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Retail rents rise in this market

7/26/2018
Tenant growth and limited construction have combined for a drop in retail vacancy in Phoenix.

Net absorption of retail space in Greater Phoenix surpassed 500,000 sq. ft. for the second quarter in a row, which signaled continued improvement for the market, according to real estate services and investment management company Colliers International. Limited construction of new space and tightening vacancy forced rental rates up during the last three months.

“The limited addition of new space means that new and expanding retailers are backfilling vacant space,” said Pete O’Neil, research director with Colliers International in Greater Phoenix. “This trend is helping the market recover from recent closings of national retailers as that space is re-purposed.”

The total net absorption for the first half of 2018 is up nearly 10% over the absorption posted during the first six months of 2017.

The total net absorption for the first half of 2018 is up nearly 10% over the absorption posted during the first six months of 2017.

The retail vacancy rate dipped to 7.6% in the second quarter, which is 130 basis points below mid-year 2017. The rate has been trending lower for the past 18 months and is now at its lowest point since mid-2008. Some of the strongest vacancy improvements have been experienced in the East Valley and Scottsdale submarkets.

Rental rates rose to $14.99 per square foot in the second quarter, which marks a 3% rise in the past 12 months. Asking rents in the East Valley rose to above $15 per square foot for the first time since 2010. These rates are up 4.6% from one year ago.

The strong first half of 2018 signals what Colliers believes will be a robust remainder of the year. Traditionally, Phoenix posts its strongest retail performance during the second half of the year. As the economy strengthens and the health of the local housing market continues, consumer spending is expected to rise and support local retail real estate. Investor demand and transaction volume of shopping center sales are expected to be steady since cap rates have remained relatively flat in the environment of rising interest rates.
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