Retail has successfully evolved from the asset class that nobody wanted to touch in 2020–2022 to one of the hottest sectors in commercial real estate. In making that transition, it serves as a good example of how reactive the CRE market can be—often with more volatility in the marketplace than is merited.
Phoenix recently cracked CoStar’s top five in the country for retail rent growth, and also came in at #9 in their ranking of US retail markets. Interest is particularly heavy in segments such as multi-tenant retail centers, where investors can spread risk across multiple tenants, and triple-net deals, which are experiencing rising demand in Greater Phoenix and across the country. “Another interesting twist is that investors are no longer solely focused on tier-one locations,” says R.O.I. Commercial Brokerage Associate Reuben Nach. “Value-add unanchored strip mall space has gained traction, with interest ranging from mom-and-pop investors and owners to larger entities such as Blackstone- and Nuveen-backed companies that are raising funds.”
What’s Behind the Strength in Phoenix Retail Commercial Real Estate?
Nach notes that the current retail market in Phoenix has several strong tailwinds behind it. A few examples:
- Vacancy rate: The past 10 years saw retail at 6.32% in average vacancy, but currently stands at 4.6%.
- Availability rate: This broader metric, which includes vacant space plus occupied space being marketed for sublease or coming soon, also indicates strength. Although it was lower back in late 2023, it is still extremely tight at 4.9% according to CoStar figures.
- Sales cap rates: These rates have normalized, and we are a long way from the record lows during the pandemic, when single-tenant deals were trading in the high threes and low fours. Cap rates for these assets have generally moved into the low-5% to low-6% range—although location, tenant credit, property quality, and lease term can create a broad yield spectrum. Investors are willing to sacrifice some return to get their hands on product, since there simply is not that much available.
- Preleasing: About a third of the new product coming online is available for lease.
- Rental lease rates: The average is currently at $26.52/SF compared to the 10-year average of $21/SF.
Beyond the numbers themselves, exciting new tenants are being announced that are making entries into the Phoenix market such as Micro Center and Vallarta Supermarkets, or growing their footprint, such as Miniso. Developers are taking advantage of the trend, too, with Vestar, Macerich, Red Development, and others working on Class A new developments. In addition to the pocket of building in the TSMC sphere in North Phoenix, the West Valley is buzzing with activity, including Diversified Partners starting on a new project and SimonCRE commencing on the second phase of Prasada.
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