Mike Duffy, SRS Real Estate
The Phoenix retail market ended 2014 on a promising note, with vacancy rates dipping below 10 percent for the first time since the Great Recession ended. It also experienced net absorption of more than 2 million square feet of retail space. Expectations for 2015 are positive, and continued improvement is anticipated, albeit slower than we might have hoped. While many segments of the market have improved, lackluster job growth and housing sales have slowed the recovery. However, both areas show signs of improvement for the coming year. Forecasts estimate Phoenix will add about 70,000 jobs in 2015, bringing the total number close to the pre-recession total. The demand for single-family housing should improve with the continuance of low interest rates, job growth and investor interest. The market is finally showing signs it is on the upward path to recovery.
Leasing activity for Class A space remains strong, while rental rates are on the rise. We have seen marked improvement in some areas like Scottsdale where rates for Class A space in centers like The Marketplace at Lincoln & Scottsdale and Hilton Village are approaching or surpassing $40 per square foot, and where vacancy rates are below 6 percent. In contrast, transitional infill areas with B and C product like Mesa struggle with vacancy rates near 14 percent to 15 percent, and rental rates at $10 to $12 per square foot. Many of the high-vacancy centers in these transitional areas may be repurposed or redeveloped into multifamily, office or other uses as the market improves and evolves.
Good investment opportunities are becoming scarce, with a limited number of stabilized properties available. The high-vacancy, value-add opportunities have been fairly picked over, with little or no retail value to add to these properties. We may soon see an increase in the number of properties on the market, however, as more than $1 trillion of CMBS loans mature nationally in the next few years. Many of these retail properties in Phoenix are over-leveraged. Owners may not be able to make the capital infusion necessary to refinance, and many may be forced to sell. Cap rates are currently averaging 8 percent marketwide, but good product will fetch a substantially lower number.
New construction deliveries have been well below historical market averages of 4.8 million square feet per year. The market received a little more than 700,000 square feet in 2014. This year looks similar, as just 425,000 square feet is projected to be delivered in the first two quarters. Many of the moth-balled projects from the pre-recessionary era will start to breathe life again as rents climb in the primary areas. However, it will be several years before the Phoenix retail market is back to normal construction activity.
This may not be the breakout year for the Phoenix retail market, but slow and steady growth and redevelopment will set a good foundation for the future.
By Mike Duffy, Senior Associate, SRS Real Estate. This article originally appeared in the February 2015 edition of Western Real Estate Business magazine.