Phoenix Retail Space Availability Falls Below US for First Time in 15 Years

Article originally posted on CoStar on December 11, 2023

The Phoenix retail market recently hit an inflection point that hasn’t happened in at least 15 years. The share of space available to lease declined to 4.6% in the third quarter, surpassing the 4.9% U.S. level.

In the decade leading up to the onset of the pandemic, Phoenix carried a structurally higher availability rate, averaging about 310 basis points above the nation’s. Since then, the Valley has been on a historic run of outperformance, with vacancy and availability steadily falling to the lowest level on record.

In fact, the availability rate in Phoenix has declined 340 basis points since the fourth quarter of 2019, the largest decrease among the 50 largest retail markets in the country. The United States recorded a 100-basis-point decline during the same period.

Phoenix boasts several advantages underpinning these nation-leading demand figures.

The Valley is among the best-positioned markets in the country, with strong rates of population gains, net migration and purchasing power growth. The robust consumer base not only has encouraged retailer expansion, but it also has reduced store closures, which are at one of the lowest levels on record.

Phoenix also has benefited from a lack of supply side pressure. Harsh lessons learned during the Great Recession have left developers and lenders much more disciplined during the most recent expansion. From 2006 to 2008, builders completed an average of more than 10 million square feet of retail space per year, compared with about 2 million square feet per year over the past decade. In addition, the removal of older, obsolete stock has helped refine Phoenix’s retail inventory.

Moving forward, market conditions here are expected to remain tight. CoStar’s base case forecast calls for vacancy to stay flat in 2024, sustaining the record-low level. Though there are some recent indications that the American consumer may be reaching their limit, the Valley’s limited construction pipeline, healthy local economy and strong demographic momentum keep the area well-positioned for the coming year.