By Matt Harper, Senior Vice President of Retail, NAI Horizon
Arizona relies heavily on a robust tourism industry. When COVID-19 hit, it was a massive blow to the hospitality and retail sectors. Coming out of the pandemic, however, the Metro Phoenix retail sector has shown great resiliency, especially mom and pops.
Phoenix ended the fourth quarter of 2020 with a positive net absorption of 124,330 square feet of retail space. With negative net absorption in the second and third quarters of 2020 – the devastating months of the pandemic – Phoenix ended the year at negative 373,715 square feet. This was compared to an overall positive net absorption of more than 1.1 million square feet in 2019.
Matt Harper, Senior Vice President of Retail, NAI Horizon
Phoenix vacancy rose slightly in the second quarter of 2021 from the previous quarter, coming in at 7.7 percent and 7.5 percent, respectively. Net absorption for the second quarter was a negative 63,558 square feet, down from a strong first-quarter 2021 of 466,714 square feet. The average triple-net rental rate rose slightly to $15.81 per square foot.
COVID-19 travel restrictions and stay-at-home orders attributed to the paltry second- and third-quarter 2020 numbers. Then those orders were lifted by Gov. Ducey, and the sun came out for retailers. The national retail sector also got the best news it had received since the pandemic started as retail sales jumped 9.8 percent for the month of March.
The majority of the leases I have completed year to date are less than 3,000 square feet and typically include the mom-and-pop variety. There were about 589 retail deals executed in Phoenix in the second quarter of 2021, with 75 percent of these deals being for less than 3,000 square feet.
Coming out of COVID-19, these types of businesses were able to execute quickly after being shut down or having to limit their services. The speed of these transactions is attributed to a single decision-maker, as well as not having to get approval from corporate real estate committees and shareholders.
Some lease types included check-cashing firms, barber shops and salons, e-bikes, restaurants, auto mechanics, reflexology, insurance brokers, churches, liquidators, dog grooming, tool supply and CPAs.
Lease terms and lengths for small business owners have changed slightly since coming out of COVID-19. I have seen shorter lease lengths and less tenant improvement allowance in exchange for rent abatement.
Brick and mortar is – and will remain – an important component of retail. Ecommerce is certainly going to continue growing, however, the experience consumers have through brick-and-mortar opportunities cannot be fulfilled online. We continue to see growth in social retail opportunities and experiences, such as axe throwing, escape rooms, arcade bars, etc.
This year, more than 80 percent of my transactions have occurred in the West Valley. It’s the fastest-growing market in Metro Phoenix. There is a vast amount of undeveloped land, as well as new freeway infrastructure with the recently opened Loop 202 freeway and still-expanding Loop 303 freeway.
Thankfully, the small businesses that were able to sustain through the pandemic are coming out stronger. They have learned to shift how they serve the consumer based on consumer demand. Many are still offering curbside pick-up options and delivery, which is something that will likely remain in place long into the future.