2018: The year that was
- The Greater Phoenix retail market posted mostly flat performance during the fourth quarter. Retail vacancy dipped 10 basis points over the fourth quarter ending the period at 7.3 percent. The rate is now 80 basis points lower than one year ago.
- Rents ticked 30 basis points higher in the fourth quarter with asking rents ending at $15.02 per square foot, up 3.2 percent from one year ago.
- The investment market for local retail properties cooled to $84.7 million in total transaction volume in the fourth quarter, down from third quarter’s $201.6 million high. Despite reduced sales volumes, median price per square foot for the year increased 7 percent to finish at $134.
- Cap rates have trended higher in each of the past three quarters and coincides with the gradual rise in interest rates. For the fourth quarter, cap rates ended at 8.22 percent, up from third quarter’s 8.09 percent.
Following a very strong first half of the year, the Greater Phoenix retail market leveled off a bit during the fourth quarter with 261,500 square feet absorbed, the lowest fourth quarter showing since 2015’s 255,763 square feet amount.
Since 2010, tenants have absorbed a net of more than 750,000 square feet on average during the fourth quarter in Greater Phoenix; and last year, net absorption during the fourth quarter topped 1.2 million square feet. Despite fourth quarter’s subdued absorption, over the year, retail witnessed nearly 2.1 million square feet absorbed, the second highest in the last five years.
Sales of shopping centers decreased during the fourth quarter in line with decreased leasing and absorption activity. While total building sales and sales volume for 2018 lagged 2017 levels, median price per square foot increased 7 percent over the year to $134.
Also of note, cap rates have continued to push higher in the last three quarters with average cap rates for the fourth quarter reaching 8.22 percent. These mixed investment trends may hinder sales of shopping centers in the months ahead.
The Greater Phoenix retail market had a very healthy 2018, with both reduced vacancy and continued absorption, albeit more modest than in 2017. With the local economy remaining quite healthy and the housing market continuing to gain momentum, expanding retailers will sustain the momentum in the market, particularly among restaurants and other small-space users that thrive when household incomes are on the rise.
While property fundamentals have been on a steady path of improvement, investment activity is lagging levels from one year ago. After generally trending lower over the past several years, cap rates have begun to inch higher, particularly as interest rates have pushed higher. It is quite possible that the trend of rising cap rates will persist, particularly if the Fed continues rising rates, although some of the better properties are still likely to change hands with cap rates in the low-to mid-7 percent range.