Phoenix Retail Commercial Real Estate Review and 2014 Forecast

“Like dreams, statistics are a form of wish fulfillment” – Jean Baudrillard

For most of us in the retail commercial real estate business in Phoenix, AZ the last 5 years were more of a nightmare than a dream. However 2013 was a very busy year and all signs are pointing toward a healthier and more vibrant retail market in 2014.

Retail Vacancy in the Phoenix Metro area continued it’s gradual decline and ended 2013 at 10.4%. This is down dramatically from the peak in 2010/2011 when vacancy nearly reached 13%, but not quite as healthy as the 2008 vacancy rate of 9.5%. We project the vacancy rate to return to single digits and should be in the 9-9.5% range by the end of 2014.

vacancy slide

Vacancy rates vary widely based on retail center type: Malls- 7.4% Vacant; Power Centers 5.5% Vacant; Freestanding Retail 6.1% and Shopping Centers 14.7%. These stats support the fact that during the last several years of the recession tenants, if able to, moved from lower quality neighborhood retail centers to Power Centers/Multi-Anchored sites as these higher quality centers dropped their rental rates and became more affordable. Now that the best spaces in these higher quality centers have been absorbed the attention of the retailers will refocus on the neighborhood retail sites and we expect the vacancy rate in the Shopping Center category to drop considerably in 2014.

Several submarkets struggled with vacancy during 2013, but we expect improvement in these areas for the reasons noted below:

Mesa– 15.8% vacant in 2013- this will improve dramatically due to the new Chicago Cubs spring training facility opening and the related boost that will come to North Mesa.

N. Phx/I-17 Corridor– Metrocenter Area- 15.8% vacant in 2013 – this area will continue to improve as Metrocenter Mall and the surrounding projects continue to attract new users to the submarket- For example- Conn’s Home Place opening in former Toys R Us space and the surrounding retail center will be redeveloped.

S. Scottsdale– 12.9% vacant in 2013- this trade area will continue to improve as the Skysong development reaches its full potential in the coming years.

In 2013 three of the strongest submarkets in Phoenix were: Surprise 6.7% Vacant; N. Scottsdale 6.8% Vacant; Peoria/Arrowhead 7.7% Vacant; Gilbert 8.0% Vacant.

Rental Rates

Rental rates continued to slip and ended 2013 at $13.94 PSF. We expect this slide to come to an end and finally begin to improve in 2014 as increased competition for available space at neighborhood retail sites finally allow Landlords to begin to push the rental rates back up after five years of declines.  Rental rates also vary widely by product type as indicated in the chart below.

rental rates product type

Retail Absorption & Construction

How far down did the retail market drop during the recession? Absorption shows this better than any other statistic. Absorption was a positive 9.3M SF in 2007… this bottomed out in 2009 at a negative 2.5M SF. Absorption has now returned to positive territory and in 2013 3.5M SF was absorbed in the Phoenix retail market. Limited retail construction has helped out over the last few years focusing the retailers in the market on absorbing existing space as only 1.6M SF of new space was delivered in 2013 and 59 of those retail projects were less than 50,000 SF in size.

new construction slide

Active Retail Tenants

Retail tenant activity picked up in 2013 with many of the available box spaces in the market absorbed by furniture, health clubs, natural grocers and discount retailers. We expect this trend to continue in 2014 although many of the A/B quality box spaces are now occupied and no longer available.

Big Box retailers

The retail shop space sector experienced good activity primarily driven by a strong growth in the Quick Serve Restaurant(QSR) segment. These food users were very active in the Phoenix metro area and they competed for many of the prime end cap spaces and former restaurants that were vacant in 2013.

shop retailers

Additional Retail Information

  • Holiday Sales were up 2.7% in 2013.
  • Online Sales rose 10% to $46.5B in Nov/Dec holiday shopping season
  • Restaurant Sales Forecast- Nations Restaurant News – AZ projected to see largest sales growth in the nation at 4.9% in 2014.
  • Adaptive re-use and infill development will continue to be areas of focus for developers and tenants in the Phoenix market.

Link to retail review & forecast slide show

Matt Milinovich

Partner – Strategic Retail Group

602.778.3830 | mattm@srgaz.com

*retail market statistics supplied by Costar Group, Inc.

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