Market Reports

— By Dave Cheatham, President, Velocity Retail Group and X Team Retail Advisors — Phoenix’s retail market has rebounded post-pandemic and is now considered a winning bet, along with industrial and multifamily. The market has benefitted from surging consumer demand, population expansion and a robust technology industry, largely fueled by accelerated growth in the chip manufacturing sector. Strong and positive economic performance has established a foundation on which retailers have built success across the Valley of the Sun. There are challenges, to be sure, which range from interest rate hikes and rising inflation to chaos in the capital markets and reduced investment transaction volume, in addition to increased construction costs. New construction has been limited, as evidenced by the fact that no Target, Lowe’s or Home Depot stores have been built in the Valley since the recession. That appears to be changing as plans for big box stores that had been idle for a decade are shifting to expansion mode once more. Second-generation space is in high demand due to the higher costs of building new, standalone stores. Market indicators are trending upward for the retail sector. Vacancies are at a record low, demand remains high and rents are continuing …

— By Brian Polachek, Senior Vice President, SRS Real Estate Partners — The holiday season is upon us, and as 2023 draws to a close the real estate community turns its focus towards the future, particularly to what 2024 holds. Let’s look at recent developments and future expectations of the Phoenix retail market, a sector that has shown remarkable growth and resilience. Phoenix’s retail landscape has experienced a significant growth period, primarily due to a combination of factors including substantial population increases, strong consumer spending, minimal store closures and limited new retail space has been built. This surge in growth is largely attributed to Phoenix’s rising appeal as a place to live as well as a business-friendly environment. The influx of new residents and businesses has created a robust consumer base, driving up spending and providing a diverse market for retailers. Remarkably, the Valley has seen positive absorption for nine consecutive quarters, totaling 4.2 million square feet in the past year alone. As a result, Phoenix has become one of the leading U.S. markets in retail demand, bringing vacancy rates down to a record low of 4.5 percent, according to CoStar. This ongoing demand signifies not only the market’s current …

Ryan Desmond, partner, Western Retail Advisors in Phoenix Metro Phoenix’s population grew faster than any other major U.S. city between 2010 and 2020. By 2021, the Valley’s 1.48 percent population growth continued to far exceed the country’s .01 percent growth — the slowest annual growth rate in our nation’s history. For a community that has historically been criticized as being over-retailed on a per-capita basis, this has injected tremendous strength into the local retail market. Today, Phoenix ranks as a hotspot among U.S. cities for retail absorption. According to CoStar, Phoenix had absorbed 4.1 million square feet of retail space year over year — the strongest absorption since the start of the Great Recession — by the start of the second quarter in 2023. This reduced the market’s overall vacancy rate to 5 percent. This is impressive, but it doesn’t reflect the increased gap between demand for Class A product and all other retail classes. Much like the flight to quality happening in the office sector, tenants looking for retail space in metro Phoenix want excellence: high-traffic locations in a growth submarket with compelling demographics. As a result, we have seen more metro Phoenix Class A retail properties reach full …

— Kyle Davis, Sales & Leasing Agent, Commercial Properties Inc., a CORFAC International Firm — A market cooldown is likely in 2023 as interest rates rise and the investor pool becomes more cautious to some degree. I believe many investors recall lessons from the Great Recession and are not as significantly overleveraged, which means the effects of this market correction may not be nearly as drastic. Phoenix’s retail market also has some bright spots. The area’s retail net absorption was positive at more than 1.5 million square feet, with vacancy rates down to 5.1 percent at the end of the fourth quarter of 2022. This is compared to the 1,071,783 square feet of absorption and 6.6 percent vacancy rate a year ago. Many look at factors like unemployment, interest rates, housing starts, etc., to speculate about the coming market. What will impact our industry most directly, however, is how the lending market reacts to these indicators. As with 2008 and 2020, creditors may look at the same data points as investors and lower their risk profiles significantly faster than investors are able to counteract. There will be many commercial property loans set for refinancing in the near or upcoming future, as commercial property …

By Dave Cheatham, President, Velocity Retail Group For decades, Arizona’s housing and commercial real estate industry have benefitted and fed the state’s robust gains as population grew. Even during the pandemic, Phoenix welcomed more than 140,000 new residents fleeing more expensive, crowded coastal cities for what many deemed an improved quality of life.  As we know, retail follows housing. Phoenix’s housing market has restarted, and these new markets will need retail to serve them. It has taken 15 years for retail vacancy rates to return to pre-recession levels in Phoenix. In the second quarter of 2022, the direct vacancy rate for retail properties declined to 6.7 percent. West Phoenix, Northwest Phoenix and Scottsdale are currently the strongest submarkets, drawing residents to fast growing cities and towns. I see retail expanding as residential development at the edges of the city continue, and agricultural land is transformed into subdivisions. With inflation shrinking household budgets, consumers are making intentional choices on where they drive and what they buy. Those retailers who are large-space occupiers will continue to focus on delivering value and lower prices to their customers. Shopping center development has been anemic in Phoenix in the past decade, as those that lease big …