In Arizona, Plans and Construction for New Movie Theaters

High growth in Southwest as movie theater companies expand

Last June, Harkins Theatres, an Arizona-based movie theater chain, made its debut in California, opening with a state-of-the-art, 16-screen cinema complex in a mall in Moreno Valley. Harkins' arrival led to the closure of an eight-screen facility owned by UltraStar Cinemas at the edge of the mall.

Soon, San Diego-based UltraStar will return the favor. The company, which owns 100 screens spread across a dozen locations in southern California, is making its first venture into Arizona with a theater in the Phoenix suburb of Surprise. The theater is expected to open in 2008.

But that's just the start: UltraStar has signed a deal with shopping center developer Glimcher Ventures Southwest, headquartered in Phoenix, to build another half-dozen theaters in Arizona over the next three years. This in a marketplace owned for years by Harkins. And UltraStar isn't alone - at least three other theater chains are considering sites in Surprise, a town of 120,000 that until recently had no movie houses at all.

"Harkins is a good company and I respect them a lot," says Alan Grossberg, president and CEO of UltraStar, which he founded in 1998. "But Arizona is growing very fast right now and we want to participate in that growth. The old boundaries in this business are changing."

New expansion era

The theater industry, which enjoyed a construction boom in the mid- to late-1990s before overbuilding forced at least a half-dozen overextended chains into bankruptcy in 2000 and 2001, is back on an expansion binge. Shopping center owners, who had grown wary of cinema tenants prone to dump leases unexpectedly, are back courting major exhibitors.

Facilities erected just a decade ago, at the dawn of the stadium seating era, are suddenly looking aged and vulnerable again as the industry morphs to outsized I-MAX screens, digital projection technology and upscale amenities like bars and restaurants on premise. Competition has never been more ferocious.

Movie studios once routinely granted an exhibitor exclusive rights to show a newly released film within a protected radius of 10 miles or more in most suburbs and small towns. A few years ago that radius had shrunk to three miles. In the next couple of years it could shrink to nothing as theater chains set up for business across the street from each other, as Harkins did in Moreno Valley. Some experts foresee a day when theaters compete against each other just as Target and Wal-Mart do today, cheek by jowel.

Right now every chain is jockeying for the best sites. Harkins, which opened just one new theater as recently as 2002 and none in 2003, is opening a half dozen locations this year and another five or more next year. "This is our most active period in a long time," confirms Michael Bowers, president and chief operating officer of Harkins, which is based in the Phoenix suburb of Scottsdale and family-owned since 1933.

Theaters cost an average of some $1 million per screen, including the land, to build. Bowers is negotiating his way to expansion by taking advantage of shopping center developers' willingness to finance construction through build-to-suit deals. A 14-screen complex going up in the new Park West lifestyle center in the Phoenix suburb of Peoria, developed by General Growth Properties Inc. of Chicago, is being built in that manner.

"Shopping center developers viewed all theaters as bad investments for a long while. Now they recognize that theaters can be an important part of a center's success," Bowers says.

With older theaters being taken out of service in many places, the statistics on industry growth only tell part of this renaissance story. In 2006, according to the National Association of Theatre Owners in Washington, D.C., the number of movie screens in service in the U.S. rose 2% to 38,439.

This content continues onto the next page...