With the ease of online shopping and the pandemic forcing folks indoors, the future of retail was hazy only a few years ago. Today, the outlook for the sector is brighter than expected. Avison Young’s quarter one (Q1) 2023 Phoenix retail market report notes that retail inventory (of spaces more than 10,000 square feet) totaled 189,242,777 square feet in Greater Phoenix area at the end of Q1. Here are some Metro Phoenix retail development trends that are arising in the retail sector.
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“(Phoenix) Retail development activity has experienced a tremendous rebound following the lull experienced during the pandemic, with deliveries in Q1 totaling 757,174 square feet and 2,700,660 square feet currently under construction — both of which are decade-highs for the retail market,” the report reads.
Total net absorption was also up in Q1, posting 1,241,192 square feet of positive net absorption during the quarter — an 11.2% increase from Q4 2022. James DeCremer, principal at Avison Young, adds that the market’s 5.6% vacancy rate is another telling figure from the report, considering 7%-9% is regarded as a healthy, normal range.
“I’ve been doing this for 20 years, and I’ve never seen a lower vacancy rate,” he says. “It suggests that [the Greater Phoenix retail sector] is underbuilt, which supports the recent uptick in development. If construction costs were lower, we’d see even more being built.”
Carol Schillne, senior vice president at ORION Investment Real Estate with the Schillne Retail Team, agrees that retail development is on a hot streak.
“We’re blessed here in Arizona, we have a very strong market,” she says. “We’ve seen a lot of activity over the last year — if you talk to most brokers or developers, it’s been a very busy time. [The Schillne Retail Team] mainly does tenant [representation], and it’s hard to find good space for our clients. Leasing momentum is super strong and very competitive, but the sales have tapered off a little bit because of the financial climate with interest rates.”
Lessons learned
Over the last 15 years, Metro Phoenix — and the global economy at large — experienced two significant economic shocks: the Great Financial Crisis of 2008 and the COVID-19 pandemic. During the Great Recession, retail vacancy rates in Metro Phoenix were upwards of 12%, according to DeCremer.
“One of the learning moments that happened in the 2004-2008 surge in retail development is that it got out in front of the growth,” he says. “When it all came to a screeching halt, retail struggled.”
Despite the Valley’s continued expansion, Metro Phoenix retail development patterns have been conservative compared to office, multifamily and industrial, DeCremer continues.
“That’s part of the reason why we’re seeing this surge [in new retail construction],” he says. “We should’ve been building more over the last decade than we were.”
When the pandemic changed a routine trip to the store into a risky venture fraught with public health considerations, many consumers elected to do their shopping online. Yet, as the emergency subsided, retail proved itself to be more resilient than expected.
“Everybody thought years ago that the internet was going to put retail out of business, but people still love to go out to dinner and try on clothes in person,” Schillne says. “When you look at how COVID affected retail, [the sector] was creative and quick to respond.”
Restaurants were adapted rapidly, with some offering takeout options for the first time. Then, as people felt more comfortable dining out, the demand for patio space expanded outdoor eating areas. Schillne believes those trends will persist in the future despite the end of the public health emergency.
Retailers also chose to “right size” or reduce overall square footage to an optimal size where they can provide the experience, product or service. While there was an uptick in this practice because of the pandemic, DeCremer sees it more as an evolution than a trend.
“We saw right sizing in ‘09 too,” he says. “I think COVID reminded [the industry] to find a layout that offers the consumer everything they want on an efficient basis. Do we really need 12,000-square-foot buffets? Is that a good use of space?”
All mixed up
Across the Valley, mixed-use projects are becoming more common. Metrocenter Mall is being reconstituted as a $850 million urban village with 2,600 multifamily units and 150,000 square feet of commercial space. Likewise, phase one of Paradise Valley Mall’s mixed-use transformation includes a 400-unit multifamily development, Harkins Theatres, Whole Foods and a host of restaurants.
“Mixed-use is definitely a trend,” DeCremer says, “and another part of the evolution of retail I was talking about earlier. Some of these big, mall-type properties absolutely need to be repositioned, and that comes with a high level of sophistication. Those projects are expensive and there are a ton of moving pieces.”
As Greater Phoenix continues to develop and land becomes scarcer, Schillne adds, mixed-use developments will become more common. She notes that special attention should be paid to the design of the retail portion of these projects.
Adequate parking is a must for any site that includes multifamily units or else shoppers will compete with residents for spaces. The retail spaces should also include the proper infrastructure for restaurants, such as grease traps and a back door so taking the trash out doesn’t have to be done in front of patrons.
Metro Phoenix retail development
“You have to have signage,” Schillne says. “It’s a challenge when you have a lot of difference uses competing for space and signage, but people need to know what shops or establishments are there so they can start frequenting them.”
This mixed-use trend coincides with another one in Greater Phoenix — cities reinvigorating their downtown areas.
“All the cities and municipalities want the next Downtown Gilbert, kind of like when everyone wanted to create the next Kierland Commons after it was built 20 years ago,” DeCremer says.
The demand for these new downtown areas stems from the sprawling nature of the Valley. As more people have moved to the suburbs, there’s now a demographic of people who want similar amenities to a place like Downtown Phoenix without having to drive there.
“Mesa and Gilbert are prime examples. They made amazing downtowns with all the restaurants and entertainment concepts they have,” Schillne concludes. “It’s a fabulous way to celebrate local businesses, which tend to go in these areas. People are embracing these Arizona brands and love the sense of community the downtown renaissance provides.”
