Case Study

By the year 2003, the ten-acre subject property extending from Reems Road to Brookside Lane on the north side of Bell Road had been the subject of several potential development scenarios – none of which had come to fruition. The site was generally considered to be a good location for retail development, having over 900’ of frontage along Bell Road (the primary commercial corridor for the City of Surprise) and direct access to both Reems Road and Brookside Lane. In spite of this, the site had missed-out on any development opportunities during the previous real estate cycle, and now there were a number of challenges that continued to impact its potential for development.

1. Competition: While Brookside Village was located at the northeast corner of Bell & Reems Roads, there were three other corners that impacted its development potential. The northwest corner of the intersection had already been developed in 2001/2002 as a shopping center with a 60,000 square foot grocer, 14,000 square feet of shops, and a fast food restaurant pad. Now, the southwest corner was moving forward as a 13 acre shopping center that would also be anchored by a grocery store, and the first phase was already under construction. Commercial development was also pending on the southeast corner, which was to include an Eckerd pharmacy on the hard corner, a fitness center, a day-care center, a Sonic fast food restaurant, a bank, a Brakes Plus car care facility, and almost 40,000 square feet of retail shops and medical office space. As a result, the amount of additional retail and commercial space that could be supported at this intersection was quickly shrinking.
2. Use Restrictions: The Brookside Village property did not include the two acres at the actual corner of Bell and Reems Roads, which had been developed as a Walgreens pharmacy in 2002. As a result of this, Walgreens had been successful in placing use restrictions on the remaining 10 acres, which meant that there were various retail uses that would not be permitted within Brookside Village. Some of these restrictions included health food stores, greeting card sales, the sale of beauty and cosmetic products, etc., which had the effect of limiting the tenants and uses that would be permitted within the project.
3. Site Limitations: Aside from the fact that the primary corner of the project was occupied by Walgreens, the site’s ownership had allowed the construction of a public sewer line through the middle of the entire property, parallel to Bell Road, which limited where buildings could be placed within the project. Additionally, the depth of the site along Bell Road was 410 feet. This is an awkward depth since it is too shallow to incorporate an anchor tenant, and also not deep enough to accommodate retail shops in the back with pads for restaurants or a bank building along Bell Road. Conversely, the site was too deep for a simple, linear strip center.
4. “Forward Architecture:” The Planning and Development staff at the City of Surprise had become enamored with a particular configuration for the design and layout of retail projects in their community, requiring that most buildings be “pushed” all the way to the front of the site bordering the roadway(s), with the idea that the parking (and storefronts) would be in the back of the shopping center, hidden from the street. They called this “forward architecture,” because it pushed the buildings “forward” to the set-back line along the street. This became a development requirement that affected Brookside Village. Ironically, rather than enhancing the “streetscape” or creating a more attractive community (which was the objective of the “Forward Architecture” policy), this type of design strategy was not suited to an arterial like Bell Road, which was 6 lanes wide, plus a median, with a speed limit of 45mph. Additionally, this type of configuration handicapped tenants who wanted to open for business in the community since it resulted in a design where they essentially turned their backs to the street that carried the traffic and the customers that they needed to attract to their businesses. Taken to an extreme, this development pattern would create a wall of buildings on both sides of a street, with signage to identify tenants, and nothing else. While we argued against this type planning and its impact on the site plan, the City was adamant and had the power to enforce this type of development configuration.

Economics

The economics associated with the development of the subject property were challenging because the existing property ownership had a basis in the property that exceeded its current market value. The ownership’s best exit strategy that would not involve taking a loss on their investment was to participate in a joint venture partnership to develop the site. By entering into a joint venture partnership with Aurbis, the ownership would be able to share in a large percentage of the development profit and ultimately realize a profit on their investment.

Development

The preliminary development plan included a combination of condominium offices, retail shops, and two commercial pads to accommodate uses such as a bank and a restaurant. Incorporating an office component would side-step some of the competition from the developments planned on the other corners and allow the project to capitalize on the demand for office space in the trade area, which was growing.

While still in the pre-development stage, a large condominium office project located ¾ mile to the east was able to begin construction, and then another condominium office project broke ground across the street on Brookside Lane. Then, the competing project to the south announced its medical office/general office component, and yet another condominium office project was announced 1-mile to the west. Now the opportunity to develop a portion of the project to satisfy demand in the office segment was closing – based on the existing and proposed office projects, there would not be enough demand to support everybody’s projects.

Aside from the challenges related to competition and the economics, the property owner (who was now the equity investor) also had a strong desire to consolidate its real estate holdings and exit the market by the end of 2006. This placed additional pressure on the development team to find a successful development strategy, execute the plan, and then sell the project in order to meet the partner’s needs. There were discussions concerning the benefit of keeping the multi-tenant retail building within a new partnership that would continue after the rest of the project was sold, and arrangements were explored to maintain this possibility.

An aggressive push to market the site to other uses and tenants began to make headway in mid 2004. By early 2005 the project had attracted a large user that required a 30,000 square foot building for a motorsports sales and service facility. Then, after having been turned-down initially by the market’s dominant day-care operator, the day-care operator was persuaded to reconsider the site (especially since a competitor was planned to locate across the street with no visibility on Bell Road). The day-care operator eventually came back to the project with a requirement for their large 14,000 square foot facility.

The project was now quickly shaping-up with the two large users and some preliminary leasing commitments from tenants for the retail shops building. A new site plan for the project was developed and submitted for planning and zoning approval. Within short order, financing was obtained and the project was under construction by July of 2005.

Construction, Completion, and Disposition

Construction on Brookside Village moved quickly, and prior to the end of 2005 it was clear that the concerns of an over-built market were becoming more obvious. The competing retail projects on the other two corners of the intersection that were in the beginning stages of development were struggling. Nearby master-planned communities were experiencing excellent activity, selling homes faster than they could build them. Discussions with the various homebuilders’ sales staffs revealed that a large percentage (25-30%) of their new home sales were to investors who were anticipating that sales prices would continue to rise, giving them the opportunity to sell the homes they were under contract to purchase for handsome profits. Aurbis believed this type of sales environment was not sustainable. When combined, all these factors were clear indications that the market was overheated and heading for a serious correction.

In light of this, it was determined that maintaining ownership of the multi-tenant retail building would expose the partnership to significant market risks. With the imminent arrival of more and more retail space within a stone’s throw of the project, the proper course of action was to complete and sell the project as soon as possible.

Brookside Village was completed by September 2006 and the multi-tenant retail building was sold in November with 85% occupancy.   Predictions of a market correction proved to be correct, but its magnitude and severity exceeded the partnership’s expectations. Three of the nearby competing commercial projects ended up facing severe market stress and were impacted by foreclosures and/or bankruptcies. Within a year, it was obvious that the housing market was doomed. The pace of new-home construction slowed rapidly and then came to a standstill. While the multi-tenant retail building was initially successful and reached a 90% occupancy level, the severity of the economic downturn eventually took its toll. The multi-tenant retail building and its associated parcel of land eventually went back to the lender. In 2010 Aurbis unsuccessfully attempted to acquire the project from the lender. By 2015 the project had recovered and it once again enjoys high occupancy.