Retail Commercial Update
July 25, 2015
Written by: Ari Spiro
President and Founder, ORION Investment Real Estate
Phoenix metro shopping center is no longer a cringe-worthy phrase that one is afraid to utter in the real estate world. In fact, after a 6-year period of bumping along the bottom after a freefall never experienced before in our market, Phoenix metro retail has roared back to an “en vogue” status receiving local, national and even international attention.
The last few quarters in 2014 and 2015 in the Phoenix metro retail sector is producing a dollar volume not seen since its peak in Q1 2007. The trailing 12 months dollar volume ending Q2 2015 totaled nearly $900 million overall; tenfold the volume compared to 2009 and 2010. Although sales volume stands 30% to 40% off peak compared to 2005, the Phoenix metro retail market is progressing steadily.
During Q4 2014, Q1 2015 and Q2 2015, the total number of transactions of multi-tenant retail properties over 10,000 square feet exceeded over 200 retail transactions for the trailing 12 months. This velocity is 30% more than the market’s heyday of 2005-2007 and only occurred one other time in 2012 when banks purged properties. Buyer exuberance coupled with improving local and national economic indicators have been impactful – driving pricing up a solid 20% over the past 3 years. To date, investor interest to competitively enter the Phoenix retail market is slow. At the same time, expected cyclical trends in combination with recent sales volume increases are keeping investors tapped into the market.
Phoenix metro retail provides a particularly intriguing storyline for investors. The average price per square feet of retail centers sold over the last year is approximately 80% below peak value achieved in late-2006 and early-2007. With current pricing at depressed levels, many industry insiders are quietly predicting values to double within the next decade.
Bargains exist with much of the retail market selling at below replacement cost. Additionally, financing remains increasing available at low interest rates fueling historically low cap rates for properties. Despite the widespread belief that the Federal Reserve will make incremental increases to interest rates over the next year, many retail investors believe we will remain in a historically low interest rate and cap rate environment. Investors also believe future retail value enhancement propositions will be in the form of increasing rental rates.
With construction costs escalating and land values rebounding, lease rates are projected to increase approximately 80% to a range within the mid $20 point per square feet to support increased development expenditures.
Outside of single-tenant construction of restaurants and bank buildings, the retail market has not kept pace with the consistent growth in population in Phoenix metro. Many investors have been waiting for rents and development to rebound further. More importantly, with an increase in retail transactions, investors are now not afraid to put real dollars behind their theories and continue to fuel growth in Phoenix metro retail.
Ari will be a host speaker at our upcoming Commercial Seminar on Friday, August 28.
