Local retailers active to start 2018

The Greater Phoenix retail market kicked off 2018 in fine form, with healthy levels of net absorption, a dip in vacancy and continued rent growth. The improvement in the retail market is even more striking when factoring in the seasonality of retail real estate performance.

The first quarter is often the slowest period of the year for retail net absorption, as merchants often close underperforming locations following the holiday shopping season. One of the latest examples of this trend was Toys R Us; during the first quarter, the company announced it would be shuttering all of its locations. Most of the store closures in the Greater Phoenix region were slated to occur early in the second quarter.

Fewer shopping centers sold in the first three months of 2018 than transacted during the same period last year. The segment of the market that recorded the most significant decline in activity was in those properties that sold for between $5 million and $10 million, while velocity was steady in smaller transactions.

While the number of properties changing hands has slowed somewhat, prices pushed higher and cap rates appear to have settled into a fairly steady territory in the low-7 percent range. With operating conditions continuing to strengthen, the local investment market is likely to be fairly active in the year ahead.

Key Takeaways:

  • The Greater Phoenix retail market had a healthy start to 2018, fueled by the strongest first quarter of net absorption since 2008. This sets the stage for what is forecast to be a very active 2018 as retailers ramp up activity in response to continued economic growth and an accelerating housing market.
  • Vacancy dipped by 20 basis points in the first quarter, reaching 8.1 percent. The rate has improved in five of the past six quarters, and is 110 basis points lower than one year ago.
  • Rent growth has been uneven, but rates are pushing higher. During the first quarter, asking rents advanced to $14.65 per square foot, a 4.3 percent year-over-year increase.
  • Investment sales of shopping centers slowed during the first quarter, and levels are lagging the pace established in the first three months of 2017.
  • Despite the drop-off in activity, prices spiked in the first quarter and cap rates are averaging in the low- 7 percent range.

Outlook:

The Greater Phoenix retail market is in position for a strong 2018. Tenant demand during the first quarter was stronger than in recent years, and continued expansion is forecast in the months to come.

There are a few primary drivers of tenant demand in Greater Phoenix. For the second straight year, Maricopa County led the country for population growth in 2017, with the addition of approximately 74,000 residents. These population gains are coinciding with an acceleration in the local housing market, with prices pushing higher and builders stepping up permitting activity. Growth in single-family housing will support retailer expansion.

The improving economic climate is supporting investment in retail properties. Prices for shopping centers were fairly consistent from 2014 until last year but spiked in the first quarter of 2018.

With local vacancy rates tightening, rents are rising and there are fewer distressed properties available for acquisition. This will continue to drive prices higher, even if cap rates remain in the high-6 percent to low-7 percent range.

The prospect of rising interest rates could have some impact on investment activity in the short term, but the improving fundamentals will likely offset much of the rise in borrowing rates.