As we approach the fourth quarter of 2016, the Phoenix retail market is experiencing its lowest vacancy rates since 2008. Vacancy has dropped to just under 9 percent, a slight improvement from the start of 2015, while rental rates have climbed 0.8 percent to $14.53 per square foot. Positive economic indicators such as population growth, a favorable job market, and new-home construction are all contributing toward a healthy retail market in Phoenix.
Consumer confidence continues to rise and demand for retail space has become stronger than previous years. Vacant spaces in core locations are being absorbed by national, regional and local retailers as well. Anchor space activity continues to be geared around value-oriented retailers, fitness users, family entertainment concepts and alternative uses. Quick-serve restaurants are the most active tenants in the market. These concepts include Panera Bread, Starbucks, Café Rio, Pieology, MOD Pizza and Jimmy John’s. In addition, new health-conscious restaurants are starting to look at Phoenix for store openings in 2017, such as Ahi Poki, Eat Fit Go, Grabba Green and Nekter.
Supermarkets are driving new development in core trade areas of Phoenix, as well as in high-growth markets. Fry’s Food & Drug has started construction on seven new stores this year, a $260 million investment that is forecasting more than 2,000 new jobs. Sprouts and Natural Grocers have both opened several stores this year as well. Developers with well-positioned grocery-anchored centers are experiencing high demand for shop space tenants and drive-thru users, which is pushing rents higher.
Recent store closures like Sports Authority, Sport Chalet and the Roomstore are the latest junior-anchor casualties and remind us that not all business models are healthy and many remain questionable. E-commerce continues to pose a threat to big box retailers as sales are impacted by cyber-shoppers.
Investment sale activity in 2016 has spiked 36 percent from the first half of last year. The median price of almost $140 per square foot in 2016 has increased by about 23 percent from last year. Cap rates have compressed to about 7 percent. This year has already seen two all-time record per-square-foot sales for retail centers at $601 per square foot for a Sprouts-anchored center in North Scottsdale and $634 per square foot for a 22,000-square-foot mixed-use property in Scottsdale.
The Phoenix market is poised for a strong finish to the year and well positioned for increased retail activity in 2017.
— By Brian Polachek, First Vice President, SRS Real Estate Partners. This article first appeared in the September 2016 issue of Western Real Estate Business.