Vacancy of retail space declined in second quarter as market improves
Net absorption of retail space for the first half of 2021 totals 496,542 square feet. This includes 249,645 square feet of positive net absorption during the second quarter. Net absorption volume posted during the first six months of 2021 is the highest since 2018. Leasing was strongest in the East Valley, where 399,172 square feet of new direct deals were completed.
In May, sporting goods company Sheels committed to occupy the former Nordstrom’s space at Chandler Fashion Square. This will be the company’s first Greater Phoenix location with opening planned in 2023. Sportsman Warehouse signed a lease for 32,019 square feet at Chandler Pavilions, relocating to the former Toys R Us space. Outside of the East Valley, ExtraSpace Storage signed the largest deal, involving 55,255 square feet at a former Safeway space in Surprise, Arizona.
Vacancy in retail space fell 10 basis points during second quarter to 7.4 percent. This is an increase of 10 basis points year-over-year. Scottsdale posted the largest decline in vacancy during second second quarter. The area’s vacancy fell 110 basis points to 5.3 percent. West Valley posted the lowest vacancy for the second consecutive quarter at 5.0 percent. This is a 40-basis-point decline year-over-year.
The highest retail vacancy is found in North Phoenix, where 10.4 percent of space is available, marking an increase of 130 basis points year-over-year. Colliers notes a significant change in the retail inventory, having removed Paradise Valley Mall. The project will be added back next quarter to the “under construction” category when the mall’s redevelopment is started.
Average rental rates finished the second quarter at $14.90 per square foot, marking an increase of 1.02 percent over-the-quarter and 1.98 percent year-over-year. Every Valley submarket but North Scottsdale posted a year-over-year increase in rental rates. North Scottsdale posted a 2.1 percent decline in rates from mid-year 2020 to the end of June 2021. West Valley and Northwest Phoenix submarkets posted the largest year-over-year rental rate increases, jumping 7.9 and 7.1 percent, respectively. Scottsdale submarket boasts the highest rental rates, increasing 0.52 percent over-the-quarter to $25.10 per square foot.
Construction of new retail properties moved forward during second quarter with the completion of three projects totaling 188,470 square feet and another 382,505 square feet now underway. The three projects completed were 100 percent leased and include: two EOS Fitness facilities in Gilbert totaling 64,400 square feet and a Fry’s Marketplace comprised of 124,070 square feet at Village Grove at Verrado in Buckeye.
Year-to-date, the market added 419,490 square feet of new retail space to inventory. At this point, the redevelopment of Papago Plaza in Scottsdale is the only inner core project under construction. All other new projects are located in the Southeast, West Valley and Northwest submarkets, The East Valley has the most activity with five properties underway totaling 126,562 square feet.
Investment interest in Phoenix’s retail properties improved during the second quarter. Transactions totaling $350 million were completed during second quarter, bringing the total year-to-date to $636 million in sales volume. The median price paid per square foot landed at $222. Drug store sales were very active during second quarter with 10 transactions totaling $52 million.
The largest retail sale during second quarter was the $162.5 million sale of Camelback Colonnade. The 1,098,685-square-foot center in the Camelback Corridor was sold by RED Development to Federal Realty Investment Trust. The same buyer purchased Hilton Village from RED Development for $37.5 million ($388/SF.)
Pent-up demand for retail activity was set loose as pandemic restrictions were lifted. This resulted in a 25 percent increase in retail spending compared to January 2020. Greater Phoenix remains in the top position for metro areas receiving immigration for the third consecutive year from July 2019-2020. This resulted in more demand by retailers to enter our market. Development in suburban areas accounts for more than 80 percent of retail construction as developers actively work to keep up with the city’s expansion.
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