The Phoenix retail market expansion has slowed down considerably as it experiences the continued effects of the economic downturn. A decline in consumer spending, negative job growth and a housing market still struggling to recover will keep development to a minimum while vacancies increase in existing centers. At the end of 2008, the valley’s vacancy was 10 percent and should rise above 11 percent during 2009.
A return to record vacancy rates seen during the 1980s is unlikely because of the slowdown in construction. In 2008, there was roughly 6.5 million square feet of new retail space delivered, but in 2009 planned projects will be put on hold. One reason is there is no pre-leasing being done, and in many cases banks require guaranteed tenants before they will consider construction loans. In response, developers are changing their focus from new ground-up development to infill and redevelopment properties.
Expect more national, regional and local retailers to close during 2009. The list of major store closures in 2008 included national retailers Mervyn’s, Linens ‘n Things and Circuit City. There is still a short list of national retailers looking for space in the valley, including Wal-Mart, Fresh & Easy, Fry’s and Dunkin Donuts. Target signed the valley’s largest lease in 2008, committing to 185,000 square feet at Salt River Commons in Scottsdale at the Loop 101 and Via de Ventura. The retailer expects to open a SuperTarget in October 2009.
Landlords will face more challenges as they experience a reduced demand for space, a slowdown or decline in rental rolls and growing demands from tenants for rental concessions and shorter lease terms. They are giving more incentives, including free rent, more tenant-improvement money and even shorter-term deals just to fill space in a center and collect rent. The dilemma for owners becomes to whom and how much they grant concession requests. They want to fill space, but they are still trying to hold onto rental rates so that when the economy recovers their incentives have not dropped below market value. The average rental rate for inline shop space in metro Phoenix is $32 per square foot per year, triple net, which is about $5 above the national average.
Despite the challenges faced by owners and tenants, there is still significant buyer demand. Only twice in the last 2 decades has there been an opportunity to acquire assets with enormous upside potential. The largest retail sale in the valley during 2008 was a central Scottsdale power center at 9175 E. Indian Bend Road. Phoenix-based DeRito Pavilions 140 LLC purchased the 1.1 million-square-foot center for $88 million from Spire South LLC of Scottsdale.
— Courtney Auther is a senior associate in the Retail Division of Grubb & Ellis|BRE Commercial LLC.