Phoenix, Arizona – The Greater Phoenix retail real estate sector posted a lackluster third quarter, following a very strong first six months of 2018. Vacancy dropped slightly, but so did rental rates during the last three months. Development of new retail space has been modest and is expected to remain so in the near future. Sales velocity has increased and prices are on the rise.
Retail vacancy fell 10 basis points during the third quarter, falling to 7.5 percent. That rate is 110 basis points lower than the same time last year. Vacancy has fallen each of the past seven quarters, but the improvement has leveled off. The Northwest Valley has seen significant demand for retail space and has a vacancy rate of just 4.8 percent.
Rents also fell during third quarter but are higher than year-end 2017. Asking rents finished the third quarter at $14.90 per square foot, which is a three percent increase over a year ago. Rental rates are highest in Scottsdale and North Scottsdale with an average of $23.65 per square foot and $22.00 per square foot. Negative net absorption in those two submarkets could result in falling rental rates in the future. The East Valley has recorded impressive rental rate growth with gains nearly double the pace of market average. Asking rents in the East Valley were up 5.9 percent from a year ago, reaching $14.62 per square foot as of third quarter.
Sales of local retail properties accelerated in recent months, with more shopping centers changing hands in third quarter than second. Despite the improvement last quarter, building sales year-to-date have lagged behind 2017 sales volume levels. Prices decreased slightly, but the median price during 2018 has been $150 per square foot. That figure is 20 percent higher than the median price for retail properties sold in 2017. Cap rates have been escalating in each of the past two quarters. Cap rates averaged approximately eight percent in the third quarter, which was approximately 50 basis points higher than second quarter. Year-to-date cap rates have averaged approximately 7.3 percent.
The fourth quarter is expected to close out the year on a high note. Fourth quarter traditionally offers the highest performance because of retailer expansion during the holiday season. Since 2010, tenants have absorbed more than 750,000 square feet on average during fourth quarter. Last year, net absorption during fourth quarter soared above 1.2 million square feet. Assuming this trend will continue, net absorption for all of 2018 is expected to top 2.3 million square feet. Continued job growth and income increases will bode well for retail real estate. A healthy housing market and additional disposable income will spur leasing of restaurants and other small-space users.