Vacant ‘Big Box’ Stores Dot Arizona Landscape

Cities that encouraged go-go construction of power centers at major intersections
are seeing their policies come back to bite them.

Market suffers void due to loss of big retailers

Not long ago, the northeastern corner of Bell Road and 59th Avenue was a retailing
hot spot mobbed with shoppers who swarmed to Costco, House2Home and nearby
restaurants.

By Glen Creno
The Arizona Republic

Now, the vast parking lot is mostly empty. Costco moved, House2Home is out of
business and some restaurants closed. A Levitz furniture store is the only remnant
of a once-thriving center.

"The parking lots used to be packed," said Anita Lempinen, Levitz sales manager.
"It’s obviously empty on both sides now."

The same scenario is playing out at retail centers throughout the Valley. Ravaged by
harsh marketplace forces, "big box" stores are going vacant at a pace that some
real estate professionals say is unprecedented.

Valley cities that have encouraged go-go construction of power centers at major
intersections are seeing their policies come back to bite them. Companies that
looked like winners – Home Base and successor House2Home, Kmart, HomeLife
Furniture, Office Depot – are closing leaving craters in the commercial landscape.

They’re not the only big stores biting the dust. Mergers and bankruptcy have left the
cities pockmarked with empty ABCO and Southwest Supermarkets stores and a
handful of leftovers from the Kroger-Fred Meyer merger.

Companies like Costco and Wal-Mart are relocating constantly, pouncing on new,
more attractive markets. The megaplex craze in movie theaters has left old-style
cineplexes sitting empty. Walgreens and Osco are leaving strip centers in favor of
new, free-standing buildings with drive-through pharmacies.

"All of this has been building to a crescendo and now you see the end result," said
Dan Salley, a senior vice president at Grubb & Ellis.

Grubb & Ellis estimates empty retail space in the Valley totals 7.6 million square
feet, the equivalent of nearly six malls the size of Chandler Fashion Center. About
5.3 million of that, or nearly 70 percent, is from stores of 10,000 square feet or more:
Grubb & Ellis’ definition of "big box." CB Richard Ellis research reports 106 empty
stores of 15,000 square feet or larger.

At the end of 1997, the Valley had 4.9 million square feet of empty stores. At the
time, Grubb & Ellis didn’t break out how much was big-box space; it only began
doing so recently when the empty boxes began piling up.

Closings are up nationally as well. About 6,000 stores closed last year, according to
the International Council of Shopping Centers. The trade group said the yearly
average of closings between 1995 and 2000 was 3,345.

Potential for blight

Empty stores bring the potential for urban blight. And stores built near anchors feel
the pinch when the shoppers move to the next hot spot.

Critics of big stores and urban sprawl point to abandoned stores as a downside to
such development. Al Norman, a consultant who runs the sprawl-busters.com Web
site, said it’s "cash box" zoning by greedy cities.

Norman said other cities in the nation protect themselves by creating
revenue-sharing deals to thwart developers and retailers who pit one city against
another. Others, he said, demand that retailers build in infill spots or pay up when
stores close.

Buckingham Township in Pennsylvania now requires developers who want to build
stores 40,000 square feet or larger, roughly the size of Best Buy or a small
supermarket, to contribute to an abandonment fund. If a store sits empty for a year,
the fund can be tapped either to raze the building or fix it up.

Such deals have been rare in Arizona. Tempe and Chandler negotiated a
revenue-sharing agreement during their fight for Arizona Mills.

But Valley cities have been more aggressive with ordinances covering construction
of new big boxes. Chandler, Glendale and Scottsdale passed big-box ordinances,
Mesa is considering one and Phoenix is developing one.

The spate of new ordinances may help fill some dark Valley stores. With cities
cracking down on construction of new big boxes, infill stores may be attractive.

"There’s only so many big boxes," said Dan Gardiner, president of Phoenix
Commercial Advisors. "And in a lot of areas, particularly central Phoenix, it’s difficult
for a big box to find a location."

Jim Colson, Glendale’s economic development director, said the fast-changing
marketplace pressures cities to keep pace with retailers’ demands. He said 59th and
Bell was the victim of booming retail markets near Arrowhead Towne Center and the
Loop 101-Interstate 17 area but he insisted the area remains viable for development.

Colson said there’s no "fail-safe method" to guarantee stores won’t go empty. He
suggested insisting on store designs that are easily changed to new uses.

Mending weakest links

The Valley has been able to absorb empty stores in the past. Sears, Target and
Burlington Coat Factory snared some locations when Wards closed, and new chains
such as 99 Cents Only scooped up some castoffs. Bashas’ bought more than 20 of
the empty Southwest Supermarkets stores and will convert them to Food City
outlets. The chain also plans to convert empty ABCOs in Sun City West and north
Scottsdale to Bashas’ supermarkets.

But the struggling economy has thrown up twin barriers to that happening often:
More retailers are going out of business and many of those still operating are
clamping down on expansion.

"Right now, there are a lot of big boxes that are all of a sudden available," Gardiner
said.

Retailers looking to expand to the Valley may be candidates to absorb some of the
space. Garden Ridge, a Houston home-decor chain which has stores the size of
Kmart or House2Home, could grab some. The chain plans to expand into the Valley.

Kohl’s, the discount department store that may open eight to 10 stores in the Valley
next year, is eyeing new real estate, as is drugstore chain CVS. Furniture giant Ikea
is looking but it will need to build new because none of the empty slots comes close
to its 300,000-square-foot prototype.

Few retailers need the sort of space that the biggest empty stores leave. That
means those stores likely will be chopped into smaller pieces. But Judi Butterworth,
first vice president of retail properties at CB Richard Ellis, said that it can be an
agonizingly slow process finding tenants, writing leases, getting city approvals and
creating separate new storefronts for each tenant.

"Even at its best, you’re two years away from collecting rent," she said.

Brokers say retrofitting an old store can be nearly as expensive as opening a new
one. Converting movie theaters, with their sloped floors and high ceilings, can run
$20 a square foot, Gardiner said. That pencils out to $500,000 just to convert a
25,000-square-foot theater into a basic building that still needs the fixtures and
improvements of a new store.

Not all is bleak, however. Butterworth said the glut of space gives retailers who’ve
had their eye on Phoenix a chance to jump into the market at bargain rates. She
said landlords eager to deal are offering good deals and perks like tenant
improvements.

"It’s the same old thing, if it’s a great location, there will be takers," she said. "The
smart guys are out there looking now."

Reach the reporter at [email protected] or (602) 444-8972.

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