CBRE Q1: Metro Phoenix retail vacancy held steady at 8.0%

Phoenix, Arizona — CBRE is reporting the Phoenix retail market posted 18,796 sq. ft. of net absorption in the first quarter. This broke a three quarter trend of negative net absorption, resulting in the first positive number since first quarter of 2020.

Metro Phoenix retail vacancy held steady at 8.0% in Q1 2021, unchanged from the previous quarter. Year-over-year, the vacancy rate was flat. The retail market continues to tighten as new construction remains disciplined with 685,916 sq. ft. of product currently under construction.

Construction is led by grocery anchored and fitness center developments with Fry’s and EOS Fitness active in the market. It is expected that retail construction will remain disciplined through the remainder of the current real estate cycle

GROCER DEMAND DRIVES CONSTRUCTION

The grocery sector continues to drive the new retail supply on the horizon in Phoenix. City Gate Marketplace, anchored by 123,000 sq. ft. Fry’s, and Village Grove at Verrado, anchored by a 124,070 sq. ft. Fry’s, is under construction. Another grocery (Fry’s) anchored retail development, the Post at Cooley Station is under construction. Grocers have been resilient during strict lockdown periods and will continue to see demand with new deliveries expected later this year.

HOUSING MARKET CONTINUES TO STRENGTHEN

The Phoenix housing market continues to grow.Year-over-year new housing permits are up 35.1% in single-family. Phoenix continues to be the leader in net migration and shows no sign of slowing down.

EMPLOYMENT

The ongoing pandemic severely impacted employment across the nation. However, the loss in employment has been less severe in Phoenix compared to other metros and the national average. In the first quarter,the Phoenix Metro lost 73,500 jobs year-over-year bringing nonfarm employment to 2.1 million.The unemployment rate has dropped significantly since the start of the pandemic where unemployment for the metro reached 10.2%. In the first quarter Phoenix metro posted an unemployment rate of 6.9%.

NET ABSORPTION

In the first quarter, there was 18,796 sq. ft. of net absorption. Gross activity for the market totaled747,719 sq. ft. Both net and gross absorption improved from the previous quarter. Positive net absorption totals were posted in 7 out of 12 submarkets. The move in of Partners dog training (20,260 sq. ft.) highlighted the positive 38,403 sq. ft. of net absorption in the North Scottsdale submarket. While the overall market was positive, significant move outs led to negative net absorption in 5 submarkets. The Sun City submarket registered -64,437 sq. ft of negative net absorption,mainly attributed to two move outs each by Pier 1 and Stein Mart. The North Bell Road submarket also recorded -65,887 sq. ft. of negative net absorption.

VACANCY

The year-over-year market-wide vacancy rate remained steady at 8.0%. Of the core submarkets, the Scottsdale and East Phoenix submarkets had some of the lowest vacancy rates for metro Phoenix to end the quarter at2.9%and4.8%,respectively.These submarkets consistently outperform others, which can be attributed to favorable location and density. Meanwhile, the Northwest Phoenix and Mesa/Chandler/Gilbert submarkets had the highest vacancy rates at 9.6% and9.9%, respectively. The reconfiguration of vacant big-box space could help push down overall vacancy in these areas over time.

ASKING LEASE RATES

The overall average asking lease rate ended the year at $16.24 per sq. ft. (NNN) compared to $16.49 (NNN) at the end of Q4 2020. Year-over-year, asking rents are down 2.0% from the Q1 2020 total of $16.57 (NNN). Average asking lease rates by development type are led by regional center developments at $25.00 per sq. ft. (NNN), followed by retail/office with average asking lease rates of $18.35per sq. ft (NNN). Of the core submarkets, Scottsdale led all submarkets at year-end with average asking rents at $22.49 per sq. ft. (NNN) followed by the East Phoenix submarket with average asking rents of $21.11 per sq. ft.(NNN).

CONSTRUCTION ACTIVITY

In the first quarter there was 685,916 sq. ft. of retail space under construction across the Valley. Two notable projects under construction are both in Gilbert and include the City Gate Marketplace, a Fry’s anchored center at Baseline and Higley roads, and The Post at Cooley Station, a Fry’s anchored center located at Williams Field and Recker roads. EOS Fitness has also been active around the Valley and kicked off a 38,000 sq.ft. fitness center at Pecos and Val Vista Rd and another is under construction at Germann and Power in Gilbert. Costco delivered a brand new 154,418 sq. ft. building at Waddell Rd and Prasada Pkwy.

OUTLOOK

Despite 2020 being a rough year for brick-and-mortar shopping, the retail sector is hopeful for a big comeback in2021 as evidenced by the first positive net absorption totals in a year. Many professionals are citing “revenge retail”, while others are not so optimistic. Since the onset of the COVID-19 pandemic, many have been pushed to e-commerce which bodes well for the industrial sector. Conversations continue surrounding big box retail redevelopment into industrial, but those talks have not yet come to fruition in Phoenix as we enter 2021. The rollout of the COVID-19 vaccine should continue to improve consumer sentiment and safety. Phoenix has the benefit of many open-air, suburban shopping centers, providing space to increase retail occupancy. The return to office should also benefit retail in 2021 and as Phoenix continues to grow its population base, retail should recover more quickly than most metros. However, national store closures will continue to impact the local market in the short-term.

Read the full report here – Phoenix Retail MarketView: https://www.cbre.us/research-and-reports/Phoenix-Retail-MarketView-Q1-2021