Metro Area Population Growth Drives Demand and Robust Retail Construction
PHOENIX, September 1, 2023 – The Greater Phoenix retail market vacancy level hit a historic low of 4.8 percent at the end of June, reflecting strong tenant demand in one of the nation’s fastest-growing cities, according to a report released by Colliers in Arizona. Data from Affinity Solutions indicates Phoenix has experienced a 16.5 percent increase in all consumer spending since January 2020.
During the second quarter, retail vacancy fell 40 basis points, a 130 basis point decrease year-over-year. This marked the 12th consecutive quarter that vacancy has reduced. Eight out of nine geographic submarkets in the city posted retail vacancy decreases year-over-year. Downtown was the only submarket with a rise in vacancy. The lowest vacancy is found in the West Valley, falling to just 1.8 percent during the second quarter. Scottsdale posted the second lowest vacancy at just 3.6 percent.
Net absorption of retail space during the second quarter totaled 717,262 square feet, bringing the year-to-date total to 1.9 million. Net absorption at the mid-year point reached 80 percent of the total net absorption posted in 2022. The market is less than 500,0000 square feet from topping last year’s absorption level. New deals larger than 10,000 square feet rose 17 percent from the first quarter and 22 percent year-over-year. The most significant new lease signed during the second quarter was PickleMall’s commitment to 104,000 square feet at Arizona Mills Mall. The second largest lease involved behavioral health group Village Mentors signing a lease for 31,550 square feet at Alta Mesa Village near Brown and Recker roads in Mesa.
Strong population growth has driven demand for space and increased construction activity. Deliveries of new retail space during the second quarter totaled 153,430 square feet. This was lower than the first quarter and 39 percent below the second quarter of 2022. The market posted new space totaling 700,000 square feet during the first quarter, and the amount currently underway is 1.47 million square feet. New projects underway are heavily located in the East and West Valley submarket clusters, making up over 75 percent of products under construction. Prasada North, which consists of nearly 300,000 square feet of anchor space, is expected to deliver in early 2024. In the East Valley, Hudson Station in Queen Creek is scheduled to be completed in early 2024.
Rental rates in the Phoenix retail market continue to grow, ending the second quarter at an average of $16.12 per square foot. This is a 1.38 percent over-the-quarter increase and a rise of 3.0 percent year-over-year. Every submarket cluster witnessed a quarter-over-quarter rental rate increase during the second quarter. The largest was experienced in the West Valley, posting a rise of 6.13 percent and ending at $16.61 per square foot. The North Scottsdale cluster had the most significant increase year-over-year, jumping 10.4 percent to $23.39 per square foot. Scottsdale submarket maintains the highest average rental rates, posting $25.80 average rates at the mid-year point. Decreased vacancy is expected to continue, placing upward pressure on rental rates throughout 2023.
Unlike other commercial real estate sectors, Retail Investment sales during the second quarter saw a 64 percent rise in transaction volume, ending the period at $293 million. However, the second quarter of 2023 fell behind sales from the second quarter of 2022 by 30.9 percent. First-half sales volume is down 50.7 percent from the first six months of 2022, with total year-to-date volume posted at $472 million. The largest bulk portfolio sale of the quarter was a double-escrow transaction involving seven EoS properties in Arizona and Florida totaling $94 million. Four of the five properties in Metro Phoenix were former grocery stores being converted into gyms. During mid-June, Starwood Capital Group sold Arcadia Towne Center to Whitestone REIT for $25.3 million.
The outlook for Greater Phoenix retail space remains optimistic as the population growth flourishes and tenant demand is vital. Between January 2022 and June 2023, they brought 148 new restaurants opening in the city, with only 74 restaurants shutting down. Quick-service establishments make up most of the doors, with 118 new establishments in the past 18 months.
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