The Greater Phoenix retail market is improving at a steady pace with vacancy dropping, rents ticking higher and investment activity gaining momentum. The city has seen positive trends despite the store closures of such national chains as The Room Store and Sports Authority.
Retail vacancy fell 10 basis points in the second quarter, reaching 9.4 percent. That level is 60 basis points below a year ago. The city has experienced a steady decline in vacancy since peaking in mid-2011. Strong tenant demand for space has led to 390,000 square feet of net absorption in second quarter and more than a million square feet year-to-date. This is a remarkable improvement over 2015 when mid-year net absorption was approximately 375,000 square feet. Vacancy drops have been exceptionally strong in the East Valley where vacancy has dropped 70 basis points in the past year. Net absorption in the first half of this year in the East Valley has far outpaced other regions in Metro Phoenix.
Tightening vacancy has put pressure on rental rates. The average asking rent has increased 3.3 percent in the past year, including a 1.7 percent rise in the first half of 2016. Asking rental rates averaged $13.93 per square foot at the end of second quarter 2016. During the past 12 months, rents in the West Valley have risen more than 5% since this submarket has one of the lowest vacancy rates in the Metro area.
Sales of shopping centers accelerated at a rapid pace during second quarter 2016. First quarter brought a dip in sales activity, but the past three months brought strong 30% improvement in activity over first quarter. Total sales activity in the first half of 2016 is up 36% from the first half of 2015. More properties are changing hands and property cash flows are improving, which pushes prices higher and compresses cap rates. The median price at mid-year 2016 reached $135 per square foot, up 22% over the median price in 2015.
The forecast for the retail market calls for more strengthening in the next 12 to 24 months. Retailers are expected to ramp up for the holiday shopping season and Metro Phoenix will gain 375,000 square feet of new grocery stores by the end of the year. Housing will be a significant predictor of future retail strength. The homebuilding environment remains fairly cautious, but increases in new home permitting and construction will ultimately support retailer expansion that rises to meet future demand.