Retail & Restaurant Development: It Ain’t Getting Any Easier

By Rebekah Morris for AZBEX

A packed house was present on Wednesday, September 13, 2023, in Scottsdale to hear all about the Valley’s hot Retail & Restaurant development projects from some of the most active players in the space:

  • Walt Brown Jr., Founder, Diversified Partners, LLC
  • Angie Grendahl, Director of Development, Thompson Thrift
  • Joshua Simon, Founder & CEO, SimonCRE
  • Amy Malloy, Managing Partner, Evolve Ventures, LLC – Moderator

The experts are in agreement the level of tenant activity in the space is ‘off the charts’. Simon stated that rental rates have increased 30% in the last 24 months. Grendahl stated that while not as many offers are coming through, the ones that do are of higher quality. All pointed at various times during the discussion to the high cost of capital, risk of time delays, and city regulation as some of the biggest risks to bringing new projects across the finish line. ‘It ain’t getting any easier’ was a prevailing theme of the discussion.

Current Projects from Diversified Partners, SimonCRE and Thompson Thrift

Diversified Partners currently has $400M in active development projects across the state and another $60M – $70M in out of state developments. Brown was excited to land the first new Walmart and Sam’s Club project in this cycle. Additionally, Diversified Partners is working on 6-7 car dealerships in East Mesa and small retail developments across the Valley.

Grendahl provided a quick rundown of Thompson Thrift’s current commercial projects including a 17-acre parcel in Surprise that encompasses 12 pads. Thompson Thrift is also very active in the industrial and multifamily sectors which were not part of this discussion.

Simon similarly was excited to share that he is bringing a new Target to the Valley, the first new store in many years to come to fruition. His well-known developments of Village at Prasada and Prasada North in Surprise are well documented. He also has recently announced Elm Street at Surprise City Center.

Lending Environment Tightened Quickly, Will not Soon Release

The biggest concern to the panelists appeared to be the availability of capital to complete their projects. Brown stated that the bankers he is dealing with are in the mindset of ‘Survive until 25’. Simon stated that the lending pipeline has dropped by more than 50% YOY. “The pipeline will be more troubled next year” he went on to add. Beyond the availability of lending, banks are now requiring significant deposits for the duration of the loan term for the deals they are doing. Grendahl took a positive spin on the tight credit markets saying that ‘if you have money, there are real deals to be had. Tenants are looking for space; large-scale development deals can be done.’

Increased equity requirements and fewer financing options are leading to new types of deals as well. Simon indicated that he has been invited to be ‘rescue capital’ for two projects so far and expects there to be a significant increase in the market of troubled deals and alternative financing companies offering capital at a very high rate.

Brown described a recent smaller project where the lender was offering unfavorable terms. Eventually, they just paid cash for everything and ‘kicked the lender out’. He indicated that it is likely not the last time that will happen because “Cash is King.” As a result, Brown and his team are spending an increased amount of time pursuing funding and cultivating banking relationships.

City Reviews & Regulation Cause Angst

City reviews and ordinances targeting restaurant development in particular were also brought up by the panel as a cause for concern. Malloy said it best when she stated ‘Developers respond to the market.’ Cities are increasing risk of development when they try to regulate a specific type of project like restricting the amount of drive-thru restaurants. Brown went on to say there is a disconnect between what residents want and what cities are encouraging. All the panelists are parents and echoed the same thought – we need and use drive-thrus!

Multiple city reviews by staff are a sure-fire way to slow down development which is detrimental to every deal.  The panel lamented the multiple reviews, often with new comments coming after rounds 2 and 3.

Phoenix is the Best Place to Develop Despite the fact that there are No Easy Sites Left

The panel wrapped up the lively discussion with their take on the outlook for the market. Despite lending challenges, and struggles with city regulation and review, the Phoenix market is experiencing strong demand for new retail development.