PHOENIX—If you walked the miles and miles (and did I mention miles?) of show floor at RECon last year and talked with most of the exhibitors, the majority were nearly giddy with excitement over the recovering state of retail. And it was justifiable to a degree, since the market sector had been the poster child of the last downturn.

But, of course, real estate is still local and more nuanced, as Jan Fincham, and Patrick Dempsey, principals in the Phoenix office of Lee & Associates, explain. Don't get me wrong, they're both enthused about the direction the asset class is going. But they're also realistic in acknowledging that there's still some post-recessionary catching up to do.

The focus for the smart investor, they say, is the shopping center, in particular grocery-anchored centers, and the best bets live at the top and the bottom of the market. Or as the Lee partners say: the trophies and the trash.

GlobeSt.com: So what's the retail picture in Phoenix and throughout the Southwest?

Fincham: Across the country in general there's a big demand for shopping centers, particularly grocery-anchored centers. Investors perceive this to be the safest investment because people make multiple trips a week to grocery stores, and the satellite tenants adjacent to them are the beneficiaries of all of that traffic.

GlobeSt.com: We've heard so much about the growing social appeal of centers and their growing role as a hub of entertainment. Are you seeing that?

Dempsey: Through the recovery, we've seen that growth, particularly in the form of popular quick-serve restaurant concepts, whether you consider that a component of entertainment or not. Clearly theaters have evolved as well in some of our properties. But owners gravitate to anything that can drive traffic, improve the asset and differentiate themselves, including venues that offer entertainment.

Fincham: Those quick-serve restaurants pay good rent too. When one comes into a shopping center, the landlord generally has to provide TI dollars to get them up and going. Their rents then are going to be higher.

GlobeSt.com: Speaking of which, in general what are you seeing in rental rates?

Fincham: Since the recovery, rents have started to creep up nationally.  In the Southwest we've just gotten to the point where we're starting to see rental rate increases.

Dempsey: There are so many varieties of retail centers out there, whether it's grocery-anchored or strip or power centers. Then there are locational differences. Rents are also directly correlated to performance in retail, so given all of these factors, we've seen a very wide range. We're evaluating properties now where shop space can be as low as $14 or $15 a foot to as high as $60. Phoenix in particular but many of the Western markets have come back to equilibrium from a supply/demand perspective, so there's not much space available. We're below 10% in many submarkets, which is healthy, and we're close to 5% in some of the best submarkets in Phoenix. However, occupancy has come at the cost of rental rates. So as Jan was saying we're posed for a spike in rents.

GlobeSt.com: We've talked about popular entertainment-type tenants and groceries. What other types are you seeing?

Fincham: There are always new categories of tenants that surface. But value retailers like Dollar Store and Dollar Tree are very popular, and Goodwill Industries is a rapidly growing tenant. The economy is still not robust, even if it's better than it was. And we're all seeing the effects of that.

Dempsey: Jan and I are working on a few deals where the popular tenants are T-Mobile or Verizon-type retailers because they want to be well-located for shopper convenience.  It's now part of mainstream retail to be able to stop in and exchange your phone and update your plan.

GlobeSt.com: So what investors are you working with and what are they looking at?

Fincham: For the grocery-anchored class with best-in-class grocers such as Kroger or Whole Foods, you've got institutional investors, pension funds and REITs, and they're outbidding everybody else.

When you step down into the next category, value-add, maybe with some vacancy and a need for repositioning, then you've got private investment groups that raise money through friends, family or maybe an institutional partner. They come in, shore up the asset, add value and share in the profitability.

Dempsey: Low-cost financing that Jan's referring to allows private groups to be very competitive in this stage of the market.

GlobeSt.com: We've covered the institutional-grade stuff and the value-add.  What about the middle ground?

Dempsey: We're back to peak pricing for many institutional-quality assets. However, the B and C assets are being priced at discounts to what the best properties are selling for.

Fincham: What's selling right now are the trophies and the trash. The trophies are sought after and the prices are being pushed upward. There is not as much demand for the propertieis in the middle. And the action returns when you consider the value-add. A lot of the investors who buy these asset have institutional money for equity. They pay a preferred return and share in the upside on a 50/50 basis or some negotiated split. That's where the most opportunity is for the operators.

GlobeSt.com: So what's the outlook?

Dempsey: We live this every day, and its music to our ears that the investment-sale market for retail is strong. We see it in the volume and the broad array of transactions that are being completed. So we anticipate continued improvement in 2015, and it will continue through 2016.