The first quarter of 2021 brought positive net absorption to the Greater Phoenix retail market, according to a report released today by Colliers in Arizona.  Absorption pushed retail vacancy down and rental rates continue showing signs of growth.

The city lost significant jobs during the spring of 2020 as the pandemic unfolded, but many have been recovered.  The retail trade supersector lost 29,000 jobs in April of last year and as of March 2021 approximately 99.6 percent of the lost jobs had been recovered.  The leisure and hospitality sector, which lost 96,400 jobs, has only recovered 64.7 percent of its positions.

READ ALSO: Ranking Arizona: Top 10 retail brokerage firms for 2021

During the first three months of 2021 the city posted 246,897 square feet of net absorption.  This marks the highest level of net absorption since second quarter 2019.  The Northwest submarket cluster had the single largest move-in with Lifetime Fitness taking occupancy of 180,000 square feet.  Leasing activity increased 18 percent year-over-year.  The volume of new retail deals has increased 85 percent since the slowdown in second quarter 2020.

First quarter was completed with 7.7 percent of retail space vacant, which is 20 basis points lower than fourth quarter 2020.  This is still an increase of 40 basis points over vacancy posted March 2020.  South Mountain posted the largest increase in vacancy both over-the-quarter and year-over-year, primarily attributed to the closure of Fry’s Electronics.  That closure added 148,992 square feet to that submarket’s inventory.  West Valley submarket posted the lowest vacancy at 4.9 percent, which is 70 basis points down year-over-year. 

Rental rates continue to rise, elevating 1.1 percent year-over-year. As the metro area grows and demand for retail space increases in the outskirts, rising land prices and elevated construction costs are pushing rental rates even higher.  Rental rates finished first quarter at an average $14.75 per square foot, marking a .34 percent increase over-the-quarter. 

Construction moved forward during the first quarter, bringing 231,020 square feet of new retail space to the market.  These new projects came online with only five percent vacancy.  Demand for drive-thru spaces and the creation of new restaurant concepts have been pushing the market for new construction.  In addition, city sprawl in both the east and west valley regions is creating more demand for retail space.  The Northwest Phoenix submarket cluster added the most square footage, including delivery of the Lifetime Fitness at 67th Avenue and Happy Valley Road, as well as the grocery store chain Aldi at Lake Pleasant Parkway and Happy Valley Road.  These two properties total 202,000 square feet and comprise 87 percent of the city’s first quarter deliveries.  Only 431,333 square feet are under construction currently, compared to the three-year average of 760,000 square feet.   The largest project under construction is Fry’s Marketplace at Village Grove at Verrado on the northwest corner of Jackrabbit Trail and Indian School Road.  The 124,070-square-foot project is expected to be completed next quarter.

Investment sales of retail properties remained healthy in the first quarter of the year with 41 transactions totaling $382 million.  The median price paid per square foot increased 14 percent year-over-year to $191.  The largest transaction was Macerich’s sale of Paradise Valley mall to RED Development in late March.  The recently completed Lifetime Fitness on 67th Avenue was sold as a sale leaseback to Spirit Realty in March for $188 per square foot.  Quick service restaurants and coffee shops with a drive thru component are still in high demand and continue to capture the highest prices per square foot.