Big-Box Retailers Drive Leasing Activity in Phoenix

The retail sector has been hard hit by the recession, but Phoenix is pulling through. The market had positive net absorption in the third quarter, driven largely by activity from big-box retailers. According to a report from Colliers International, Phoenix posted 101,270 square feet in absorption during third quarter; however, the vacancy rate grew slightly to 7.7%.

“Big box anchor tenants are driving the positive activity in Phoenix, particularly in build to suits opportunities,” Phillip Hernandez, research manager at Colliers International, tells GlobeSt.com. “Currently of all retail product under construction there is only 6 percent of available space, with large commitments from grocery stores and gym tenants.”

Grocery retailers largely led this activity, including Costco, Safeway and Sprouts, as well as Fry’s Marketplace. “[These retailers] represent four of the five largest retail deliveries in 2020, predominately on the outskirts of town, being fed by the continued sprawl both in the east and west valley,” says Hernandez.

In addition to leasing activity and expansion from big-box retailers, Phoenix also had a1.7% increase in employment during the quarter to close the quarter at 5.9%, which was considered low compared to other markets. In addition, Phoenix had fewer and shorter business closures. Altogether, this also helped contribute to stronger retail activity.

While Phoenix is certainly outperforming other markets, the retail sector is facing challenges. Rental rates have fallen below pre-pandemic levels to .2% lower to $14.62 per square foot. “Rents had a slight increase compared to third quarter 2019, but the slowed increase is directly affected by the volatility of the market,” says Hernandez. “With a lot of uncertainty and the national announcements of companies going out of business, landlords know they need to be extremely competitive when marketing available space.”

Still, ongoing grocery expansion plans could spell more positive activity. Aldi, for example, is opening two locations before the end of the year, and it will open another 11 next year. “Two fast casual burger chains have quietly expressed plans to expand their footprint in the valley,” adds Hernandez. “The retail market has not made the complete recovery from Covid, however the strong population growth is expected to continue and the suburban areas will continue to have healthy construction and leasing.”