Retail: Vacancy Steady, Rents Declining, Investment on the Rise

PHOENIX – A slight uptick in area-wide vacancy and continued downward pressure on rents was the main news in Colliers International’s Research & Forecast Report. As such, this particular news wasn’t too much of a surprise.

Vacancy rates across the area slid slightly from 12.7% to 12.8% during the quarter, with asking rents declining 2.4%. Furthermore, asks are 7.8% lower from a year ago. Where there seems to be a disconnect, however, is that despite the higher vacancies and lower rents, investment activity seems to be heating up.

Two huge deals closed during Q3, both in Scottsdale: The Promenade sold for $110 million, while the Shea Scottsdale Center changed hands for $50.3 million.  The reported noted that investor focus on quality assets has boosted the price to $74 per square foot, with cap rates hovering around the mid-8 range.

Pete O’Neill, Colliers’ senior research analyst, tells GlobeSt.com that the vacancy and rent figures weren’t a surprise and the fact that two huge deals closed in Q3 was interesting. “It’s attention-getting when you have two major deals like that in a market in which we’re not seeing a booming demand for space,” he says. “That’s noteworthy, if not surprising.”

It’s not only the larger centers that are getting attention either. Larry Ortega, Colliers’ senior vice president, retail properties, says the company just listed three smaller centers on Oct. 21, two of which had significant vacancies. “We’ve already received six to seven offers on these properties, and we just started marketing,” Ortega says.

He tells GlobeSt.com that today’s Phoenix-area investors are seeing value in buying retail centers for between $70 and $100 per square foot. “Those have income and upside. If you can work with an agent that can solve the vacancy issues, you have a good product,” he adds.

And if those properties are quality properties, solving those issues shouldn’t be much of a problem, thanks to reduced asks. “’C’ tenants are going into ‘B’ properties, and ‘B’ tenants have been able to expand into ‘A’ properties at a significantly reduced rate,” Ortega remarks.

This is not to suggest, however, that there is a buying frenzy throughout the metro area, in which investors are descending on every single asset brought to market, no matter the location. O’Neill points out that the deals getting done are in established areas with good demographics.  The two Scottsdale deals, for example, were in areas boasting high disposable income. “These aren’t necessarily speculative plays,” he continues. “When the economy starts to improve, these are the areas where there will be a good opportunity for increased retail business.”

Both O’Neill and Ortega see a good Q4, thanks in part to the holiday shopping season. Added to that, Ortega says, lenders are less reluctant to put properties on the market. “Three months from now, we’ll see continued improvement,” he adds. “And 2012 will be a building year as we see an uptick in business activity.”