The Broader View
Following a lull in the first few months of 2014, the Greater Phoenix retail market strengthened in the second quarter. Tenants stepped up leasing activity, vacancy tightened and rents ticked higher. The positive retail real estate trends should continue in the coming months, buoyed by annual retail sales growth in the 7-8 percent range. Assuming consumers remain active and interest rates stay low, retail sales should continue to accelerate. While the retail climate is improving, there is still room for growth. The driver that would have the greatest impact on the local retail market would be a more favorable employment market. The pace of employment growth in Phoenix is outpacing the national rate, but employers are adding jobs more slowly than in the past two years. More robust employment gains are forecast for the second half of this year and 2015, and this economic growth will fuel further strengthening in the local retail market.
Current Conditions
The Greater Phoenix retail market bounced back in the first quarter, with net absorption of nearly 395,000 square feet recorded. This followed negative net absorption of approximately 103,000 square feet in the first quarter 2014—the first quarter of negative net absorption in nearly three years. Over the past year, net absorption has totaled nearly 1.5 million square feet, outpacing the delivery of new space in that time by more than 1 million square feet.
Vacancy declined 20 basis points in the second quarter to 10.6 percent. This marked the 10th time in the past 11 quarters that vacancy has tightened and the rate is now 70 basis points lower than one year ago. Vacancy has trended lower throughout much of the Valley, particularly in suburban locations. Some of the most significant improvements over the past 12 months have occurred in the Scottsdale and North Scottsdale submarkets, where vacancy has been on the decline over the past two years. The only areas where vacancy has risen over the past year are the Downtown Phoenix and Airport Area, which combine to account for less than 5 percent of total retail inventory in the metro area.
Rents are beginning to turn a corner in Greater Phoenix. Asking have ticked higher in each of the past two quarters, reaching $13.81 per square foot in the second quarter. Despite the recent gains, the current figure is still 1.1 percent lower than one year ago. Looking ahead, asking rents will likely remain near current ranges in the coming months, before gaining more sustainable momentum when the overall vacancy rate dips below 10 percent.
Despite a second quarter dip, sales velocity in the first half of this year is down less than 5 percent from the same period in 2013. The median price in shopping centers sold year to date is $109 per square foot, up 34 percent from the 2013 median. Part of the rise in prices and decline in activity is a function of fewer distressed properties being sold. Performing properties have accounted for approximately 75 percent of closed deals year to date; in recent years, distressed properties made up nearly 50 percent of all transactions. Average cap rates have remained fairly stable in the low-8 percent range since 2013.
