Dave: Anytime retail developers get ahead of themselves and start building before demand exists, that’s irrational.

Jeff: Because the regional economy is so heavily into construction, the halting of population growth affected Phoenix more than other cities. Even within the state, less overbuilt cities such as Tucson didn't have the same boom and bust.

Dave: That’s right, and another thing that made the fall so precipitous for the retail sector in particular was the fact that rents were artificially high — that’s something that made the foundation of this recent recession very different from the last truly deep recession in the 1980s. Unlike in the ‘80s, vacancy rates remained in the single digits leading up to the recession, but rents (like home prices) were artificially high. Those high expenses for area retailers meant that, when revenues dropped off, things went upside down very quickly.

Jeff: Retail vacancy rates definitely didn’t stay in the single digits during the recession, that’s for sure. Retailers were also hit with multiple problems at the same time: the growth of online shopping options, the high rents and the housing crisis itself made it a perfect storm that affected Phoenix more than the average city. We have had to absorb most of that vacant space before real local growth resumed, and I believe recent development shows we’ve turned that corner.

Dave: There were a couple of years there when value retailers were the only ones opening a significant number of new stores—that was also an opportunity for them to get into a market many of them they couldn’t afford previously.

Jeff: Traditional retailers have only recently begun expanding in earnest again in Phoenix — is that another sign that things are moving forward?

Dave: I think so, yes. I also think that Phoenix has a lot of intangibles going for it: it’s relatively affordable, there’s plenty of sunshine, and we have a stronger-than-average job market. I see some parallels to one of the strongest areas for retail in California, the Inland Empire, in the way Phoenix has gone through this recession and initial recovery.

Jeff: That’s not a bad comparison: hit hard, but bouncing back well. Perhaps more importantly, the consensus is toward a more state outlook, so we can expect predictable growth for the next few years.

Dave: Keep in mind, Phoenix actually lost more jobs than Detroit over the course of the recession, but its economy is very resilient.

Jeff: Dave, I know we’ve been talking about Phoenix, but a lot of these ideas apply to almost any market in the country.

Dave: No doubt. The specifics and nuanced details of market behavior will always vary from one city to the next or from one region to the next, but the principals can apply in many areas of the country.

Jeff: Let’s hope we’ll continue to see a similarly healthy ‘back to normal’ trajectory for retailers and markets around the country in the months and years ahead.

Dave: Amen to that.

How do you see retail development coming back in Phoenix or in your own backyard? Have we turned the corner from a national perspective? Leave a comment below or email to continue the conversation.

Click here for past columns by Jeff Green.

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