Above: The renovations at Scottsdale Fashion Square show a mall willing to continue to provide the experiential retail experiences of the future, as malls across the nation close down, or renovate in hopes of attracting non-retail users.(Provided rendering by Scottsdale Fashion Square)
The Greater Phoenix retail real estate market began 2018 with impressive sales and leasing but closed out the year with a relatively flat performance in fourth quarter.
Retail vacancy dropped 10 basis points during the fourth quarter to 7.3 percent. The vacancy now rests 80 basis points below a year ago. The rate has dropped each of the past eight quarters, though the improvement has leveled off a bit.
The city posted its weakest fourth quarter net absorption figures since 2015. Net absorption for this traditionally strong quarter totaled 261,500 square feet. Since 2010, tenants have created fourth quarter net absorption averaging 750,000 square feet. Last year, fourth quarter net absorption topped 1.2 million square feet. Despite the fourth quarter slowdown, the retail market accumulated nearly 2.1 million square feet of net absorption in 2018. This makes 2018 the second strongest year for net absorption in the past five.
Rental rates rose 30 basis points during fourth quarter, finishing up the year at $15.02 per square foot. This is approximately 3.2 percent higher than year-end 2017. Rents in Scottsdale and North Scottsdale submarkets are the highest at $23.77 and $22.17 per square foot respectively. North Scottsdale rents rose 11.8 percent during 2018 and the Airport Area increased its rental rates by 7.9 percent. Scottsdale also posted strong increases with a 5.7 percent elevation in asking rents.
The investment market for retail properties slowed during fourth quarter, when total transaction volume was $84.7 million. This is quite a fall from third quarters transaction volume of $201.6 million. Despite lower sales volume, the median price per square foot for the year increased seven percent to finish 2018 at $134. This past year was a bit of a rollercoaster for investment sales. They were strong in first quarter and fell off during second. They rebounded during third quarter, only to slow down again in fourth quarter. The number of shopping centers that sold decreased by approximately 25 percent of the year to end 2018 at $495.3 million in sales.
Cap rates trended higher for each of the past three quarters, which aligns with the gradual rise in interest rates. Fourth quarter cap rates ended at 8.22 percent, up from third quarter’s average of 8.09 percent.
Fluctuations in the market aside, Greater Phoenix experienced a very healthy 2018 in the retail real estate sector. The local economy remains quite healthy and the housing market is gaining momentum. Expanding retailers will want to take advantage of that growth, especially restaurants and other small-space users who benefit when household incomes are on the rise. The area’s steady improvement in property fundamentals has fueled investment activity but increasing interest rates will drive up cap rates as the next 12-14 months unfold. Better properties will continue benefitting from cap rates in the low to mid-7 range while higher risk investments will experience the cap rate pressure.