Retail Outlook Positive as Consumer Confidence Returns
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Retail Outlook Positive as Consumer Confidence Returns

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May 16, 2012 – (RealEstateRama) — With the macroeconomic background providing further substance to Arizona’s growth, the retail sector found positive momentum this quarter. As confidence builds nationwide the consumer confidence index leveled off around 70 this quarter after hitting a low of 39.8, during third quarter 2011. The index is a measure of the financial health, spending power and confidence of the average consumer, according to The Consumer Confidence Board. The level of expenditures on food, clothing, and desirable products all increased this quarter, boosting the capacity for retail activity. There were no outstanding factors of influence this quarter, net absorption tracked positive numbers, vacancy rates trended down slightly, and there was soft downward movement in rental rates. Slight growth in the retail market is fueled by optimistic news seen in the manufacturing job market, as well as the increases taking fold in personal income. The remainder of the 2012 should be positive for retail markets. Businesses with solid cash flows looking for additional space, and confident consumers should ramp up demand for a variety of products.

The Phoenix metro area saw the retail markets absorb 355,592 square feet of space this quarter. That marks the third consecutive quarter of positive absorption. The west valley, which includes Glendale and Surprise, marked the highest gains in net absorption, coming in just under 130,000 square feet. The worst performing submarket was the downtown area, posting negative absorption of (-10,128) square feet of space. These results were varied over the different retail space types, with shopping center space absorbing the highest with just fewer than 145, 000 square feet of space. The uptick in absorbed shopping center space reinforces our belief that consumers are ready to spend, and retail tenants will continue expanding. While the recovery is still in its infancy, retail businesses will be forced into competing for superiority, whether is be through newer technology, exclusive designs, or web enabled sales. Forecasts predict approximately 1.5 million square feet will be absorbed throughout 2012. Construction projects this quarter saw 100,646 square feet of space being delivered, down from 158,000 delivered in the fourth quarter of 2011. Space under construction lost ground, following 174,000 square feet of space last quarter, this quarter initiated only 96,035 square feet. We may see large retail space users shifting to more urban areas, moving away from the suburban areas that were hit much harder during the crisis.

Retail vacancy rates dipped down slightly in the first quarter to 12.0% from 12.1%. Only one submarket toppled into single digit numbers; the Sky Harbor Airport area marked a vacancy rate of 8.4%. On the other hand, the East and Northwest Valley had increases in vacancy rates. As for rental rates, data was mixed between submarkets, overall rental rates trended down to $14.72 following a rate of $14.74 during forth quarter 2011. Retail markets approached a trough for occupancy rates at 87.4% during 2011. That level has increased to 88% this quarter, as the upbeat business cycle entices more spending and space seekers.

Sale activity fell during first quarter 2012 to 47 transactions, down from 77 transactions observed during the previous quarter. This data was paired with a decline in total dollar volume. There were two large transactions observed this quarter. A private REIT purchased a 610,000 square foot power center in Gilbert and local REIT Cole Capital purchased 285,000 square feet of regional mall space in Gilbert. Both purchases outline the perspective noticed by National Real Estate Investor, that REIT’s are taking more aggressive stances in retail and developing portfolio holdings of quality retail centers.

Leasing activity increased to 401 transactions. Notable lease agreements include the 41,704 square foot plaza in Sun City at 12420 W. Thunderbird, and the 38,000 square foot mall space leased to The RoomStore at 4609-4375 E. Ray Road.

Investment activity highlights the recent flow of capital, lenders favor standards of low risk, high quality properties that can generate solid cash flows. This quarter found cap rates trending down to 7.6%, as demand for high quality income producing properties strengthened. Retail properties that provide access to the growing consumer sectors, i.e. (apparel, food & tobacco, furniture, paper products) will help urge the CRE market along. Overall our outlook for retail market activity in Arizona is strong. We should continue to see positive absorption numbers, and as vacancy rates continue to decline rental rates should tick up. Arizona’s Coincident Economic Activity Index which “includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing and wages and salaries” increased to 181.49, up from approximately 174, indicating positive growth.

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About NAI Horizon
Established in 1992, NAI Horizon is a full-service commercial real estate company located in Phoenix, Arizona. NAI Horizon offers a full range of comprehensive real estate services including property management; brokerage and appraisal services to local, national and international clients. Serving the greater Phoenix metropolitan area, NAI Horizon is a member of the NAI Global commercial real estate network providing real estate solutions to 350 offices in 55 countries worldwide. For more information visit www.naihorizon.com or www.naiglobal.com.

Contact:
Terry Martin-Denning 602.852.3438
COO/Designated Broker

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