Phoenix, AZ Retail Market Report
Market Overview
The retail market in Phoenix is experiencing strong performance, driven by a thriving labor market, expanding consumer base, and positive demographics. In Q2 2023, net absorption of retail space reached its highest level in the past 12 months since the Great Recession, indicating a healthy demand for retail properties. Quick-service restaurants, fitness users, grocers, and medical tenants are driving leasing activity in Phoenix, and this demand is expected to remain robust, resulting in low vacancy rates throughout 2023. The city’s rapidly growing suburbs have experienced significant gains in retail demand and expansion thanks to the availability of affordable land. While construction starts have increased recently, the overall pipeline remains modest compared to historical standards, with build-to-suit projects being common due to limited available space. Rent growth in Phoenix has consistently outpaced the national level, with lower-cost submarkets experiencing the strongest increases. Investors are attracted to the market due to healthy fundamentals and attractive yields, although higher interest rates have started to impact sales volume.
Highlights
- Rents in Phoenix are up 9.6% year-over-year to $23.72 per square foot.
- Phoenix completed $2.5 billion in retail sales volume in the past 12 months.
- Drive-thru properties are in high demand due to shifting consumer behaviors and the increased adoption of mobile ordering and food delivery.
- Phoenix ranks among the top markets in the nation for new demand, fueled by its attractive demographic profile and diversified local economy.
Rents | Vacancy | Construction
Phoenix retail rents have finally surpassed the previous cycle’s peak, reaching an all-time high in Q1 2023.
Over the past 12 months, the average asking rent of Phoenix retail properties increased by 9.6%, surpassing the national average of 3.5%. Projections indicate that Phoenix retail rent growth will continue, with a predicted 7.2% increase by the end of 2023. The Phoenix retail market has experienced robust leasing activity, with approximately 4.3 million square feet of space absorbed in the past 12 months. Smaller tenants dominate leasing activity since approximately 85% of leases signed in the past year were for spaces under 5,000 square feet. Additionally, 2.1 million square feet of retail space was delivered over the past year, with 2,153,200 square feet currently in the construction pipeline. Most construction is for small to mid-sized spaces, catering to restaurants, fast-food operators, grocers, gyms, and coffee shops.
Sales
Phoenix, By the Numbers in the Last 12 Months
- Square Feet Delivered: 2.1M
- Properties Under Construction: 118
- Rent Growth: 9.6%
- Sales Volume: $2.5B
- Average Vacancy Rate: 4.7%
The Phoenix retail market has seen record levels of investment, with approximately $2.5 billion in retail sales volume in the past 12 months, outpacing the historical average of $1.7 billion. However, in H1 2023, approximately $750 million worth of sales were recorded, reflecting a 50% decrease compared to the average sales volume during the same period in 2021 and 2022, attributed to the changing capital markets environment and increased economic uncertainty, including rising borrowing costs. Furthermore, rising interest rates and tighter lending standards are anticipated to have a negative impact on transaction volumes and pricing, with average cap rates expected to face upward pressure in the future. Out-of-state private buyers, primarily from California, have been the most active in the Phoenix retail market.
