Cushman & Wakefield Reports Lower Vacancies and Focus on Neighborhood Centers
PHOENIX, November 2, 2015 – Cushman & Wakefield, a global leader in commercial real estate services, announced today that the Metro Phoenix retail market posted its 16th consecutive quarter of declining vacancy. Vacancy fell to 11.1% at the end of Q3 with neighborhood and community centers drawing the most leasing activity.
Metro Phoenix recorded nearly 552,000 square feet of occupancy growth during Q3, bringing the year-to-date total to 984,000 square feet. The Chandler/Gilbert, Scottsdale, Central Phoenix and Northwest Phoenix submarkets accounted for 83% of the total net absorption for the quarter. All but two of the city’s retail submarkets posted positive net absorption during the three-month timeframe.
“Tenants are no longer making decisions based primarily on price,” said Brent Mallonee, Vice President of Cushman & Wakefield. “They are paying higher rents for the best location. Included in that equation are the visibility of the center and space, access to transportation corridors and demographics of the surrounding consumer market.”
Neighborhood and community centers are occupied largely by smaller retailers, which were hit hardest by the recession. The majority of Phoenix’s retail net absorption is taking place in these centers as small business owners and regional retailers see a resurgence. “A huge part of our new occupancy is coming in the form of restaurants,” Mr. Mallonee said. “Economic recovery has brought more disposable income, and people are dining out far more often. Metro Phoenix is booming with new restaurant concepts, both locally created and brought here from out-of-state.”
Many of these new restaurant concepts and retailers are selecting redevelopment properties. “The term ‘infill’ is being used in this market to describe the redevelopment and repositioning of commercial projects,” Mr. Mallonee said. “This phenomenon is taking place not only in the Central Business District, but also in the suburbs. Often redesigned with a trendy, urban appeal, these properties attract consumers of all ages, especially the young adult market.”
Strip centers have struggled through the recession and continue to fight for more occupancy. The third quarter brought notable declines in this sector, with vacancy dropping from 17.4% at mid-year to 16.3% three months later. Power centers and regional malls held a stable 5.6% vacancy for the past two quarters.
“Regional malls hold a healthy vacancy level, but their success varies greatly by location and age,” Mr. Mallonee said. “Newer centers like Chandler Fashion Center and Scottsdale Fashion Square are in high demand, with space leasing as soon as it is vacated or built. Aging properties in less appealing demographic markets like Metrocenter and Paradise Valley Mall are drawing non-traditional users for large blocks of space. In addition, our regional malls have seen a decline in sales per square foot over the past couple of years. This decrease is being attributed to the recent influx of outlet malls and ecommerce that have pulled shoppers away.”
Rental rates for Metro Phoenix retail space are rising as the vacancy falls. Average asking rent at the end of Q3 2015 was $14.21 per square foot (on an annual triple net basis.) This marks a $0.33 per square foot increase for the quarter. Neighborhood and community centers, as well as strip centers, all experienced gains in rates. However, power centers, regional malls and specialty centers experienced small decreases in average rental rates during the quarter.
Investment activity is strong in the retail sector with investors seeking Metro Phoenix assets that currently have very low cap rates. Construction of new retail space is increasing. Year-to-date, approximately 394,000 square feet of new retail space has been completed, which is the equivalent of 86% of the total for all of 2014. Scottsdale Fashion Square has the largest construction underway with a 142,000-square-foot expansion that is fully preleased.
