Before the global pandemic, Phoenix’s retail market was resilient in the face of an evolving industry due to positive demand drivers and a conservative supply pipeline. However, the economic disruption caused by the coronavirus has created significant headwinds for the market, which has become evident in the retail metrics. To some, this may feel as if they are walking directly into a windstorm, but hope is ahead. Post pandemic predictions expect Phoenix to ease its way back within the retail market.
When the market eventually adjusts and returns to a pre-pandemic state, job and population growth will support retail demand in Phoenix. However, brick-and-mortar retailers will remain in competition with e-commerce and will need to be agile as consumer buying patterns continue to evolve.
While the local retail market showed resilience in the face of a fast-changing retail landscape over the past several years, the coronavirus has dealt a significant blow and is weighing on Phoenix’s metrics. Vacancies have lifted from 7.0% in 19Q4 to 7.8%.
Some new-to-the-market retailers and existing tenants have been expanding, which has helped offset the negative impact of national store closures. Yet many of these tenants are building new, rather than absorbing vacant space on the market. Discount retailers and hobby stores have held up well. In July, TJ Maxx and Michaels opened newly delivered spaces in Laveen Park Place. Aldi will make its first entrance into Phoenix with the opening of four locations by year end. The German discount grocer will move into newly delivered space in fast-growing suburbs Gilbert, Goodyear, and Peoria, and will occupy an existing storefront in Chandler. Fry’s is also building two locations in Gilbert.
Over the past 12 months, rents increased by 1.3%, which is better than the national average. Rents still have a way to go before returning pre-pandemic levels. While the full impact of the pandemic is not yet evident in the data, we will continue to monitor the health of the sector.
In previous quarters, landlords at strip and neighborhood centers have realized modest rent growth. Still, malls have struggled, with the segment recording measurable rent reductions over the past few quarters. Malls that have diversified their tenant bases to include more “internet-resistant” tenants such as theaters, restaurants, and even office space have faired better than malls whose main composition is apparel retailers. However, internet-resistant retailers have been the hardest hit by the coronavirus due to social distancing.
Most retail construction is made up of built-to-suits for gyms, fast food and grocery-anchored shopping centers. About 820,000 SF of retail space is under construction, which accounts for about 0.4% of the existing inventory, a small share by historical standards.
Looking ahead, a conservative supply will limit pressures in the Phoenix retail market, which has been the case in years past. Construction starts have tumbled this year and development is expected to remain modest over the next several quarters.
Economic volatility and rising uncertainties have caused many investors and lenders to pause, negatively affecting Phoenix’s capital market’s scene. Deals are still occurring and are driven by upcoming 1031 exchange deadlines and demand for grocery-anchored retail centers, drug stores, drive-thrus, and auto-part retailers.
National investors are heavily targeting Walgreens and CVS locations in the Valley. Cap rates for these properties fall in the high-5% to mid-6% range. The Walgreens on Mill Avenue in Tempe earned the highest price per SF among the drug store trades this year, selling for $625/SF in May.
The latest employment report from the Bureau of Labor Statistics illustrates the weight of the impact and the path to recovery. From March to April, the market lost 200,000 jobs. Since then, employment has started to edge up, making Phoenix one of the nation’s best performing large metros. By September, the market recovered about 45% of March’s job losses as businesses reopened, and school began.
Thanks to the large labor pool, businesses are selecting Phoenix to expand their operations. While labor is the primary driver behind the market’s business attraction success, relative affordability helps tip the scale in favor of Phoenix when companies make their site selection decision.
While it is clear that the retail market has taken a hit during the pandemic, Phoenix’s consistent growth and California investors should help to bring the valley back up to pre-COVID conditions once this has passed. If you have any questions regarding the retail or any other commercial market, please do not hesitate to contact me.