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PHOENIX-The retail market in metropolitan Phoenix followed the office and industrial markets during the first half of the year, experiencing a downturn in leasing activity and increase in vacancy rates.

The Valley’s overall vacancy rate for retail space at the start of the second half of the year is 6.1%, up a full percentage point from the mid-year mark posted in 2000, according to a new survey by Grubb & Ellis Co.’s Phoenix office. “The amount of leasing activity in the metro Phoenix area slowed considerably during the first half of 2001,” says Donald D. Morrow, Grubb & Ellis’ regional managing director.

The Valley had just 934,000 sf of net absorption of retail space thus far this year, a considerable drop off from the activity experienced in the first half of 2000. According to the report, four of the nine submarkets experienced negative net absorption. The hardest hit was west Phoenix, which had negative net absorption of more than 250,000 sf.

Vacancy rates rose during the two quarters in spite of the overall positive net absorption because more than two million sf of new space was brought onto the market during that time. “Contributing to the increase in vacancy rates was the closing of big-box tenants, such as Office Depot and Home Base and several major grocery chains shifting locations,” Morrow says. “Retailers have been hesitant to take over this vacant space while waiting to see what will happen with the local and national economy.”

Some of the vacated space was quickly taken off the market. The ABCO grocery chain, which was put on the block by Fleming Foods last year, offered up dozens of grocery store locations in the Valley and Tucson. Most locations were purchased by other grocery store chains, including Safeway and Southwest Supermarkets. Retail analysts had worried that the stores would add a glut of space to the market.

The highest vacancy rate for retail space is south Phoenix, which is riding at 12%. Next comes west Phoenix, with 9%. Central Phoenix has 6.5% and the northwest Valley, 6.5%.Scottsdale remained the strongest area for retail, posting a 4.2% vacancy at the Q3 start. North Central Valley is showing 5%; Tempe, 5.6%; and Mesa, 5.9%.

There are a number of retail development projects around the Valley chasing after new rooftops or following the completion of the expanded freeway system. Nearly seven million sf of new retail space was under construction at June’s end. Chandler-Gilbert has more than 2.5 million sf coming out of the ground, most of it at Chandler Fashion Mall, which is being developed by Phoenix-based Westcor. The regional mall is being built adjacent to the Price Freeway, a newly opened section of Loop 101. The north central area has more than 1.3 million sf under construction and the northwest, more than one million sf. Only central Phoenix area has no construction activity.

In spite of the slumping activity and rising vacancy rates, there are some positive signs for retailers, Morrow says. “Despite the overall slowdown in the economy, residential housing throughout metro Phoenix remained relatively strong,” he says. “New retail construction followed this trend as the total inventory grew by over two million sf during the first half of 2001.” More than 25,000 new home starts are expected in the Valley this year as re-sales hit a record number in June. More than 80,000 new residents are expected to move into the Valley this year.

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