How Will Phoenix Absorb New Retail Development

Article originally posted on Globe St. on November 6, 2019

Along with the rest of the market, Phoenix retail is experience a growth spurt. According to a recent report from Colliers International, vacancy is down and net absorption and rental rates are up. The activity has triggered strong new development activity. While only 91,000 square feet of retail delivered in the third quarter, there is 686,000 square feet under construction. While new development is active, it hasn’t surpassed demand.

“I’m not necessarily concerned with over construction in our current market but it helps to put my view into perspective,” Tom Brophy, research director at Colliers International, tells GlobeSt.com. “After peaking at approximately 9M SF under construction at the end of 2006, to its nadir of 360,000 square feet in 2010, we’ve been generally averaging 1 million square feet of new construction since 2016—about 5 million square feet below our peak average set in 2006 to 2008.”

Construction costs have helped to keep new development in check. With costs to build rising, developers are showing restraint before breaking ground. “With both construction costs, including labor and materials, up some 30% over last two years, and land costs remaining elevated, has created enough of a headwind for new construction which, I believe, has acted as a buffer against over development,” says Brophy. “In addition to higher development costs, banks/lenders of retail development are far more strict now than I’ve ever seen which has, essentially, stopped spec development. Case in point, of all retail projects currently under construction, most of that space is pre-leased, in fact only 27 percent of all space is currently available for lease.”

Most of the new developments in this market fall into the experiential retail category. The Butterfly Wonderland or iFly and Octane Raceway in the Salt River Pima-Maricopa Indian Community along the 101, the Great Wolf Lodge and the Medieval Times Dinner & Tournament are examples of these projects. “What many of these new concepts are attempting to do is be Amazon-proof, meaning that they target those businesses where people have to go into and it can’t be easily replicated over the web,” adds Brophy.

While the market is evolving, there is still more change to come. “While there are certainly market force headwinds in retail, specifically from Amazon and the like who are changing the dynamics of the space, it most certainly is an interesting time to be involved in retail,” adds Brophy.

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