Overall market fundamentals & general leasing activity:
Q4 was highlighted by roughly 600,000 sq. ft. of positive net absorption, which was the greatest amount of any quarter in 2016
Overall, 2016 saw nearly 5 million sq. ft. of gross leasing activity, surpassing 2015 totals by just over a million sq. ft.
Market wide vacancy dipped four basis points (bps) quarter-over-quarter, ending Q4 at 8.9 percent.
The Valley’s average asking lease rate ended Q4 at $17.16 PSF (NNN), which is a 4 percent year-over-year increase.
Trend alert: Rent growth was particularly supported by rising demand from restaurant users in 2016 as these users typically pay a premium for well-located, quality space.
Construction completions reached a six-year high in 2016, reaching 1.3 million sq. ft. of new product brought online.
Completed construction in Q4 alone exceeded 350,000 sq. ft.
Trend alert: Grocers lead the new construction wave with four Fry’s Marketplaces and two Spouts Farmers Markets build-to-suits were brought online, driven by high levels of household formation and housing growth. Demand for grocers is expected to extend into 2017, with two Fry’s and one Sprouts in the development pipeline.
According to First Vice President Greg Abbott, 2017 should continue to be a healthy year for retail. He points to steady job and wage growth continuing to support consumer spending as well as a strengthened housing market as indicators that will benefit the Valley’s retail sector.
“Phoenix still has a lot of runway for retail growth, given we were one of the last markets to head into recovery post-recession,” said Abbott. “The Valley’s housing market is projected to be one of the best in the country and because retail tends to follow rooftops, I expect a lot of momentum as retailers expand and enter the Arizona market.”
Big box retail highlights:
Metro Phoenix’s big box market performed well in 2016 despite several big box retailer bankruptcies early in the year. Big box space continued to be in high demand as tenants expanded their footprints across the Valley.
At year’s end, 120 big box spaces totaling just over 4.3 million sq. ft. were available across the Valley. Breaking that down, CBRE Research reports at year end metro Phoenix had 28 Class A spaces totaling 953,067 sq. ft.; 53 class B spaces totaling just over 2.1 million sq. ft.; 27 class C spaces totaling 819,686 sq. ft.; and 12 class D spaces totaling 497,712 sq. ft.
CBRE experts expect much of the older big box space to be redeveloped to meet modern use requirements. This includes adaption for uses other than retail, as well as seeing some broken down and split into smaller footprint boxes.
Supply/demand balance remained healthy as four big-box spaces totaling over 300,000 sq. ft. were delivered – all 100 percent pre-leased.
Former Sports Authority space continues to be in high demand. Three of the class A spaces were absorbed in Q4 bringing the 2016 total of absorbed SA boxes to four.
Target signed an approx. 50,000-sq.-ft. lease for a “flexible-format” store – the first of its kind in the Valley.
First Vice President Todd Folger says he expects demand from big box retailers will continue at the same – if not higher – levels as we head farther into 2017.
“2016 saw 17 big box spaces absorbed for 905,046 sq. ft. in Q4 alone and 41 spaces for nearly 2.1 million sq. ft. for all of 2016. With only 28 class A boxes currently available, the market is getting increasingly competitive,” said Folger. “Development has started to keep pace with demand, so I expect pre-leasing activity on new class A space to remain high as well. The remainder of available big box space is starting to reach the end of its functional life, so look for continued redevelopment of those boxes for uses outside of retail.”
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