Absorption of retail real estate in Greater Phoenix slowed during the second quarter, but investors were busy purchasing retail properties. The mid-year retail research report released by Colliers International in Greater Phoenix forecasts improvement in the retail sector for the second half of 2017.
Vacancy remained flat at 9.3 percent in the second quarter and net absorption decreased. The past three months was the lowest quarter in more than two years for retail absorption with just more than 175,000 square feet posted for the three months. Net absorption for the first half was approximately 858,000 square feet, down by seven percent from the first half of 2016. The first quarter posted a strong level of retail tenant move-ins, but second quarter activity fell off. Despite the slowdown, the market is expected to keep pace with its running four-year average of two million square feet of net absorption per year. As the remainder of the year unfolds, the East Valley is expected to continue its strong performance. That submarket holds approximately 30 percent of the total retail inventory. The East Valley’s vacancy rate dipped below 10 percent during the second quarter for the first time in nearly a decade
The investment market strengthened in the second quarter with sales of shopping centers accelerating and prices rising. Sales of shopping centers were up more than 50 percent from first quarter, but sales velocity for the first half of this year is still down 11 percent from the same period of 2016. Year to date, the median price paid for a shopping center rose 20 percent from the first quarter to $118 per square foot and cap rates compressed to approximately 7.5 percent.
Asking rental rates are increasing, up 4.3 percent in the past year to $14.56 per square foot. This is the strongest annual rental growth in nearly a decade for Greater Phoenix. Rents in North Scottsdale have increased 6.6 percent in the past 12 months, rising to $19.42 per square foot on average. While these rates are positive, Valley-wide rental rates remain approximately 25 percent below pre-recession levels.
The retail market has experienced healthy conditions during the first half of 2017 and is expected to strengthen during the next six months. Fluctuations from first to second quarter highlight the uneven nature of the retail sector’s recovery. Employment growth has been steady and recent gains in leisure & hospitality, as well as construction provide indicators of overall health in the local economy.