As the economy goes… For years Phoenix, the nation’s prototype Sun Belt boom town, was host to one of the nation’s most prolific retail real estate development juggernauts. Many millions of square feet were built in a wide variety of project types along new highways and elsewhere as residential development spread rapidly throughout the metro area. The recession, which had harsh impacts on the local market, has now been followed by the return of job growth—and population growth rates have increased following the recent slowdown. These factors bode well for the local market. If a new economic boom and new explosions of demand and development for retail are not on the near-term horizon, the market’s recovery is underway nonetheless.
While still above the national rate, vacancy in the 69.8-million-square-foot local community-neighborhood shopping center market is moving downward amid positive absorption and growth, albeit modest in proportion, has returned to average rents. Similar trends and comparisons are apparent in the power center market as well. The low construction profile of the recent term is being followed by renewed activity—a “modest” building boom in the words of Marcus & Millichap.
The recession brought construction in the community-neighborhood shopping center sector to a near halt—but not before negative absorption drove the rate to its 12.1% cyclical peak in first quarter 2011. With absorption turning positive—first slowly, then more decisively—the rate has been moving downward. By the end of the second quarter of 2012 it had decreased to 11.5%, down 30 basis points for the quarter, down 60 year-over-year. Additional declines are expected for year-end and after. The second quarter national community-neighborhood sector vacancy rate, for the sake of comparison, was 10.8%, down 10 points for the period.
Vacancy in the local power center market, also above the same-category national rate, also has been declining. Reis put the second quarter rate at 6.7%, down 20 basis points for the quarter, down 90 year-over-year. The second quarter national power center rate was 6.3%, down 10 and 50 points for the quarter and since the second quarter of 2011. The backfilling of big-box spaces emptied earlier has contributed to the improvement in power center occupancy. For the 215-million-square-foot retail market tracked by Cushman & Wakefield, second quarter vacancy overall was 11.8%, down 40 basis points year-over-year. “[N]ominal new supply will help vacancies correct sharply over the next two years,” advises this source.
SUPPLY AND DEMAND
As large as its pre-recession completion volumes were—1.5 million square feet on average per year over the 15-year span ending with 2008—the community-neighborhood shopping center market was but the tip of the iceberg for Phoenix area retail development during the period as any number of major large-format projects brought millions of square feet of space on line. To say the least, the recession with its weak demand and rising vacancies had a chilling effect. Indeed, for all retail combined, Reis reports the completion of only 76,525 square feet all told in 2011, 65,525 of which, in a single project, belonged to the community-neighborhood segment. A slowdown in construction deliveries of this magnitude was unprecedented on Reis’ books for this market in some 30 years of coverage.
With the economy, population growth and demand for retail real estate product turning the corner, 2012 provides the foundations for a new cycle of construction. Indeed, alongside 382,000 square feet of newly completed supply year-to-date (in a single community center in Peoria in January—see Submarkets) net absorption for the first half of the year ran at 642,000 square feet, a comfortable excess over the new supply. Reis’ late-August report on individual retail construction projects anticipates the delivery all told of 1.8 million square feet this year, mainly in large-format projects including two power centers and an outlet center in west suburban Glendale. In addition, a second outlet center, at 360,000 square feet, broke ground in March in Chandler (see Submarkets). No additional community-neighborhood shopping sector projects are under construction for delivery this year. Reis expects construction in this sector to increase slowly; net absorption should maintain its positive margins over new supply.
What could be a highly significant favorable turn for retail demand, meanwhile, may be getting underway. As noted in the opening section of this report, marked signs of improvement, including rising sales prices, declining inventories and foreclosures, and even the small-scale return of construction, have appeared in the local single-family market. As trends in that market unfold, notes Marcus & Millichap, “retailers that shuttered during the housing crisis will be encouraged to expand in densely populated areas of the metro.” In addition, adds this source, “most of the submarkets will post positive absorption this year as new supply remains limited and national tenants, including Sprouts, Hobby Lobby, and Dollar General, capitalize on the available space and low rents,” states Marcus & Millichap. Cutting the other way, however, store closures through recent years by Borders, Circuit City and Best Buy have left more than 8.5 million square feet of empty big-box space on the market, according to Marcus & Millichap.
Three years of negative growth, with rates of loss diminishing by the year, have finally come to an end in the local community-neighborhood shopping center market. At $18.67 psf and $15.96 psf, asking and effective averages for the second quarter of 2012 were up 0.2% and 0.3% from the quarter before following identical rates of increase during the first quarter. With
these gains, most of the modest losses suffered in 2011 were redeemed. A similarly modest performance is expected for the remainder of the year before growth picks up somewhat in 2013. The recent performance of power center rents as tracked by Reis has been similar. At $26.38 psf, the second quarter average asking lease price for non-anchor power center space was up 0.3% from the quarter before and was up 0.9% year-over-year. “Operators sitting on large blocks of space in established areas,” comments Marcus & Millichap, “will have to offer lucrative concessions to backfill the space, while properties in less-desirable neighborhoods will struggle to attract tenants.”