The Phoenix Retail market has turned the corner and is now finally, on the path to recovery. Although the recovery may be slow and steady, there is relief in the market that we’ve reached the light at the end of tunnel… & it has become clear that it’s not an oncoming train.
Absorption Up Trend In-Place – Rents starting to Follow
The beginning of the recovery has been long awaited and is certainly welcomed news for Phoenix retail market participants. After four long years, which featured significant vacancies and declining rental rates, Metro Phoenix retail has now experienced five quarters in a row of positive absorption. The positive trend is now firmly in place. Further, healthy leasing activity in the most recent quarter (Q4 2012), resulted in 1.4 million square feet of net absorption in that quarter and 2.6 million for full year 2012. While not up to the lofty levels that we experienced in 2006/2007, the Q4 2012 absorption was the strongest since 2007. Average rental rates in the market, which tend to lag absorption, are still drifting down albeit at a slower rate than they were over the past four years. Average quoted rental rates, for all retail product types, was $14.20 per square foot at the end of 2012, which was the lowest since the recession started. This is not a surprise as quoted rental rates followed absorption into the recession and it will follow the market out as well. However, in the most desirable submarkets and/or in some “A to A+ Core” properties, rental rates have reversed course and have started moving up. Rental rates in “B” and “C” submarkets will bottom out this year as they too begin their move back up.
Vacancy Improving and will be helped by Limited New Supply Coming To Market
Metro Phoenix’s vacancy rate decreased in the fourth quarter to 11.6%, down from 11.75% in the prior quarter. Although improving, this level of vacancy is still significantly higher than the longer term market average of about 7%. However with an improving job market, increasing home values, and a better economy, demand for retail space will continue to increase. We expect 1.9 Million square feet to be absorbed in 2013 leading to a year-end vacancy rate of 10.9%. Furthermore, with a very limited supply of new space in the pipeline that will be delivered in 2013 or 2014, the continued increase in demand for retail space existing will continue to help reduce the market vacancy rate.
Investment Sales Finished 2012 Strong – Pricing Continues to Improve
Phoenix continues to receive increasing demand from shopping center investors whether it’s for value-add or stabilized type product. As a result of a strong performance in Q4 2012, total retail center sales volume was up in 2012 as compared to 2011. With 109 retail sale transactions, for a total dollar volume of $865.4 Million and an average price per square foot of $113.52, sales volume in 2012 surpassed 2001 numbers which included 101 retail sale transactions for a total dollar volume of $851.4 Million and an average price per square foot of $129.43.
Cap rates are continuing to compress as low interest rates and increasing demand from investors’ seeking a reasonable return on their capital is creating growing demand for incoming producing property. Average cap rates for multi-tenant shopping centers sold through the first nine months of 2012 were 8.23% which is down from 8.51% in 2011. However, this number is somewhat misleading for the broad market as it is weighted disproportionately lower by the sale of a few larger class “A” properties that traded in the 5.5% – 6.75% range. The overall range in cap rates for various product types is notable as they ranged from 5.5% for the most desirable class “A”/core properties to 10%+ for class “C” product in less desirable trade areas. Also, demand for good credit, single tenant net leased deals has been especially strong with those deals trading at historically low cap rates. Supply and demand is driving the single tenant net leased market investment market. With the amount of capital chasing these deals, due largely to low interest rates, combined with limited new supply coming to market cap rates are being compressed. Cap rates for both multi and single tenant retail in Phoenix will remain near current levels as investors continue to seek out investing alternatives while, at the same time, keeping a close eye on the economy and interest rates.
For additional information contact:
Sr. Vice President Investment Sales