Greater Phoenix Retail Vacancy Below 10 percent and Net Absorption is Improving
Phoenix, Arizona – The Greater Phoenix retail real estate market is performing well, despite the national trend of retail struggles. Overall vacancy of retail space in the metropolitan area was approximately seven percent at the end of third quarter, which was the 20th consecutive quarter at below ten percent levels. The metro began the year with negative net absorption, but leasing has improved since first quarter and is expected to finish the year relatively strong.
Phoenix remains one of the top five U.S. metropolitan areas for job creation. During the 12-month period ending in August, estimates indicate employers added 57,800 new jobs.
The combination of new jobs and population growth is adding to the retail consumer population of the city and helping to fuel retail real estate.
Vacancy of retail real estate in Phoenix has remained steady for the past seven quarters. The Airport Area and Northwest Phoenix submarkets have been attracting businesses, driving demand for retail space and pushing down vacancy rates. The Airport Area vacancy declined 70 basis points year-over-year to 3.3 percent while Northwest Phoenix’ vacancy declined 50 basis points to 4.6 percent in the same timeframe. During the past 36 months, the strongest net absorption of retail space was experienced in the East Valley and North Scottsdale.
Net absorption of retail space in Greater Phoenix fell into negative territory during first quarter. Conditions rebounded in second and third quarters. Net absorption is expected to reach 500,000+-square-feet for 2019.
Rental rates rose slightly in the third quarter, finishing at $15.40 per square foot, which is up 3.2 percent from a year ago. Downtown Phoenix, Scottsdale and Northwest Phoenix submarkets seized the highest year-over-year asking rate increases, rising an average of 12 percent. Since 2015, Greater Phoenix asking rental rates for retail space have increased nearly 15 percent, with much of the growth occurring since 2017.
The investment market for retail properties increased in total transaction volume, up 72 percent, to a total of $344 million during third quarter. First and second quarter transaction volumes were $143 million and $275 million respectively. The median price per square foot increased 54 percent year-over-year to $182. Sales of NNN leased retail investments have been increasing as well. In fact, during 2019, sales volume increased for this product to just under $159 million, which is the highest volume since 2016. Cap rates have been declining each quarter in 2019, dropping 138 basis points over the year to a current 6.71 percent. This level is far below the above-eight percent cap rates experienced at the end of last year. The Federal Reserve’s reversed course motivated a change in direction for cap rates, which should remain stable or decrease further before year-end.
Sustained population and job growth in Greater Phoenix, the healthy local economy and bolstered tourism are helping to fuel a more robust retail outlook. Expanding retailers are expected to continue thriving as the metro retains its dynamic pace.