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Light Rail Draws Development

Light rail is more than just providing transportation for the people in Phoenix, it’s also providing a boost in the economy. One person that recognizes the value of Valley Metro’s light rail in downtown is Jeff Moloznik, vice president development with Red Development, the commercial real estate company behind CityScape, a 1.2-million square-foot urban project in the core of downtown Phoenix. It’s located at a light rail stop and features 600,000 square feet of office space, a 242-room hotel with a 224-room apartment building above, 200,000 square feet of retail space , 50,000 square feet of open space, and 3,000 below-grade parking spaces.

The project was kicked off in 2005 and broke ground in 2007 and they are just finishing construction on the apartments. When complete, as to the size and scale of the project, Moloznik said, “It will be just over $500 million.”

He says that the light rail line was one of the drivers for why this primarily retail development company chose this project for this location. “The fact that the city, state and county had made an investment in the light rail was one of the key drivers of an economic feasibility standpoint for us.” He continued, “If the city, state and county are going to invest that kind of capital and the public is going to invest that kind of capital into a system like this long term, this site would have unlimited potential, regardless of what economic situation we were presented with.”

He says he has a philosophy on light rail that he always describes it to people as a natural resource, somewhat like a river. It was used for transportation historically and around the river is where cities developed. “It’s not this revolutionary concept,” he stated. “We plan real estate around transportation infrastructure.

“In the suburbs it’s around freeway intersections; it’s just common.” He continued, “I don’t think of the light rail any different than that in terms of its effect in our business on the site selection process. It’s just the same logic that applies to master planning around freeway intersections.”

Adding to the attractiveness of the location is that with the light rail system, downtown is 15 minutes from the airport. “It’s so convenient and it’s so easy,” Moloznik said. “The nice thing about the light rail is that it’s got a predictability to it and someone that isn’t familiar with mass transit has that comfort level with connecting.”

He said they saw a large hotel off the light rail as a “cool thing” for the traveler. They come in, walk across the street and check into the hotel.

When Red Development was doing the site selection process, looking at the project, evaluating the long-term potential and risk, Moloznik said there are four general pillars that they always use and one was the light rail. “The fact that the city, state and county had made an investment in the light rail and it was completed in December 2008 was one of the key drivers of an economic feasibility standpoint for us.” He stressed, “It was such a level of investment, such a monumental infrastructure project it was one key component as to why we wouldn’t fail here.

“If the city, state and county are going to invest that kind of capital and the public is going to invest that kind of capital into a system like this meant long term, this site would have unlimited potential regardless of what economic situation we were presented with.”

When CityScape is complete, it will be just over $500 million, Moloznik said. “And that was through what was for us, the worst economic crisis.” The construction loan closed in 2009 and it was one of the largest private commercial construction loan closed in the country during that year. “We met with 70 banks in a period of 12 months trying to get a construction loan during that time and no one was loaning any money.

“We just know from everyone we met with that there were no loans closing in 2009. If not for our ability to speak to what the city, state and county had done in terms of downtown investment, it translated in our ability to close that loan.

“There was a lot of disbelief. There have been so many stories of dense urban planned projects that have never actually happened so what we had to overcome more than anything was the negative downtown bias in the community.”

Pre-Rail Downtown Phoenix

Out the window of Red Development, where the CityScape project sits, when they first came down there in 2004 to seriously look at the site, there was a surface parking lot. And as Moloznik said it was barely a surface parking lot. “You would maybe park 100 cars on it. A lot of parking stalls were sunk in and unusable.” He explained, “That was the reality of having an existing land owner just demolish the structures that used to be on the site and just pave over the demolished structure.

“It was just a bad situation.”

Moloznik said they entered into an agreement with the city of Phoenix to repair and renovate the parking structure in the ability to build retail space above it.

For Red Development this is the only asset in its portfolio that isn’t purely retail. Most of their projects have been suburban and urban retail projects. And while Molznik said they do have redevelopment in their portfolio, they had never done anything like this.

“What attracted us to this site is the same thing that has attracted us in other sites and it’s the deficiency of retail space.” He explained, “We’ve always tried to find opportunistic sites and for us, what’s something that everyone else has overlooked.”

In the Valley, downtown Phoenix was the most overlooked submarket from a retail standpoint. As Moloznik said, “The area was woefully deficient.” Some numbers to illustrate the point were in the 90 blocks of downtown there was about 400,000 square feet of retail. In San Diego there was about 2.5 million and in Denver, about 1.8 million. Moloznik said, “There was not another city that had gone through a recent rebirth that had less than a million square feet of retail.”

The first mission, he said, was to squeeze retail into this project and use everything else to underwrite the retail. “We knew if we could deliver the urban experience people have in other cities to our hotel guests, officer workers, apartment residents, we would compete with any other development in downtown because they have access to all these shops.” He added, “That’s the beauty of it. You walk out your front door and stumble into something to do.

“The idea that you could build a project like this in the middle of both light rail lines is pretty unique and special and it happens to be in the center of Phoenix. A pretty special spot.”

Being on the light rail line it gives people living there the opportunity of never having to get in their car. “We’ve got parking below-grade here and on the other block,” he said. “it’s not an excessive amount of parking.”

CityScape's Outlook

CityScape has a 97 percent occupancy rate and while that’s important, Moloznik said the success rate is determined on the per square foot retail sales. And of the project, it has some of the highest per square foot retail sales in the state. One restaurant in particular that is part of a portfolio of 50 restaurants is the highest grossing of those 50. “There are huge-volume restaurants,” he stressed.

People are using CityScape and the light rail and Moloznik said it’s the demand of the younger generation. “These are the trend setters for us and everyone else will follow. This is where young people want to be.”