The Phoenix housing market, a primary pulse check for the Valleys commerical real estate market, has had a positive impact on the retail sector. With constant news of climbing home prices and leaps in construction dominating daily news, the previous doom and gloom mindset of any homeowner in Phoenix has begun to shift. With a path out of the residential slump in sight, fears have been eased and consumer spending is on the rise, with less reservation as to when things will improve. Adding to this confidence is an employment increase that may soon come close to pre-recession levels. In November of 2012, 224,000 retail jobs were added in the Phoenix market, a difference of just 20,000 jobs compared to pre-recession 2007 totals. These numbers represent an 8.38% decline in employment for the Phoenix retail sector over the last 5 years, compared to the 4.3% drop seen nationwide. While the struggle continues, these signs show that what was once viewed as impossible may be just around the corner.
Average rental rates fell during the fourth quarter of 2012, but are showing hopeful signs of slowing the downward trend. The year began with average rental rates of $14.72, and ended Q4 with an average of $14.28. In contrast, both 2010 and 2011 showed an average rental rate decrease throughout the year of over $1.10. While still on the decline, the fall seems to be slowing and even stabilizing in some areas; the Scottsdale, North Scottsdale, and Northeast Phoenix submarket clusters all showed slight increases in rental rates.
Net absorption levels showed positive signs of improvement throughout 2012. The fourth quarter raised the bar with over 1.5 million net SF absorbed, bringing the yearly total to 2,814,752 net SF absorbed. Leasing activity fell slightly in the final quarter of 2012, down 9.4% from Q3. Overall, the total 2012 leasing activity increased 6.6% compared to 2011, and is up a staggering 20% from the total SF leased in 2010.
Vacancy also brought positivity to the fourth quarter posting rates not seen since 2009. The overall vacancy rate fell to 11.3%, down from the 11.9% posted at the beginning of 2012. Both the West Phoenix and Airport Area submarkets boasted the lowest vacancy rates with 8.3%, while the East Valley left the most to be desired with a 13.6% vacancy rate for the fourth quarter. While vacancy rates are continuing a slow and steady decline, down from the peak of 12.6% seen in the beginning of 2011, there is still a long way to go to reach the lows seen before the recession when rates were steadily between 6% and 7%. While the Phoenix retail market will not recover to that level for a few more years, the data indicates that the Phoenix market is trending up and is on a slow and steady path to recovery.
The top lease transactions for the third quarter included two large leases by Burlington Coat Factory, one in the Airport Area Submarket Cluster, and one in the Scottsdale Pavillions shopping center that was hard hit during the recession. Also leasing a large space in The Pavillions is Octane Raceway, signing 45,086 in the revitalized shopping center near Talking Stick Resort.