At the end of the third quarter, the vacancy rate for retail space was 6.77%, up only slightly from the second quarter, according to a new survey by the Phoenix office of CB Richard Ellis. Exclude the regional malls and the rate goes to 7.38%. "Surprisingly, we look OK," says Judi Butterworth, a CB Richard Ellis broker in Phoenix. "That's still a good vacancy rate."
The strongest Q3 market was the north Scottsdale area, Butterworth says. "North Scottsdale has just been on fire," she says. "If they are even remotely high-end, they have to be in Scottsdale." Scottsdale's vacancy is 4.16%, the lowest of any submarket in the Valley.
The poorest performing submarket is northwest Phoenix, which posted a 10.18% vacancy. The area has 75 centers, many of which are older or in neighborhoods in transition, says Butterworth.
Any new centers that have been built during the year had high levels of pre-leasing and therefore aren't bringing a lot of empty space to the market, according to Butterworth. The major retail projects opening this quarter, Chandler Fashion Square and Desert Ridge Marketplace in north Phoenix, with occupancies of above 90%.
Major retailers such as Sam's Club, Costco, Super Wal-Mart, Target, Home Depot and Lowe's continue to expand in the region, as does the fiercely competitive drug store chains even though they typically don't show up on surveys because their buildings are under 30,000 sf. Still, they have built more than 30 locations in the Valley so far this year, bringing between 300,000 sf and 500,000 sf to the market, Butterworth says.
Lower interest rates fuel the residential market, which in turn feeds the development of grocery-anchored centers. The Valley is on pace to surpass the number of homes built last year, perhaps adding as many as 30,000 before the year's out. Several new grocery-anchored centers are on the drawing board. The hotbeds of residential development in the suburbs of Gilbert, Chandler, Queen Creek, West Phoenix, Litchfield Park and Avondale all are in line for new grocery-anchored centers, albeit smaller ones than in the metro area. Developers are leaning toward centers with just 20,000 sf of additional space and a few retail pads, whereas last year they might have built 70,000 sf of additional space. "It's a lot easier to fill a small center," Butterworth points out.
The region's retail sector was braced for a space glut by the closing of nearly 60 stores by ABCO and Fry's, but that has mostly been absorbed and hasn't hurt the market, according to Butterworth. National chains, IGA supermarkets and Southwest Supermarkets took nearly 40 of the closed stores and reopened them under new flags. "I was encouraged that we were able to absorb as much as we did," she says. "That's really positive."
Investors remain interested in the Valley because it's perceived as a stable market that will continue to grow. The relatively few number of retail centers on the block has kept demand high. "There are still many, many buyers of retail products," she says, "everything from valued-added to top of the line. Investors feel comfortable buying something in our marketplace because we have been stable and we are diverse.
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