Phoenix Retail Rents Soar As Vacancy Hits All-Time Low

Article originally posted on CoStar on June 27, 2023

Historically tight market conditions driven by robust population growth and healthy consumer spending have sent rents surging in the Phoenix retail market.

Annual rent growth surpassed 9% in the second quarter of 2023, one of the best performances in the country and triple the market’s pre-pandemic, five-year average. For comparison, the United States as a whole recorded an annual rent increase of 3.6%.

The Phoenix metropolitan statistical area ranked as the fourth-fastest-growing market in the U.S. in 2022, as individuals and businesses flocked to The Valley chasing affordability, job opportunity, quality of life and a less-restrictive regulatory environment. These healthy demographic tailwinds fueled demand for growing retailers that are now finding fewer options for expansion. Additionally, the construction pipeline remains muted with only 2.1 million square feet underway, down from a high of over 11 million square feet in 2006. Much of the new development is for build-to-suit projects, and about 85% of it is being built with a tenant already in place.

Strong underlying retail demand coupled with a lack of supply-side pressure compressed the Phoenix availability rate below 5% in the second quarter of 2023, a more than 300-basis-point improvement from the level seen entering the pandemic. As a result, local landlords have been able to achieve outsize rent increases, positioning Phoenix as one of the strongest rent-growth markets in the county.

Other high-growth markets have outperformed for many of the same reasons. Sun Belt regions dominate the ranking of markets with the largest rent gains, occupying eight of the top 10 positions. Powerful in-migration trends in places such as Florida, Nevada, Texas, Tennessee and the Carolinas have contributed to healthy retail growth in these markets.

Moving forward, expectations are for Phoenix retail rent gains to normalize in the coming quarters as the market transitions to a more typical growth trajectory. Macroeconomic concerns, including the potential for a recession, present some downside risks if consumers reduce their spending amid labor market weakness. Nevertheless, strong competition for available space is expected to continue over the near term, and CoStar’s current baseline forecast calls for Phoenix rent growth to outpace the national level through 2024.