By Ryan Sarbinoff, First Vice President, Regional Manager, Marcus & Millichap
Retail metrics in the Valley have soundly improved after enduring some turbulence during the health crisis. Through the first nine months of 2021, net absorption totaled roughly 1.6 million square feet, putting the market on a trajectory to record its highest annual count since 2017. More than half of that absorption was logged between July and September, indicating that momentum is building.
Phoenix retail market is in a much stronger position heading into 2022
Several factors are driving the uptick in retail space demand. Metro employment surpassed the pre-
pandemic peak by August 2021, spearheading consumers’ ability to spend. At the same time, more seasonal residents are returning to the Valley after many chose not to travel in 2020, while tourism is also progressing.
According to the City of Phoenix Aviation Department, passenger counts at local airports increased by 67 percent year-to-date through September relative to the same period last year. All these underlying forces benefit retail spending, and ultimately fuel tenant demand.
Ryan Sarbinoff, First Vice President, Regional Manager, Marcus & Millichap
Longer-term outlook is robust, piloted by growth trends
Phoenix is expanding at a swift pace, with the metro’s favorable climate, quality of life and job availability attracting new residents. From the beginning of 2022 through 2030, the market’s household count is projected to grow by 22 percent, almost three times the national pace. A larger pool of residents translates to higher levels of spending, which encourages retailers to enter or expand their market presence.
Recent lease signings exhibit the confidence that many firms have in the future of Phoenix. Experiential retailers, one of the most impacted segments during the pandemic, have been responsible for a handful of new commitments. Urban Air will move into a 50,000-square-foot spot in Gilbert next October, while EOS Fitness will occupy a 40,000-square-foot space in Queen Creek next May. Traditional retailers have been leasing properties as well, with Dick’s Sporting Goods and Sportsman’s Warehouse both moving into 30,000-square-foot-plus facilities this past September.
Bifurcated landscape impacts investment decisions
The rebound from the pandemic differs across market areas and retail segments, prompting many investors to adjust their strategies. As of the third quarter, multi-tenant asking rents were down year over year due in large part to sluggish demand for space in large malls amid low foot traffic. Meanwhile, single-tenant rates surged almost 7 percent during that stretch as necessity retailers and drive-thru-capable shops thrived. As a result, single-tenant buildings accounted for more than 60 percent of deals completed during the second and third quarters. This is compared to a nearly even split during the same six-month period in 2019.
Despite the slight shift in preferences, average sale prices have grown in both segments. In terms of submarkets, East Valley and Scottsdale comprised roughly half of multi-tenant deals and one-third of single-tenant trades over the past six months ending in September. These two submarkets, along with Downtown Phoenix and North Scottsdale, had the most impressive vacancy compression in recent quarters.