Phoenix Retail Real Estate Endured Difficult 2020

Credit: Phoenix Relocation Guide

The retail real estate market was arguably hit hard by the COVID-19 pandemic, but Metro Phoenix endured the challenges more successfully than most markets. The metropolitan area posted positive net absorption in 2020 and rental rates remained healthy during the difficult year.

During 2020, Metro Phoenix experienced incredible population growth and job growth that helped shore up the retail marketplace. Maricopa County ranked #1 in Talent Attraction, according to EMSI’s 2020 Talent Attraction scorecard in December 2020. While unemployment hit an all-time high of 12.5 percent in April, the area has recovered nearly 79 percent of the initial jobs lost. Pressure to stay home during the pandemic, employment at Food and Beverage Stores increased from April through November 2020 by an average of 4.24 percent compared to 2019. The Retail Trade supersector experienced increased employment every month since May but remains down 1.38 percent since November 2019.

Multiple national company closures and bankruptcies caused significant vacancies in Metro Phoenix. Fourth quarter 2020 ended with 64,036 square feet of negative net absorption, yet posted positive net absorption of 215,692 square feet during the entire year. The East Valley and West Valley submarkets led fourth quarter with positive net absorption of 93,672 and 70,760 square feet, respectively. North Phoenix experienced difficult move-outs by JC Penny and other tenants at Christown Spectrum totaling more than 250,000 square feet in 2020. Another significant closure in the Valley was Stein Mart vacating three locations totaling 107,000 square feet.

Vacancy of retail space increased 20 basis points over the quarter and 60 basis points year-over-year to a current rate of 7.9 percent. Leasing activity gained momentum during fourth quarter 2020, with the number of new deals increasing 11.9 percent over-the-quarter. The West Valley submarket delivered more than 200,000 square feet of new product in 2020 and had the largest decline of vacancy year-over-year of 70 basis points since 2019. The Metro Phoenix area added 1.1 million new square feet of retail during 2020. Thirty new properties boasted an incredibly low vacancy rate of less than 6.5 percent. The largest amount of vacant space is located at The Watermark in Tempe.

New trends in retail leasing include a shift on the tenant side to accommodate the demand for carry-out options at restaurant properties without drive-thru lanes. Fast Casual restaurant chains, such as Chipotle, are creating new mobile pick-up lanes.

Despite increased vacancy rates, rental rates for retail held steady in Metro Phoenix. Rates increased 0.68 percent year-over-year and 0.82 percent over-the-quarter ending at $14.73.

This demonstrates a slight improvement over third quarter 2020. South Mountain, Northwest Phoenix and Downtown clusters experienced the largest year-over-year asking rate increases. The highest rental rates at the end of 2020 were found in Scottsdale and North Scottsdale, despite these submarkets experiencing rental rate declines during the year.

Investment Sales volume of properties larger than 10,000 square feet gained more confidence in fourth quarter 2020. Volume increased 49.1 percent from the third quarter to $273 million in sales, marking the best quarter of 2020. Fourth quarter in 2020 was far outpaced by the final quarter of 2019, declining 46.2 percent year-over-year. The largest sale of the quarter was Yam Properties’ purchase of Pima Crossing from Karlin Real Estate. This seven-property purchase totaled 246,177 square feet for $51.5 million. Two Walgreen’s drug stores landed in the top five transactions in per square foot price, commanding $630 and $485 per square foot. A large portion of retail properties sold during the year were projects with drive-thru lanes because of the resilience and increased demand for this type of product during pandemic closures.

Despite the setbacks of pandemic closures, the Greater Phoenix retail market remains optimistic. Many regional tenants are seeking expansion and relocation to Arizona. As the area attracts new retailers and expansion of existing ones, the market is beginning to see old mall space converted to unique new purposes. Some older, large mall spaces may be converted into schools, grocery stores and/or co-working office space usages.

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