Absorption spikes to close 2017

The Greater Phoenix retail market closed 2017 with its strongest quarter of net absorption in five years. Tenants moved into a net of more than 1 million square feet of retail space during the fourth quarter, bringing the total for 2017 to more than 2.8 million square feet.

Much of this tenant demand is being concentrated in high-income, fast-growing areas of the Southeast Valley. Net absorption in Gilbert reached nearly 290,000 square feet in 2017, while retailers moved into a net of more than 265,000 square feet of space in neighboring Chandler.

Combined, these two cities accounted for approximately 20 percent of the total net absorption in Greater Phoenix in 2017, a continuation of a trend that firmly took hold in 2016, when combined net absorption in Chandler and Gilbert represented more than 40 percent of the Greater Phoenix total.

The local investment market gained momentum during the fourth quarter, although transaction activity in 2017 somewhat lagged totals from the previous year. Prices also retreated a bit in 2017, although there was a wide range in pricing based on occupancy levels and tenant quality.

Key Takeaways:

  • The Greater Phoenix retail market ended 2017 on an upswing, with strong net absorption driving the local vacancy rate lower.
  • With more space leasing up and vacancies tightening, landlords have begun to accelerate the pace of rent increases.
  • Net absorption exceeded 1 million square feet during the fourth quarter, and for the year more than 2.8 million square feet was absorbed. This was the strongest year of retail net absorption in Greater Phoenix since 2007.
  • A rise in demand fueled an increase in rents. Asking rents advanced 4.6 percent in 2017, ending the year at $14.64 per square foot. Rent gains in 2017 were far steeper than increases recorded in the previous two years.
  • More shopping centers sold during the fourth quarter than in the third quarter, but transaction activity for 2017 still slightly lagged 2016 levels.
  • The median price was also a bit lower in 2017, in part because more high-vacancy properties are selling as lease-up opportunities.

Outlook:

The Greater Phoenix retail market will likely have a strong 2018, as tenant demand remains healthy and the economic outlook calls for continued expansion. The local economy has been on an upswing for the past several years, adding more than 300,000 jobs since 2012, including 30,000 positions within the retail sector.

Further expansion is likely in the year to come. In addition, the local housing market is bouncing back, with prices pushing higher and housing starts slowly gaining momentum, trends that should continue in 2018 and should support the local retail climate.

Growth in the local retail market is coming from a number of sources. Restaurants have been leading the way, fueled by population expansion, job gains and some recent wage growth that is resulting in more disposable income for consumers.

While the outlook for 2018 calls for another wave of restaurant openings, grocery stores could be another source of demand in Greater Phoenix. German grocer Aldi is a potential new entrant into the local grocery market, after the company announced plans to open a regional distribution center in Goodyear.