Phoenix-area mall up for grabs

Real Estate Alert, June 2, 2004

Two pension funds are marketing a Class-B mall in suburban Phoenix that appears to be recovering from an onslaught of competition.

The 1 million-square-foot Fiesta Mall, located in Mesa, is expected to fetch about $135 million. The owners, Alaska Permanent Fund and Ohio School Employees, tapped Eastdil Realty for the listing.

When it was built in 1979, Fiesta was one of the first large retail properties in the area, which is 10 miles east of Phoenix. Since then, residential growth has boomed, spawning the development of a half-dozen competing shopping centers.

Two years ago, Macerich opened Chandler Fashion Center, which cut sharply into Fiesta's business. Fiesta's inline sales dropped to a low of $360/sf, from $459/sf. Now, however, the mall is rebounding, with sales up to $375/sf. Annual net operating income is about $10.5 million. At the expected sales price, the mall would produce an initial yield of about 8%.

The two-level mall serves a middle-income community with household incomes averaging $50,000 a year. It's located near US Highway 60, the major east-west route in Mesa. There are four department-store anchors: Dillard's, Macy's, Robinsons-May and Sears. In-line space, divided among 135 stores, is 95% occupied.

In March, two trade groups recommended strategies for boosting the mall's sales. The report, by the International Council of Shopping Centers and the International Economic Development Council, was commissioned by the City of Mesa, which saw its tax revenues from the mall decline between 2000 and 2002.

The report noted that after the opening of Chandler Fashion Center, sales plunged by 40% at three of Fiesta's four anchors, while in-line sales fell 22%. It characterized competition from the handful of nearby centers as "relentless." The other competitors include Superstition Springs Mall, which is 10 miles east of Fiesta, and Arizona Mills, which is six miles west. In addition, Kimc0 Realty and Vestar are each developing centers that will be within four miles of Fiesta.

The report also pointed out that the reciprocal easement agreements once in place among the owner, anchors and inline tenants have expired. Such agreements typically cover the maintenance of a mall's common areas and outline covenants that obligate the anchors to stay in business at that location. With the expiration of the agreements, the anchor retailers are free to move elsewhere.

Nonetheless, mall sources said Fiesta Mall is a resilient property in a growing market, with significant re-development potential. Mesa's population has soared by 38% over the past decade.

Alaska Permanent Fund is advised by L&B Realty Advisors, while Ohio School Employees is advised by J.P. Morgan Fleming. Fiesta was marketed for several months in 2000 but no acceptable offers were received.