Retail construction accelerates in Phoenix, bucking national trend

Article originally posted on CoStar on May 4, 2026

Following more than a decade of limited activity, the Phoenix retail development pipeline is expanding again.

About 2.8 million square feet of retail space was under construction in the Greater Phoenix area in the first quarter of 2026, an acceleration from the 1.6 million square feet underway on average from 2015 to 2019.

That amount represents about 1.1% of existing stock, ranking the Valley among the top-five markets in the nation for most retail space underway, on both an absolute basis and as a percentage of inventory. Phoenix is joined in the ranking by other high-growth Sun Belt markets in Texas and the Southwest.

The pick up in retail development is a divergence from trends seen nationally. The United States as a whole has about 0.5% of inventory underway, down from an average of 0.7% from 2015 to 2019.

While Phoenix has one of the most active retail construction pipelines in the country, it is still not at a level where it is causing an imbalance, according to Kean Thomas, vice president of finance and development with Vestar.

“The Valley has seen a decade of underbuilding following the Global Financial Crisis, and though construction is picking up now, underlying tenant demand remains strong,” Thomas said in an interview with CoStar Analytics.

The current development pipeline is one-quarter of the level seen in 2006. Back then, about 11 million square feet of space was underway, or 5% of existing inventory, according to CoStar data.

Thomas points to three main factors driving the acceleration in retail construction: fundamental tightness in the space markets, growing appetite for retailers to expand store counts and availability of capital.

The Phoenix retail availability rate finished the first quarter at 4.9%, near the lowest level on record. For comparison, the Valley carried an average availability rate of 8.1% in 2019, and the 320-basis-point improvement since then is the largest decline in the United States, among markets with at least 75 million square feet of existing retail inventory.

“Vacancy is ultra-low and gets even tighter in the big-box segment,” said Thomas. “Across our entire 12 million-square-foot Phoenix portfolio, we don’t have a single big-box space available.”

Available space also skews older and in areas with lower household incomes, according to CoStar data, indicating that conditions are even tighter than they may appear for high-quality expansion options.

The healthy fundamental backdrop provides developers and their capital providers with greater confidence to move forward on new construction projects. With low vacancy and steady rent growth in the forecast, the space markets are expected to remain a tailwind for development over the near term.

Another factor helping spur retail construction is a larger appetite from tenants to expand store counts, according to Thomas.

“In most cases, profit margins are healthy, balance sheets are strong, and retailers are increasing efficiency. With fundamental business operations becoming a bigger focus following the stabilization of their e-commerce platforms, a lot of tenants are shifting back to the blocking and tackling of improving their business, which includes expanding locations.”

The improving sentiment among retailers is supportive of construction and provides strong preleasing demand for new developments.

The third, and perhaps most consequential, factor driving the acceleration is the capital markets environment.

“Debt and equity are becoming increasingly accommodating for new retail construction,” said Thomas. “Capital providers are often underweighted to the sector in their portfolio and like retail’s long-term tailwinds.”

The improving cost and availability of capital grease the wheels for new development. It helps with economic feasibility and can clear the way for projects to move forward.

Though the capital markets are warming up to retail, lenders and equity providers are still disciplined, according to Thomas.

“Loan-to-costs are manageable and haven’t widened out much. They also still want to see strong preleasing and locations.”

New construction typically occurs in areas with healthy population growth, new residential construction and a limited existing retail offering. Places like Buckeye, Queen Creek and Surprise have been popular targets for development, according to CoStar data.

“We’re filling the donut,” said Thomas. “Development is going into places that already have a strong consumer base and are underserved in terms of retail.”