PHOENIX—A brief tour of downtown and the Valley's suburbs gives a semi-accurate snapshot of the strip mall vacancy scenario: there are vacancies aplenty, and it doesn't look as though the outlook will be changing any time soon.
With a fourth quarter snapshot to date holding the Valley's strip mall vacancies at 17%, Cassidy Turley broker Brad Douglass tells GLOBEST.COM how the Valley became positioned thus, and what he thinks the future of 2014 holds for strip malls across the Valley. Like a lot of segments of this market, the trouble hearkens not just to the 2008 economic downturn, but to what directly preceded it.
How did the Valley get so many strip malls in the first place?
According to Douglass, many were built on a speculative basis between 2000 and 2007, with a lot of newcomers trying to get into the commercial real estate business—some of them without the means or the knowhow. Also, as a result of urban sprawl, Douglass says each new neighborhood development felt the need for a retail corner, even when it wasn't completely viable or necessary.
Then came 2008.
“As a result of the downturn many shopping centers went through foreclosure and back into the hands of banks. When these banks went to resell theses centers they were sold mostly for cash to new investors at a discount. For example: 30 cents to 50 cents of the original 2007 values,” says Douglass. “As a result of this lower purchase price, these new investors could offer rents for spaces at rates that were much lower than before. So this has created a movement of many strip center tenants upgrading into neighborhood grocery-anchored centers that have a larger draw or anchor like Safeway, Walgreens or Fry's.”
So as some tenants upgraded their businesses and their digs, many strip malls were left with few tenants and deferred maintenance, which made them less attractive than ever to businesses. Especially when a tenant could get the same or more amenities in a higher end center for the same rent.
Deferred maintenance is a real problem for many strip malls, it's driving away current tenants and keeping new ones at bay.
In the East Valley, Mesa strip malls have been hit particularly hard.
“Quarter over quarter Mesa has the highest vacancy rate,” says Douglass. “On the whole Mesa has suffered from soft demand and over supply. We've struggled in filling those vacancies.”
The solution may come in looking at strip malls in a different light—as viewing the spaces for alternative uses. And there has been some success in that arena.
“We're taking a look at what is not a traditional retail use. We're seeing a lot of urgent cares, government type uses, like satellite offices for DMVs and other government services. We're seeing a lot of gyms and the like,” says Douglass.
Although Douglass says he sees rents starting to stabilize, strip malls, he reiterates, have a ways to go. “That deferred maintenance is a big issue, but we are starting to see some property improvement,” says Douglass. “But on the whole, we still have an excessive supply of retail strip space. We need to look for alternative uses, otherwise you just end up chasing the bottom.”
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