Absorption is a Priority in Phoenix's Retail Market
The boom times of retail development in Metro Phoenix, which started in the mid-‘90s, have long been considered the “good ol’days.” The market peak of 2007, when 11.2 million square feet of new retail was delivered, was followed by development plummet. Between 2010 and 2012, the region averaged less than 1 million square feet per year. Phoenix’s retail recovery began in 2011, and has experienced a steadily increasing demand for existing space. Though few are singing “Happy Days are Here Again,” times are looking up. Retail and restaurant sales are increasing in Phoenix. This, combined with an availability of quality retail locations at attractive rents, has inspired national and regional retailers and restaurants to increasingly think about Phoenix when they’re looking to expand.
Much of the demand for new retail and restaurant space has occurred in mature areas since the start of the recovery. As reports of new home sales increase in the outlying areas, however, some of the troubled retail centers that were built between 2006 and 2008 are experiencing an increase of activity.
Retail vacancy rates dropped in the past nine months by almost 1 percent, settling at 10.5 percent for the third quarter of this year. The demand for A-grade product has been the strongest.
Established retailers like Marshalls, TJ Maxx, Burlington Coat, Ross, Sprouts Farmers Market, Whole Foods and Nordstrom Rack have all recently opened in the area. Newer retail entries to the market include Conn’s Electronics, Winco Foods, Living Spaces (133,000-square-foot showroom) and American Home Furnishings (179,000-square-foot showroom and a 500,000-square-foot warehouse).
While a majority of the new stores are opening in second-generation spaces, Winco, Living Spaces, American Home Furnishings and two outlet malls totaling almost 700,000 square feet have been developed in the past 18 months. The entertainment category has picked up as well with recent or planned openings by Top Golf, Ifly, AMC Theaters and Main Event.
Demand continues to be red hot in the quick-service food category. Smash Burger, Potbelly, Jersey Mikes, Dunkin Donuts, Kneader’s, Café Rio and Starbucks are expanding aggressively. New store openings have also come from Sleep America, Mattress Firm and Great Clips.
Limited retail development near term is planned. Other than Winco, there has been virtually no new grocery-anchored centers or traditional neighborhood centers developed in the past three years. Current market retail rental rates do not permit much new traditional retail development, with the exception of a limited number of retailers. Phoenix may never see retail development like it did between 2004 and 2007 when the retail base grew by more than 20 percent, but development will return.
As the Phoenix economy continues its expected growth, and quality retail product is absorbed, rents are predicted to see a slow but steady increase leading to new retail development. The real base supporting new retail, though, will come from new home development, which follows job growth. A recent study by Moody Analytics shows that Phoenix is poised for change. According to the study, Phoenix will lead the nation in job growth over the next five years, at 3 percent. It also projects an economic growth of 4.6 percent, and an income growth expectation of 3.6 percent for the same period.
No one is singing “Happy Days are Here Again” in Phoenix right now, but the music may have quietly started to play.
— Dan Gardiner, president and co-founder, Phoenix Commercial Advisors