Phoenix and Raleigh Lead the US in Retail Rent Growth

Article originally posted on CoStar on March 8, 2024

The Phoenix and Raleigh, North Carolina, retail markets were firing on all cylinders last year as they were the only major U.S. markets where annual asking rent growth exceeded 9% in 2023, earning them the top spots in the nation’s ranking.

Though these two high-growth Sun Belt markets are located in opposite corners of the southern United States, they boast similar demand drivers. Strong in-migration, rising incomes and growing local economies fuel robust underlying retail demand.

A lack of meaningful supply additions and limited store closures also have helped compress space availability to record lows. As a result, these tight market conditions have provided retail landlords with ample leverage to raise rents, while increased profitability and efficiency at the individual store level have allowed tenants to absorb higher occupancy costs.

The average asking rent for Phoenix retail properties rose 9.7% in 2023, the largest increase in the country and nearly triple the U.S. level of 3.4%.

Phoenix’s recent outperformance is a noteworthy departure from historical norms. Before the pandemic, the Valley’s rent growth either matched or lagged the national average. The surge in demand following COVID-19, however, catapulted Phoenix toward the top of the rankings. The Valley was a major hot spot for relocations in 2020 and beyond, which helped bolster spending growth and retail space demand. Residents flocked from expensive, urban gateway markets to the south and west seeking greater affordability, more job opportunities and better weather. According to the latest data from the U.S. Census Bureau, an average of 175 people move to the metropolitan area every day.

Geographically, gains have been broad-based. All 10 of Phoenix’s major retail districts boast rates of rent growth that are more than double the U.S. level. Pinal County, in particular, has been an outperformer. The affordable exurb comprises large swaths of land in the southern portion of the greater Phoenix market. It has seen rents climb 31% since the fourth quarter of 2019, compared with a 27.5% increase for the Valley as a whole.

Asking rents for retail space in Raleigh increased 9.5% last year, the second-highest gain among major U.S. markets.

The annual rent growth was a record for Raleigh, but the market has long outpaced the rest of the country. Over the past decade, rents have increased in Raleigh by 61.9%, while rents across the U.S. have grown 33.1%. Raleigh has had higher rent growth than the national average each year since 2016.

Like in Phoenix, the increases have been widespread in Raleigh. Annual rent growth is at least double the national average in each of Raleigh’s primary residential districts, and more than half saw double-digit gains. The highest-performing areas were communities on the closest northern side of the market, such as Route 1 and neighboring Northeast Wake County. Route 1 is home to the affluent and fast-growing town of Wake Forest.

The elevated level of rent growth in Raleigh has been supported by the market’s high population growth and rising income levels. Raleigh’s population increased by over 2% last year, the third-fastest rate among U.S. markets with populations over 1 million.

Much of the market is located in Wake County, which has a median household income of over $97,000 according to the U.S. Census Bureau. That number has increased 51.5% over the past decade, while nationally, incomes have risen 46.2%.

As population and income have risen, availabilities in the market have hit record lows. Brokers representing owners say competition for space has increased and it is not unusual for landlords to receive multiple offers on available spaces, driving rents higher.

U.S. consumers are carrying a record amount of debt while credit card utilization is up and missed payments have been rising. All these signs point toward a reduction in consumer spending, and earlier this year retail sales growth turned negative.

These macroeconomic developments will reduce retailers’ ability to support rent growth in markets across the country. National rent growth has decelerated over the past year and is expected to continue to moderate.

Phoenix and Raleigh are not immune from these larger forces, and rent growth is expected to decelerate in both markets. However, both regions remain attractive areas for relocation for both people and businesses and should continue to outperform in population and job growth. That will likely keep rent growth in the markets above the national average even as it slows from its current record levels.