1Q: Still Performing
- Despite retail’s rough waters on a more national level, the Greater Phoenix retail market continued to perform well. Despite a 10-basis point increase over-the-quarter, retail vacancy dipped 40 basis points (bps) over-the-year to 7.4 percent.
- Rents ticked higher in the first quarter with asking rents ending at $15.37 per square foot, up 5.3 percent from one year ago.
- The investment market for local retail properties increased to $143 million in total transaction volume in the first quarter, up from first quarter 2018’s $109 million and 2017’s $107 million. Median price per square foot for the year increased marginally, up 1 percent, to finish at $187.
- Cap rates, which trended higher in each of the past three quarters, reversed course and decreased 38 bps to 6.84 percent and coincides with the Federal Reserve freezing near-term rate hikes.
Greater Phoenix retail market had negative absorption of nearly (102,000) square feet, its first negative showing in 19 quarters. Before sounding the alarm, it should be noted that most of this can be attributed to already known Sears closings. Since 2010, tenants have absorbed a net of 90,000 square feet on average during the first quarter in Greater Phoenix. Despite first quarter’s negative absorption, retail is expected to continue to remain positive, over-the-year, at 1.5 million square feet.
Sales during the first quarter spiked 31 percent to $143 million, the highest since first quarter 2016’s $291 million. Total sales transactions increased as well to 25 total transactions and median price per square foot increase of 1 percent over the year to $187. Cap rates, which had previously been trending higher, pushed lower to 6.84 percent, nearly 140 bps lower than the fourth quarter.
The Greater Phoenix retail market had an overall healthy first quarter, despite a modest contraction in absorption due to known store closures, with both reduced vacancy and ongoing rent growth. With the local economy remaining quite healthy and with sustained population growth (Maricopa County is #1 in the nation again for population growth in 2018), expanding retailers should sustain the momentum in the market, particularly among restaurants and other small-space users that thrive when household incomes are on the rise.
Property fundamentals have continued to remain on a steady path of improvement. After generally trending higher of the last several quarters, cap rates have begun to inch lower, most likely, in response to the Federal Reserve’s abandonment of further near-term rate increases. The net result, markets remained robust for most of the first quarter and the drag on real estate prices many were expecting, as a result of rising rates, has not materialized. With a more dovish Fed, and more talk of QE 4 (Quantitative Easing), expect elevated demand for commercial real estate assets to continue.