Vacancy rate falls to single digits for 1st time since 2008

Real Estate | 8 Mar, 2015 |

Retail vacancy rates for Metropolitan Phoenix have fallen into the single-digit range for the first time since 2008, according to a recent retail study by CBRE’s Phoenix office. While the retail market continues to improve at a more gradual pace than previously anticipated, retail real estate experts point to the 9.6 percent vacancy rate as an important milestone and a good reflection of the economic recovery.

“Single-digit vacancy is very good news for the retail sector,” said CBRE Vice President Greg Abbott, who specializes in retail real estate services. “This number is actually telling us two things: first, existing retailers are experiencing growth and new retailers are entering the Phoenix market; and second, the positive leasing and absorption activity is resulting in an improvement in market conditions such as higher rents and lower tenant concessions.”

Abbott, who partners with Vice Presidents Chris Ryan and Bill Bones, points to the fact that metropolitan Phoenix has not experienced any substantial, new retail development since 2008 as a major factor in the falling vacancy rate. Additionally, Bones notes that a significant amount of available retail space is considered functionally obsolete. This means the amount of functional, available space is even less than the numbers show.

“Slowly, but surely, retail tenants are expanding or entering the market. However, availability in the type of space retailers are interested in is growing increasingly tight,” says Bones. “Class A space, in particular, has a high barrier to entry right now in terms of supply. Tenants are very interested in class A opportunities and they are jumping on them when they come available.”

Class B space is also seeing healthy tenant demand. While these spaces may be older, the team points to their location in neighborhood or community centers, which offers great identity and stable residential and nighttime demographics, as key benefits for tenants.

Ryan says continued, pent-up demand for A and B space will cause rental rates to rise significantly over the next couple of years, particularly if there is no substantial new development. Increased rental rates could translate to high barrier to entry for some retailers.

“We have reached a point in the market cycle where existing, useable space is being absorbed, whereas five years ago we were absorbing new space as it came online via preleased tenants. Now tenants are leasing up existing space,” notes Ryan.

CBRE Research reports that the metropolitan area has not seen more than one million square feet of new retail construction delivered to the market, year over year, in the the last five years. 2014 reported merely 285,400 square feet of new product, while 2013 saw 512,000 square feet come online. Conversely, from 2000 to 2010 metro Phoenix saw an average of 5.5 million square feet of retail product delivered annually.

So, as the amount of quality space continues to tighten and retailers experience more incremental growth, new development will be inevitable. But what does new retail development look like? And what happens to the so-called “un-useable” space?

“Those spaces that have reached or are nearing functional obsolescence will have to be repurposed for new uses such as charter schools or mini-storage or redeveloped as multi-family or office,” says Abbott. “In fact, we’re already seeing those types of projects across the Valley.”

The retail team points to examples like the former East Valley Mall at the northwest corner of Arizona Avenue and Warner Road in Chandler, which is being repurposed from a mall into multiple new uses including a charter school, multi-family development as well as mini-storage. Additionally, Valley East Plaza, located at the northwest corner of Southern Avenue and Longmore Road, has been demolished to make way for the new Centrica office project. The shopping center, which formerly housed Bed, Bath & Beyond, Petco and Circuit City, sat vacant for more than six years before new ownership had it repositioned for office development.

As for new development, Abbott says developers today are still fairly conservative and most want a committed tenant or a solid anchor or shadow anchor prior to commencing the project.

New construction that will come online this year includes 132,000 square feet at Fashion Square Mall that’s going to be a new Harkin’s Theater and Dick’s Sporting Goods location. A 75,000-square-foot neighborhood center called Silverstone at Pinnacle Peak is also under construction and will be anchored by a Sprout’s grocery. Scottsdale Quarter, which has already established itself as a retail hub, also has an additional 30,000 square feet that will come online in its new mixed-use building.

Going forward, the retail team says retail market participants will continue to keep a watchful eye on improving fundamentals and tightening supply of space.

“If vacancy in the A and B spaces continues to fall, as it has in recent quarters, development really is inevitable,” says Abbott. “I think this is an interesting point in the cycle and tenants and landlords alike could see some really great opportunities in the coming quarters.”

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